Dr Reddy's Laboratories Ltd (RDY) 2010 Q2 法說會逐字稿

Ladies and gentlemen, good morning, good afternoon, good evening, and welcome to the Dr. Reddy's Q2 FY10 Earnings Conference Call. This is Rochelle, the Chorus Call conference operator. As a reminder, for the duration of this presentation, all participant lines are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for you to ask questions. (Operator Instructions). I would now like to hand the conference over to Mr. Kedar Upadhye of Dr. Reddy's. Thank you and over to you, Mr. Upadhye.

Thank you, Rochelle. Good morning and good evening to all the participants and welcome to Dr. Reddy's earnings conference call for the second quarter ended September 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 this call will be made available on our website at www.drreddys.com.

Please note that all discussions and comparables 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.

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.

Thanks, Kedar. I welcome everyone on the call today. All the figures referred in the financial highlights are translated at the convenience rate of $1 to INR48.09. The financial highlights are as follows.

Revenues for the quarter are at $382m, representing a growth of 14%. Revenues for the first half, at $760m, represent a growth of 17%. Within this, revenues from our Global Generics business, at $264m, grew by 14% for the quarter. The revenues for the first half, at $535m, represent a growth of 20% over last year. Our PSAI business, at $112m for the quarter, represented a growth of 11%. Revenues for the first half of $213m represent a growth of 9%.

Gross profit margin for the quarter at the Company level is at 47% as against 49% in the previous year. The current quarter margins have been impacted by one-time inventory provisions of EUR6m in betapharm on account of non-moving stocks and $4m in the US for inventory valuation adjustments of Sumatriptan lying with us. Excluding these non-recurring items, the adjusted margins are at 51%. The segment margins for Global Generics and PSAI are at 53% and 36%, respectively.

EBITDA, at $79m, represented a growth of 52% (sic - see press release) for the quarter. EBITDA for the first half, at $170m, grew by 70%. SG&A expenses, including amortization for the quarter, are at $111m and these remained flat as we continue to monitor our operating expenses. This expense includes the benefit of a decrease in the amortization charge due to the impairment of betapharm intangibles that we recorded in March 2009.

ForEx gain of $5m, as against a ForEx loss of $6m in the previous year. This gain is largely on account of movements in local currencies versus the rupee at our subsidiaries.

PAT, at $45m for the quarter as against $22m in the previous year, represented a growth of 106%. PAT for the first half, at $96m, has grown by 113% over the last year. The effective tax rate for the quarter is 21%. This is on account of larger share of profits recorded at higher taxable entities. Diluted EPS is at $0.27 for the quarter.

Moving on to the balance sheet, during this quarter the operating working capital reduced by $28m due to improved efficiency in managing our inventory, receivables and write-offs at betapharm. Capital expenditure for the first half of fiscal 2010 is upwards of $30m. Our foreign currency exposure of cash flow hedge options for the next 18 months is approximately $217m, hedged in the range of INR47 to INR52. Total net debt is at $177m and this translates to a net debt to equity ratio of 0.19.

With this, I now hand over to Satish.

Thanks, Umang.

For the quarter, revenues from our Global Generics segment grew by 14% year on year and 20% growth for the first half. In the United States, despite expiry of Sumatriptan exclusivity in the second week of August, this business has shown a good growth. The India business is clearly showing the up-trend, consequent to the supply chain initiative that we had started some quarters back and also backed by aggressive new product launches. Russian market continues to de-grow, but we are in a better position than the previous quarter. Sales actually have registered a growth against the market trend in Russia. Germany performance, however, continues to be challenging for us.

Let me now take you through a few of our large markets, starting with North America. Revenues are at $89m for the quarter, which represents a dollar growth of 23%, driven by new product launches in the last one year and volume growth in many of our leading products.

Sumatriptan is now genericized with multiple players in the market, and a large part of our quarter's revenues up to the second week of August for this product was offset by the price adjustments of the stocks held by our customers.

We have recently entered into a settlement agreement with Novartis for generic versions of Novartis Lotrel tablets, which involves a stabilization of business and of the lawsuits in the US relating to our ANDA. Under the terms of the agreement, we will launch the generic version some time before the expiry of the Orange Book patents for the product.

We concluded another deal in the US for the purchase of an ANDA on fenofibrate capsules, which goes under the brand name Antara which is now with Lupin. As part of this deal, we have the rights to launch the product at some time prior to the expiration of the listed patents.

This quarter, we also received five ANDA approvals including the final approval of Nateglinide that was subsequently launched in September. Also included in this list is the tentative approval of Fexofenadine Hydrochloride and Pseudoephedrine Hydrochloride 60mg and 120mg.

These events demonstrate our continual ability to create a growing annuity of limited competition opportunities. In addition, we also expect to launch omeprazole magnesium OTC in the coming weeks. The delay in launch was because it took more time than originally anticipated to manufacture the commercial quantities of the product.

Till date, we have filled two ANDAs this year and we expect to increase the filings rate for the balance of the year. We now have 62 ANDAs pending approval at the US FDA, of which 27 are Para IVs and 16 are FTFs. The 16 FTFs address a market of $9b sales at innovator value.

Moving on to India, India has started delivering the intended results in line with our previous actions, and this quarter we recorded our highest ever quarterly sales of INR252 crore (inaudible) to $52b. The year-on-year growth of 13% was largely led by some of the top brands like Omez, Razo and Omez-DSR. Sequentially, over the quarter, the value growth is at 5%, largely on account of volume growth across products.

We have experienced a good growth momentum in India for the last six months. The secondary sales trend as per ORG IMS for the first five months of April to August for this fiscal shows a growth of 17% for Dr. Reddy's as against a market growth of 14% and the top 10 companies' growth of 16%.

Earlier, we had identified the need to improve our penetration in the rural market, and in the beginning of this fiscal we began targeting a few states with a contractual field force, and now we are beginning to see a good traction in this segment of the (inaudible). We have also begun to address our portfolio gaps, with an increased intensity in new product launches this fiscal. So far, we have launched 32 new products till date, including differentiated products like Finrid, which is a fentanyl patch for acute pain management.

In the dermatology segment, six products have been launched till date. In order to capitalize on our relationship with doctors in the dermatology segment, we have recently created a dedicated team to cater to the high-potential cosmetic market. Our first product, Strea Professional, under this new division aesthetics just got launched about two weeks back.

The combined drivers of increased new product launches, coupled with the improvement in our supply chain efficiency and also the measures that we have taken to address our weakness in sales in certain regions, will enable us to achieve a robust growth in this business for the balance of the year.

Talking about Russia, the revenues are at $38m, which registered an increase of 25% in dollar terms over the previous year and 22% quarter on quarter. The year-on-year growth was primarily led by price increases and a lower base effect, while the sequential growth was primarily led by volume increase.

The secondary prescription sales trend as per the Pharmexpert market research agency for the first five months of April to August, compared to the same period last year, indicates a de-growth of 6% in dollar value for the Russian market. For the same period, Dr. Reddy's secondary sales grew by 7% in dollar value terms. In terms of the local currency growth, the industry and Dr. Reddy's grew by 27% and 45%, respectively. The disparity in ruble and dollar growths is due to the sharp devaluation in ruble witnessed in the previous year.

In terms of portfolio, we are aggressively pursuing opportunities through various in-licensing deals. We are also investing in the high-potential OTC segment, which is approximately 10% of our business today. Also, our customer credit limits continue to be very tightly controlled even now.

The Russian market has begun to show signs of improvement from the earlier quarter, but as compared to a robust growth in the earlier years we may observe a slightly subdued growth for the balance of the year.

Coming to Germany, revenues for Germany this quarter are at EUR32m, which represents a decline of 25% over the previous year. The sequential increase of 32% (sic - see press release) was on account of one-time seasonal vaccine sales in this quarter, which is our flu vaccine.

We feel that this market has still not stabilized and with the increasing number of insurance companies going the tender road, we continue to face a high pressure on the pricing and margins. Further, with the new government in place, healthcare reforms with a different view cannot be ruled out.

As you are aware, we have cut down our field force from levels of 250 people at the time of acquisition to now about 50 people. We believe at this point of time that the current field force is at an optimal level, and we are largely catering to the pharmacies.

To remain competitive in this market, we will continue to evaluate and take appropriate measures to reduce administrative costs in Germany. We will likely see a significant decline in this business for the year and the revenues may stabilize at much lower levels than the previous years. Our German business, either way, constitutes a much lesser portion of the overall business than earlier times, and with less than 10% revenue contribution now and further lower share in terms of profitability.

As far as the Pharmaceutical Services and Active Ingredients business is concerned, our revenues for the business are at $111m that grew by 11% over the previous year and 10% quarter on quarter. The trend in our order book also continued to improve from the earlier quarters for the API business, and in this quarter we have filed five DMFs and nine till date this year. Cumulatively, we have filed 361 DMFs globally, of which greater than 80% relate to the regulated markets.

We believe that the rebalancing in the global macroeconomic scenario would impact us positively and we expect a steady growth for this business for the balance of this year.

So I now hand it over to Prasad.

Thank you, Satish.

Let me begin with an outlook of the overall business. As you would observe from this quarter's numbers, our Pharmaceutical Services and Active Ingredients business and the key markets of India and US continue their growth trajectory. As we have been highlighting, the German market continues to be challenging. The shortfall to revenue achievement in Germany is due to the de-stocking in Q1 after the AOK tender kicked in, coupled with the continuing price falls.

While the revenues will be below plan in Germany, we are making efforts to mitigate the risks to cash flows. However, in the next quarter, we may expect a number of tenders to announce their final awards, which may trigger the testing of betapharm's goodwill and impairment on our balance sheet.

In the previous month, in the US, one lot each of four products were voluntarily recalled by us as a precautionary measure, because the affected -- specific affected lots were observed to have contained a small number of over-sized tablets. This voluntary recall was conducted with the full knowledge of the US FDA. We have responded to the FDA on our investigations, and have initiated various corrective and preventive measures at our manufacturing sites in order to prevent such instances and complaints in the future.

Our North American generics pipeline continues to impress with a growing annuity of limited competition opportunities. In addition to current opportunities -- the current opportunity of Omeprazole OTC and Fondaparinux, we are currently the first and only filer on Fexofenadine Hydrochloride and Pseudoephedrine Hydrochloride combination of 180 and 240mg strength, respectively.

Let me now give you an update on our strategic alliance with GlaxoSmithKline. The progress in terms of product selection by the core team is well on track. A few large markets were initially identified, and the process of transferring the dossiers to GSK and filing with the respective regulatory authorities in these countries has already begun. The processes of product selection have also begun for the countries where we had exited earlier this year. We expect that the first shipment of products under this deal will begin some time early in next fiscal year.

In biologics, we are close to launching one product this year and the second one has got deferred to the next year. Our product engine continues to deliver and we will be able to launch one product every year.

The base business growth in the first half of this fiscal has been fueled by volume growth and new product launches in the chosen key markets of our Global Generics business. This volume expansion has certainly created pressure on our capacities, and to address this we continue to invest in manufacturing infrastructure to build adequate buffer capacity.

In parallel, the process for facility planning of our SEZs has begun in real earnest. And in addition, the efficiencies in our product development engine have started to deliver in terms of an enhanced portfolio mix and improved resource utilization.

With this, we continue to build a robust pipeline to achieve our medium-term FY13 target of $3b of revenue and 25% return on capital employed.

I now open the forum for a Q&A session and thank you all again for your kind attention.

Thank you very much, sir. (Operator Instructions). Our first question is from the line of Balaji Prasad of Goldman Sachs. Please go ahead.

Thank you. Hi. My question was with regard to two of the products in the US market. Firstly, on Sumatriptan, can you give us some number -- the revenue numbers for this quarter and how much of this came through in this quarter?

And secondly, what are the specific issues which have delayed the launch of Omez OTC in the US market?

Why don't you take the question on Sumatriptan?

Balaji, on Sumatriptan, the revenues for this quarter are less than $10m and the profit contribution that is even further less because of the shelf stock adjustment that we have taken in the quarter. So there is negligible profit impact of Sumatriptan.

Okay.

Revenues are less than $10m.

Okay.

Coming to the omeprazole delayed launch, it's a combination of facility readiness as well as the right equipment being in place, and we have now achieved that. In the next few weeks, we should launch the product.

Okay. And typically, how challenging is this OTC market to penetrate and launch in the US?

This is a market we currently serve, so it's nothing new to us.

Okay.

We are confident of penetrating the market.

Okay, great. I just had a second question on your ANDA filings. I just don't see the needle having moved much in terms of the product filings. Any particular reason for it or is it just that you are bunching your ANDA filings and we could see this number revert in the next quarter?

You're right. I think it's an issue of timing and bunching.

Okay, great. I'll get back to the queue.

Thank you.

Thanks.

Thank you, Mr. Prasad. Our next question is from the line of Mr. William Kirby of Nevsky Capital. Please go ahead.

Thank you. Yes. I just have one question on your gross margins. Please could you take us through what's leading to the volatility in gross margins? I appreciate that there were various one-offs and so the clean margin was 51% in the last quarter, but just what other factors are leading to that changing, please?

So I'll give you a small overview of that. The gross margins typically for us have been in the 50% to 52% range. That's our base business gross margin. This quarter we had 47% because there was a charge of EUR6m in Germany that we've taken on account of inventory, inventory write-downs. And there was about $4m on account of a shelf stock adjustment in the US with regard to Sumatriptan. So if you add those two back, we are back at the base business gross margin range of 50% to 52%.

Okay, great. Thank you.

Thank you. Our next question is from the line of Nimish Mehta of MP Advisors. Please go ahead. Mr. Mehta, could you switch to your handset, please?

Yes.

Thank you.

Thanks for taking my question. My first question is regarding the Fexofenadine D tablet or Allegra D tablet. You mentioned having -- being the only filer, so do we assume that you'll be launching a [draft] patent pertaining to the exclusivity of the first to file company?

No, no. We are the first to file on this product.

Okay.

So we have to wait for the 30-month approval and the resolution of the litigation. So it's a bit premature to answer your question in terms of our strategy whether we will launch a draft.

Okay. And this is regarding D 12 or D 24?

D 24.

D 24, okay. Another question is regarding the Russian market. You mentioned that in ruble terms the growth has been at about 27% and it's kind of the same even when it comes to rupee terms. So how do we reconcile, given that the ruble is still depreciated on a Y-o-Y basis? What's this INR?

I think the 27% that you've mentioned is the dollar movement and not necessarily the ruble movement. I think in what happens in -- I am sorry, you're right; the ruble currency growth for us has been 45%.

I see. It has been 45%.

But I have a note 27%, 27% is the industry growth. And the way to reconcile this is that we would mitigate any impact of the ruble devaluation through a price increase.

I see. Okay. So you have so far not taken any price cut or hit or --?

Not as yet. We have taken the price increases in about three quarters back, when the ruble was very volatile and depreciated rapidly.

Okay. Thanks very much. I'll join back in the queue. I have further questions.

Thank you, Mr. Mehta. Our next question is from the line of Sally Yanchus of Tradewinds Investments. Please go ahead.

Yes, hi. I just wanted to talk a little bit more about Germany. You said that you expect a new round of tenders this year. That sounds like it could negatively impact betapharm's business. Maybe you could clarify. Do you expect to see just overall more aggressive pricing pressure on all the competitors or do you expect to see them standardize on fewer vendors? How specifically do you expect betapharm to be affected here? And is this a byproduct of the new government in Germany? Thank you.

Umang?

Yes. I would probably say that it's still extremely uncertain, the situation in Germany. The tendering process is continuing. But the form of the tenders, whether there would still be sole awardees or there would be multiple winners for the tender is one question, and the second is the new government statements in terms of the powers of the SIG funds. So we do expect that the market would have pricing pressure and it's clearly our -- and clearly our business is not out of that as yet. But there is a fair amount of uncertainty into that business in this quarter.

A lot of tenders are going to be opened in the October to December quarters. They are going to be awarded. And the government is going to issue a statement in terms of the healthcare scenario. And I think, once that happens, the situation would be relatively more clear at the end of this quarter.

Okay. And could you also clarify, you mentioned a one-off benefit from a flu vaccine in Germany. Was that this quarter or a quarter a year ago?

It was this quarter and it's -- this is -- this also happened in the previous year, so --

Okay, so it --

But it was to a much lesser extent in the current year.

Okay. Thank you.

Welcome.

Thank you, Ms. Yanchus. Our next question is from the line of Ranjit Kapadia of HDFC Securities. Please go ahead.

Sir, can you give, with the Russian market, how the -- because we have been seeing -- hearing that the market is -- GDP growth rate has come down to minus 9% recently, and that market is totally having a problem, Russia, pharma market is --

Oh, I think it takes time to stabilize rates, as far as the market is concerned. So if the de-growth continues in the market, it happened in the first quarter, it continues in the second quarter, overall rate -- I am just talking about the pharmaceutical market overall. So we also see the de-growth in the first quarter and the second quarter, because of the volumes increase, we have been quite all right. So generally what we are saying is for the rest of the year the growth will be somewhat subdued, right, because in the previous year it was quite an aggressive growth. What we're saying is it will be subdued, but that's all we are saying. So it's not a disaster, the way you are thinking about it.

And sir, regarding Omeprazole OTC product, what sort of advertising promotion we are planning?

It is not going to be advertised. It's a store brand. So it's basically going to be substituting the advertised brand.

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

Thank you.

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

Yes. Thanks for taking my call. Just one question on margins, generally. I think this quarter the -- I am particularly interested about the margins, considering the fact that, Sumatriptan, we've not had too much of a contribution and the domestic business is still around 13% growth. I just wanted to get a sense about what kind of margins are we looking at going forward, considering Omeprazole is going to come in and hopefully domestic business is also going to do well. Are we expecting to maintain these kind of margins or do you see some impact on margins? What's our view on that?

We've not guided on margins exclusively, but let me try to give some context to your question. Typically, our business over the last two years has been in the 50% to 52% margin range. And if you take out those exceptions, you will come back to that range for the current quarter. So we -- without Sumatriptan, it's -- our business would operate in the 50% to 52% range.

Okay. And the second question is on PSAI, especially Europe. We've seen some very strong growth coming in that. Any specific reason? You've mentioned that there has been some exchange rate benefit as well, but any specific reason and what's the outlook on especially Europe?

It just had to do with the product mix, so there is nothing really exceptional in there.

Is it sustainable? Is it something which we can continue to expect going forward?

Yes. Overall, the PSAI business, yes, it will sustain (inaudible) the bottom line, yes.

And then the third thing was on the tax rate. I missed some part. You mentioned something which -- on the tax -- tax is actually quite significantly up against even our expectation of 16%, 17% for the full year.

This is related to the expiry of the 100% EOU benefit that we used to have in our formulation manufacturing plant. I suspect that rate will remain around that (inaudible) for the next few quarters.

So for the full year what (multiple speakers)?

Can you restrict yourself to one question at a time, because there are a lot of people on the line?

I am sorry. Just the full year tax rate we expect to be around 18%, 19%, then?

Yes, we are guiding to about 18% to 20%.

Okay. Thanks a lot. Thanks a lot, sir.

Thank you, Mr. Agrawal. Our next question is from the line of Bino Pathiparampil of IIFL Capital. Please go ahead.

Hi. Just for this Omeprazole OTC launch, do you already have contracts tied up with stores?

We are going to launch in the next few weeks and we will launch the product into the retail chains. The contracts are usually constructed just when you -- just a few days before you launch, depending on the prevailing pricing and discount structure. So there is no such thing as contracts existing today.

Okay, right. And just one quick question on the Antara deal. Your launching of Antara, is that linked to somebody -- some other generic player launching?

We are not sharing our -- the specific nature of the deal, but it is likely to have limited competition.

Okay. Right. Thank you very much.

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

Hi. Good evening, everyone. First question is Allegra D 24, the risk profile for the launch, is it any different from the plain Fexofenadine?

It is a little different.

Okay. A much higher risk profile? When does 30 months get over?

It is different. I can't tell you whether it is lower or higher. It's a subject of assessment. The 30 month clause expires March 17.

Okay. And on Lotrel settlement, would there be any upfront payment involved?

No, no.

Okay. And just one final point, on US product recall. Is it a contained problem or could there be more recalls as we go forward?

As of now, we have no outstanding complaints. Having said that, we are doing a lot of work within the plant and as a result some level of production slowdown has happened. So we have put in some new equipment, some new procedures, as a result of the investigations we did. So we at this time believe it's contained to those four specific lots.

Okay. Any thought on the GSK equity deal, which keeps getting reported in the press?

You know we can't talk about any speculative news that comes from the press.

Okay. Thank you very much.

Thank you. Our next question is from the line of Balaji Prasad of Goldman Sachs. Please go ahead.

Hi. Just a follow-up question on the German business. While our expectations were that the AOK tenders would drive sales growth through volumes, or at least maintain revenue growth, revenue as per last year's levels, we do not see it happening. Any clarification on this?

I think -- we did think that we would maintain sales, but dependant on a certain -- that was --

Right.

-- on a hypothesis that we could maintain our sales in some of the non-tender products.

Right.

But I think we lost share rapidly there on the products for which we didn't win tenders, and that has really impacted the performance of the Company in that company.

Why -- what was the reason that you lost market share only on these non-tender products?

The other guys who got the bids, they took very rapid market share. So the products where we won the bids, we gained share very rapidly. We lost share very rapidly in the products that we didn't win. Overall, the situation is still evolving and we have to wait and see how the market will stabilize in the next couple of quarters.

Okay. Thanks, Prasad.

Thank you.

Thank you. Our next question is from the line of [Gina Gupta] of Tata AIG Life Insurance. Please go ahead.

Hello, sir. Congratulations on a good set of numbers. My question is regarding the SG&A expenses. We've seen a sharp reduction in those expenses in this quarter. Could you just take us through some key initiatives which have led to those?

Well, one major initiative is exiting a large number of small markets where we were spending money and not really gaining traction. Betapharm, we brought down the sales force there, so that helped us for the social plan. So a combination of factors of tight control plus some restructuring that we did in the Company has helped us manage SG&A effectively.

Also, the last quarter had a one-time charge on account of our social plan. So that charge was there in the previous quarter and this quarter it's not there, so that's one reduction. And second, as Prasad mentioned, because of the social plan, the people aren't there and -- the same number of salaries and people aren't there in betapharm, so that's the other reason why also the SG&A has gone down.

Okay. So, going ahead, we can expect these levels to either sustain or maybe even improve from these levels?

I would not think that they would improve dramatically, but this could be the rough range we are looking at.

Okay. And sir, secondly, out of our total German portfolio, what percentage of it would be under the AOK tenders?

40% is roughly the portfolio that the AOK had tendered. There is a subsequent AOK tender and there are several other tenders which are coming up, but as of -- the AOK itself is just 40%.

Of our sales in Germany?

Of our portfolio in Germany. Our sales would be -- our sales in Germany. Okay. So, sorry, I stand corrected, our sales in Germany. But that ratio will continue to change, depending on how much of the tenders we win or lose going forward.

And sir, lastly, just can you -- if you can throw some light on the growth prospect of PSAI segment in this current environment.

It will be in the teens, low teens, that -- between 10% and 15% in the next few years. That should be a sustainable rate of growth.

Okay. Thank you.

Thank you, Ms. Gupta. Our next question is from the line of Nimish Mehta of MP Advisors. Please go ahead.

Yes. Thanks again for taking my question. Just once again on the Allegra D 24 franchise, I assume that then -- Dr. Reddy's will not be launching Allegra D 12 (inaudible). And please correct me if I am wrong. Allegra D 24 launch will be after D 12, so do you still expect limited competition and substantial upside from the product?

I think the question -- the assumptions that you make may not be entirely right. It depends on how the case comes out and how the approval comes. I really can't give you a definitive answer on how this would behave.

Okay. Are we there on Allegra D 12 also targeting (multiple speakers)?

Well, on the [data, post] exclusivity will be there.

Post exclusivity along, so that's okay. Fine. And one more thing, one more clarification I wanted to have on that. You mentioned that there will not be any significant marketing cost for [Omeprazole] OTC. Is that correct?

Somebody asked a question whether we would have to advertise.

Okay.

So our OTC business is not a direct to consumer kind of thing but it is really a store brand, which will substitute the advertised product.

Okay. Can you throw some color on what kind of marketing costs?

Marketing costs are not significant. It's basically selling to key accounts. But you know the ramp-up will be slower than a generic in this case.

Okay.

That's what it is.

Okay. Thanks very much.

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

Hi. Thank you. Good evening, everyone. Just a couple of questions. One was on what are the -- if you can share some numbers on Nateglinide contribution for this quarter.

We don't give product level sales. It's not very significant.

What's significant is it was launched in September. That's why it's so (inaudible) pill is not sold so much.

Okay. And on the US safety issues, when were your US FDA approved formulation facilities last inspected?

About a year ago, I think.

And (multiple speakers).

(Multiple speakers) inspection now and it will be inspected in November.

So next month it will be inspected?

Right. This was an inspection scheduled much before the recall, actually.

Okay. And how many approved facilities do you have for formulations?

We have two, one here and one in the US.

Okay. And my -- this is my final question, was on Lotrel. Given that there are other players who also settled with Novartis and given your deal structure, do you see yourself being potentially able to launch in the next, say, one to two years timeframe?

I can't answer that question.

Okay. Thank you.

Thank you. Our next question is from the line of [Miyun Kankalia] of Deutsche Bank. Please go ahead.

Yes. This is Abhay Shanbhag here. Just a couple of questions, number one a bit of follow up on this US FDA inspection. The plant you have in the US, is that the acquired one from -- a couple of -- one or two years back?

Yes, this is the one we acquired from BASF.

Okay. So that's largely the PSAI, so all your generics typically happen from the Hyderabad plant?

Currently it does, but we are shifting some products into the US facility. And slowly, over time, this will support the US generics business.

Okay. And as far as the GSK deal goes, our understanding was that you wouldn't have much of excess capacity. So would you be looking to ramp up your CapEx? We haven't seen that in the first half, so would we see that happening?

Yes, you will see that happening. We are investing significantly both in the API and the (inaudible), so we will be creating large capacity for the next two years.

Okay. Any sort of CapEx number you could guide? Would it be like $100m, $200m in the next two years specifically for this one or --?

Yes, it will be in that range.

Okay. And what will be the number you could look at GSK in about, say, three or four years' time? Would it be 5% to 10% of revenues or what sort of numbers can you guide?

It will be a meaningful number, but it's too early to give you specific numbers.

Just one last question. The US growth has been very, very high, at 36%. Is there any new product where some channel filling or anything was done or [it's largely] your volume growth in existing ones?

Volume growth and new launches both put together.

But you are not willing to differentiate between one and the other?

No.

Okay, fine. Thank you.

Thank you. Our next question is from the line of Alok Dalal of MF Global. Please go ahead.

Yes, hi. Any update on Fondaparinux?

There is no update as such. So it has been reviewed, we have received some comments, we are responding to them.

Okay. Thank you.

Thank you.

Rochelle, can we have two to three more questions from now?

Sure. Thank you, sir. Our next question is from the line of Akshat Vyas of MK Global. Please go ahead.

Yes. Good evening. My question pertains to US market. We have been given an understanding (inaudible) statement that after two years of being in the US market there is some stability in the growth effect coming in. So can you put some color on the US market in terms of overall growth and how the things are happening in the country over there?

I think this question is very specific to each Company. The growth will depend on the pipeline we have and the base that we have. At Dr. Reddy's, we believe that it's a high potential market for us. We are not yet in the Tier 1 of that business. We are still at the second level, the Tier 2 competitors. There is a lot of headroom for growth in the US market.

But are you seeing some kind of (inaudible) like -- you know the kind of cycles which used to happen in the past. There is some stability to come?

There is no stability. This is a generics business. You compete on price. And this has always been the case; it will continue to be that.

Okay. The second thing, like what was the impact of -- if rupee appreciate, to all of the (inaudible) Dr. Reddy's? If you can quantify in terms of like 5% appreciation in the rupee.

Yes. So for this year it will not be significant because of our hedging strategy. And for next year we will be picking up our hedges to ensure that we don't have any meaningful impact. So our hedging strategy will be clear, that our hedge exposure was $400m and we would typically cover roughly about 60% of that.

60% of net exposure?

That's right.

Okay. And what (inaudible) we have had those contracts?

Our current hedges are in the INR47 to INR52 range.

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

Thank you, Mr. Vyas. Our next question is from the line of Nitin Agarwal of IDFC-SSKI. Please go ahead.

Just I want to get some more color on the Nateglinide situation. You said you are right now the only player in the market, so how do you see the landscape playing out here?

There are two players in the market. We are one of them.

Okay.

We just launched the product and it's going to be a decent product for us.

Which is through generics or (inaudible)?

Through generics apart from the innovators.

And you see this kind of limited competition situation lasting for a while?

It depends. I think there is one more approved product there but that guy hasn't launched.

Okay.

We don't know the situation.

And secondly, on the R&D cost, now that a lot of these ANDA filings really bunched up in the second half, do we see a material jump in the R&D charges going forward?

Overall, we'll peg it at the 5% that we've planned for, but yes, some R&D cost has moved from the first half to the second half.

Okay. Thanks very much.

Rochelle, can we have one last question, please?

Sure. Thank you, sir. Our last question is from the line of Nimish Mehta of MP Advisors. Please go ahead.

Yes. Thanks again. You mentioned about the deal on Antara with Lupin, and you also mentioned that it is likely to be a low competition generic launch. Can you explain, given the fact that TriCor [that is Abbott's, if you know if] Abbott are going to lose patent in 2011?

Yes. I think Antara is a slightly more differentiated product that the old drug, Fenofibrate. And we therefore have taken this as -- on the strategic call for a launch at a much later period.

But do you expect to launch after genericization of TriCor?

Right.

That's right.

Okay. And still it will be -- because of the differentiated aspect, it will --?

Yes.

Okay. And second, in general, have you seen any kind of price stability in the US generic market or any color on that?

There is no general trend as a business. Certain products in our -- which are in (inaudible) the prices go up and down. This is basically a commodity business, you have to compete on price, and that situation continues.

Okay. Thanks very much.

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I would now like to hand the conference over to Mr. Kedar Upadhye and the management for closing comments.

Thanks to all of you for joining Dr. Reddy's management for the earnings call. In case of any additional clarifications, IR Desk is available to address those clarifications. Thank you.

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