Dr Reddy's Laboratories Ltd (RDY) 2010 Q3 法說會逐字稿

Ladies and gentlemen, good morning and good evening. Welcome to the Dr. Reddy's Q3 FY'10 earnings call. As a reminder, for the duration of the presentation, all participants are in the listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

At this time, I would like to hand the proceedings over to Mr. Kedar Upadhye of Dr. Reddy's. Thank you, and over to you, sir.

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 ended December 31, 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 transcription 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 consolidated financials, 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.

Thanks, Kedar. I welcome all of you on the call today. Before I begin, I'd like to mention that all the figures referred in the financial highlights section are translated at the convenience rate of $1 to INR46.4.

The financial highlights for the quarter and YTD are as follows. Revenues for this quarter are at $373 million, representing a year-on-year decline of 6%. Excluding the revenues from Sumatriptan in the previous year, the growth is at 17%. Revenues for the nine months of $1.2 billion represent a growth of 9%.

Revenues from Global Generics business at $253 million declined by 14% for the quarter. Excluding the revenues from Sumatriptan in the previous year, the growth is at 16%. Revenues for the nine months at $807 million represents a growth of 7%.

In our PSAI business, revenues at $113 million for the quarter represented a growth of 17%. Revenues for the nine months at $334 million represent a growth of 11%.

Gross profit for the quarter, the Company level is at 51% as against 56% in the previous year. The change in gross margins is on account of a favorable mix of high margin revenues from Sumatriptan that occurred in the previous year. Gross margin for nine months are at 51%.

Within the segments, margins for Global Generics and PSAI segments are at 60% and 31% respectively. EBITDA is at $79 million for the quarter. For the nine months this year, EBITDA at $255 million grew by 31% versus last year.

SG&A expenses, excluding amortization for the quarter, are at $109 million, and these are flat as compared to both the previous year and sequentially. This reflects the benefit of operating leverage and cost management initiatives carried out during the last several quarters.

In March of last year, 2009, we had recorded an impairment of approximately EUR200 million relating to the goodwill and intangibles of our Betapharm business in Germany largely due to an expected gradual shift in the German generic market to a tender based model.

In the last couple of months, and particularly during the quarter, a number of insurance companies in Germany have announced their final results, indicating a higher pace of transition to the tender based model, with an associated significant deterioration in prices from the previous year's levels.

As a result of this, the Company tested the carrying value of betapharm's goodwill and intangibles, and recorded a non-cash write-down of intangible assets and the beta brand amounting to EUR48 million, and a non-cash write-down of goodwill amounting to EUR76 million. The overall net impact on the income statement was EUR109 million, net of the deferred tax liability reversal.

Both these charges, the carrying value of betapharm intangibles and beta brand in our books, is approximately EUR93 million, while the carrying value of goodwill is now zero.

Loss for the quarter as a result of the impairment is at $112 million, and the adjusted PAT, adjusted for the impairment, stands at $50 million. Adjusted PAT for nine months this fiscal is $158 million as against adjusted PAT of $110 million in the previous year, representing a growth of 43%. The adjusted effective tax rate for the nine months is at 19%, and diluted EPS is at $0.29 for the quarter, and $0.93 for nine months of this fiscal.

Moving on to the balance sheet, we reduced working capital by $10 million as we continue to keep tight controls on our inventories and receivables. Capital expenditure for nine months this year is at $56 million.

Our foreign currency exposure of cash flow hedge options for the next 15 months is approximately $445 million, hedged in the range of [INR47] to [INR52]. Of this, $394 million pertain to hedges taken for next year. Total net debt to equity is at 0.13.

I now hand over to Satish.

Thanks, Umang. So for this quarter, the results you will notice that we have continued to demonstrate our ability to grow our top line and bottom line consistently. This is despite the absence of any large [ForEx] opportunity this financial year.

Within the Global Generics business, the growth and revenues from branded markets has helped us offset the decline in revenues from the [regular] to generic markets. All our revenues from the Global Generics segment at [$2 million to $3 million], grew by 16% year-on-year, excluding the Sumatriptan revenues in the previous year.

As most of you are aware, in number 2009, the US FDA conducted a scheduled audit at two of our three storage facilities. While there was one minor observation at one of those such facilities, the existing open list of inspections in the form 483 have been declared to be removed for the other unit, which is an injectable facility. The positive outcome from these audits reflect and reinforce our capabilities in maintaining robust quality and compliance processes.

Let me now take you through our key markets, starting with North America.

Revenues for the quarter at $64 million in North America represent a decline of 53% from the previous year. Excluding the sales from Sumatriptan in the previous year, the year-on-year growth is flat.

In September this fiscal year, one lot each of four of our products were voluntarily recalled by us. This caused a temporary slowdown of production, resulting in the diversification of supply sources by a few of our customers. As a result, our base business revenues have been flat for this quarter.

We have filed our investigation reports with the US FDA, and we have addressed all the issues, along with necessary corrective and preventive measures to avoid such instances in the future. Post the successful US FDA inspection and clearing of back orders, we are now confident of growing our customer franchise in the US.

In December, we launched Omeprazole Mg OTC as a private label with one major customer. In the next few months, we will begin shipments to additional customers as part of our plan to ramp up our market share gradually over time.

This quarter, we have seen two ANDA approvals, including the tentative approval of Fexofenadine 180 and Pseudoephedrine to [14] milligrams. We have filed one ANDA this quarter, and there are many more which are ready to file, and we expect to ramp up our filings in the next two quarters.

We now have 62 ANDAs pending approval at the US FDA, of which 35 are Para IVs, and 13 are first to files.

We expect to see strong opportunities from our near term launches, such as Fondaparinux and Fexofenadine Pseudoephedrine higher strength. We believe that we are well positioned to capture the value from these and similar such opportunities, while, of course, the launch timing is subject to the progress of regulatory [fair due] process, and the outcome of any pending litigation.

Moving on to India. We have begun implementing a supply chain initiative in the middle of last fiscal year. During the initial quarters of that year, it resulted in the de-stocking of inventory at our distributors, and hence a lower level of primary sales.

In the current quarter, our revenues of INR2,632 million reflect a year-on-year growth of 34%. Of this growth, 29% is driven by volumes, and 7% by new product launches. A part of the volume growth is also due to the low base effect.

The growth momentum in India for the last nine months has enabled us to move one rank up to number 12, as per ORGIMS for the year-to-date number 2009.

Our secondary sales growth of 20% during the same period remains higher than the industry growth of 16%. For the same period, we also continued to grow at a faster rate compared to the top 10 companies.

Historically, our new product launches in India were low as compared to our peers, and in the last few quarters, we have begun to address this gap adequately. For nine months this year, we have launched 56 new products across various therapeutic areas, and the contribution to total revenue this year is at 4%.

We also plan to launch one biosimilar in the last quarter of this year, which is contingent upon approval from the regulatory authorities in India.

On to Russia, we have seen a reversal of the declining trend in the market. Revenues at $49 million registered a growth of 52% in dollar terms over the previous year, and 28% quarter-on-quarter. The growth is equally driven by both volumes and prices.

The Pharmexpert prescription secondary sales trend for number 2009 year-to-date indicates a growth of 13% for Dr. Reddy's as against a growth of 2% for the Russian market.

We also continue to pursue opportunities to expand our portfolio through OTC diversification, in-licensing deals, and through other niche products where the competition is lower.

Coming to Germany, revenues this quarter are at EUR30 million, which represent a decline of 4% over the previous year. The market situation remains challenging, which led to our evaluation of impairment trigger in this quarter.

A number of insurance healthcare providers have awarded the final results during the quarter, while a few more results are awaited. These new tenders continue to cause pressure on the existing level of sales due to a steep decrease in the product prices.

Our goal of mitigating erosion of profitability through cost rationalization continues. As you are aware, just in June this year, we had restructured our field force from levels of 120 people to now about 50. We are now in discussions with the Works Council in Germany for another round of significant restructuring of the workforce in betapharm. This restructuring we expect will get completed in the Q4 of this fiscal.

Talking about our PSAI business, our revenues in this segment are at $113 million for the quarter, a growth of 17% over the previous year, but on a quarter-on-quarter basis, it pretty much remained flat.

The growth of the API business has continued to generate customers launching their products. For the CPS business, which was affected due to recessionary pressures, we are now beginning to receive increased orders from our customers.

The overall order books for PSI as of December 2009 have improved from the levels of September 2009. This quarter, we have filed 11 DMFs, including three in the US, eight in Europe, and cumulatively, we have filed 388 DMFs globally.

With this, I now hand over to Prasad.

Thank you, Satish. I would like to begin my discussion by briefing you on some key senior management changes in the last few months.

To achieve our stated goal of $3 million of revenue, and an RoCE of 25% by fiscal '13, we realize the need to strengthen our organization. As part of this process, we have made a few changes in our senior management team.

Saumen Chakraborty, who [last year] headed Corporate and Global Generic Operations, will henceforth function as President Corporate, and will focus on the integration of people, processes and information across the organization to facilitate a culture of total quality, execution excellence, and high performance.

Abhijit Mukherjee, who you know as the Head of the PSAI business, the Pharmaceutical Services and Active Ingredients business, will now lead our Global Generics business end-to-end, and we believe that this dedication of a senior leader to integrating the entire business will make a big difference to our Global Generics business.

In addition to this, there have been a few other changes in our North America and proprietary products organization.

Now moving on to other business highlights, you will observe from this quarter's performance that PSAI, as well as the key markets of India and Russia, have contributed to significant growth.

Germany continues to remain a challenge, and we are, of course, initiating suitable measures to mitigate the impact of the cash flow from this business.

Based on our results for the first nine months, we now feel that our full year revenues are expected to be lower than -- lower due to the decline in Germany, delay of a few of our key launches in the US, and temporary loss of revenues in US due to recall related incidents.

In view of this, we now expect a lower single-digit growth in revenues for the full year as compared to our earlier 10% guidance given by us. However, in spite of such lower revenue growth, we are confident of meeting our RoCE guidance for the full year, adjusted for non-recurring charges.

The strategic alliance with GSK have been progressing well. The first set of formulation products are expected to be launched in Mexico in early Q1 of the next fiscal year, and we continue to work with GSK team on the portfolio and products selection for our other segments of the business.

As announced recently, we are pleased to see encouraging results on the headline data from the first phase 3 study for Balaglitazone. The trial metrics primary endpoint of (inaudible) controls, and the next steps for additional phase 3 studies will be finalized after further discussions with the regulators.

We will also explore possible partnerships to monetize this asset. We continue to reiterate our $3 billion revenue target for FY'13. The growth trajectory for this business in our key markets is encouraging.

In addition, in the next two or three years, the patent expiries in the US are worth more than $75 billion as compared to less than $50 billion in the last three years. We are well positioned in terms of our portfolio, pipeline and infrastructure to maximize the value from this growth opportunity.

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

Thank you very much, sir. We will now begin with the question and answer session. (Operator Instructions).

The first question comes from the line of William Kirby from Nevsky Capital. Please go ahead.

Thank you. Yes, I have two questions, please, firstly on Russian revenues. Is -- the increase there, how much of that is due to restocking or other effects, or is that a clean level of underlying demand?

And then, secondly, inflation in general and advertising expenses seems to have come down quite a lot. How should we think about that as a percentage of revenues in future years, please?

So in Russia, I think half of the growth is on account of pricing, which was related to the devaluation of the ruble. And the other is due to the season effects. So we probably will see -- this is maybe a very high quarter for Russia.

On SG&A, we have optimized the business model in Germany and certain other R&D units, as a result of which the SG&A level has stabilized at the current level. So we are not guiding to any future period percentage, but because of the last two to three quarters, this number of -- what you're seeing in SG&A of about 5,000 million, will maintain.

Okay, great. Thanks very much.

Thank you, Mr. Kirby. The next question comes from the line of Balaji Prasad from Goldman Sachs. Please go ahead.

Hi. Good evening, everyone. I have two questions, firstly on the US launches delay. Any specific reason as to why -- that you can see about this, for this? And secondly, when do you expect each of these to come onto the market?

And my second question is on betapharm. Do you see any further write-off on the beta brand coming through in the near future?

Yes, with respect to the launches delay, this was a combination of both internal and external factors. The -- I think the delays -- so the (inaudible) launching on Q1 next fiscal as opposed to this quarter.

Which of these products will be coming onto the market in Q1?

Some of our products, I don't want to name them right now, but a couple of products which should have been launched in this quarter got pushed out to the next quarter.

With respect to betapharm, now the carrying value is about EUR93 million. At this level, we are comfortable that there should not be any further impairment if the level of performance remains at what we expect it to be. But having said that, this is an evolving market, and I don't want to make any categorical statement here.

Fair enough. If I could just ask further on the GSK alliance, you are planning to enter the Mexican market with this alliance. What is the rationale behind choosing this market, and how are you going about choosing the products to launch this market?

And what is the strategy in encapsulating (inaudible), and in one to two years, what could this mean in terms of revenue for DRL?

Yes, so the alliances are aimed at us supplying products for GSK for all its emerging markets. It also preserves our right to enter these markets whenever we want. But as a Company, we've decided that we'd focus on five major markets and try to drive growth in these five markets before we really expand our geography footprint.

We, of course, have other Tier 2 markets, about another 10 markets, but the primary focus is on these five markets. This enables us to concentrate our resources, execute better, and also prioritize better.

Okay.

So the logic of working with GSK is that we would supply them product, and they would do all the front end marketing. And because of their global presence, for them, the incremental costs of setting up front end is very small. In addition, they have the advantage of having innovative products, branded products, based on which they can piggy-back and sell branded generics.

So this is basically the strategic rationale for the alliance. We started registering products in various markets. The big markets are, of course, Turkey, Brazil, Mexico. There are a few other markets, but these three will primarily drive the initial activity. We're just launching products in Mexico later this year. It's not going to be significant for the first year, or even the end of second year I don't think it will be very significant. In third year onwards, we'll see meaningful numbers.

Okay, thank you very much. Good [teleconference]. Thank you.

Thanks.

Thank you, Mr. Prasad. The next question comes from the line of [Chris Nandoo] from [Quantum]. Please go ahead.

Good evening. Hello.

Yes, good evening.

I just had two questions. In relation to R&D expenditure, there's a -- so correct me if I'm wrong, it's down from a Q-on-Q basis. I'm asking this question just because you had a change of agreement with your balaglitazone expenditure. So that's one question. Will you throw some light on that?

And would be the amount -- what would be the breakup of CPS and API in the PSAI? If you could just give me help there with the figure, please?

So I think the R&D expense is not related to the balaglitazone change. It is more related to phasing of our bio studies. The cost of the bio studies are a major component of our R&D budgets, and they come bunched up. So part of that will be incurred in Q3 and in Q4, and then Q1 later. So that's merely a phasing of expenditure. It doesn't signal anything beyond that.

Any guidance you can give us on what expenditure will be incurred in the phase 3 which is going to be conducted?

We are not going to fund that, so we'll have to wait and see. And I think we'll only know once the regulator comes back and defines what kind of trial is necessary for approval of this product. And we are not even sure we'll fund ourselves or our partner. We may even license it to a third party. But in terms of R&D spend as a [possible] change, I think it will be -- it will hold around 5%.

Okay, and about the break-up of the CPS and the API in the PSAI business, could you just --?

We are not disclosing that level of detail.

Okay. Thank you. I'll get back in the queue.

Thank you.

Thank you. The next question comes from the line of Surjit Bhalla from Elara Capital. Please go ahead.

Yes, thanks for taking my question. My first thing is that you at least sales, the growth of around 10% in the US market, even if I remove those Imitrex sales in this quarter?

It was slightly below last year's sales; very marginally below.

I mean, the last time, you said that it was around $72 million of last year same quarter sales of Imitrex. Out of $143 million, it is $71 million the rest of the business now vis-a-vis $64 million, which is also inclusive of your business in Omeprazole OTC. So at least around 10% kind of the growth you were seeing in this quarter, right?

Around 3%.

3% in rupee terms. 1% in dollar terms.

Another thing is that how much loss have you accounted for recall in US market?

We are not sharing that level of detail. The loss of the recall itself is not significant. I think the -- the bigger impact is the slowdown in sales as well as the various actions that we had to take. The actual recall is not very significant in terms of cost.

Any particular reason for your particular route in domestic (inaudible) market?

A higher degree of focus and some initiatives to improve the sales force targeting and new product launches.

Any new customer addition?

No, not really. I think also you must recognize that the last year's performance was a little at a lower base as a result of de-stocking that happened as a result of our change in distribution model.

Thank you. I'll get back to queue.

Thank you.

Thank you Mr. Bhalla. The next question comes from the line of [Anobar Agorvel] from Credit Suisse. Please go ahead.

Yes, this is a question on Omeprazole OTC sales. You did mention that -- what were the reasons for the delay in launch, and what is the reason for a very tentative beginning. Are we --?

Yes, firstly, I think the OTC (inaudible) don't behave in the same way as the generic products, because the OTC products have packaging and a few other artwork; all of these issues. And switching sources is not as quick as you switch the generic product.

Having said that, I think we have some internal issues in terms of recruitment. There are delays in [scale off] and all of those. So that delayed the launch itself, but the uptake also, I think ,because of this delay, somewhat in our customers are a little more tentative. But now we see that picking up, and we should start picking up share reasonably quickly now.

So is this share that is going to come out of new customers, or share within customers?

It's both.

Right. No, what I'm trying to understand is have you already entered the larger customers, or are they still to be signed up?

I think, you know, it's a mix of both, existing as well as larger customers.

And trying my luck here; any share targets that you could disclose?

No.

Any update on Fondaparinux?

No update as such. I think the regulatory review is going on. We haven't had any formal response on our application yet, but we are all geared up to quickly turn around any request that may come. And we believe that next fiscal year we will launch this product.

Right, but there was this -- under the give initiative, the FDA was required to process this within six months or something, right?

Yes, accelerated rate. It's still in that process, but it is a reasonably complex product, so --

It is. Okay, I'll join back the queue. Thanks.

Thank you, Mr. Agorvel. The next question comes from the line of Ranjit Kapadia from HDFC. Please go ahead.

Good afternoon; good evening. And some of my question relates to this Omeprazole Magnesium. We said that we have already started with one of the customers, so going further, what are the plans, and how many more customers you are likely to add?

Second question regarding domestic market; you have done a very good growth of 34% for the formulation, and about 30% for the [PSAI] segment. So going further, what are your plans to address this market?

You know, the Omeprazole issue, I think we already answered that we are going to drive growth through both new customers as well as existing ones. On the Indian market, we have a few initiators. Would you like to talk about them, Satish? Your role in initiating the (inaudible).

A couple of things they'll see; one is the supply chain initiative that we had done earlier, right? So that actually created a certain base on which you're seeing this kind of a growth. So it's a low base on the growth what you see.

The second thing is the rural markets initiative that we commenced on a pilot basis last year, but now this year we have the full benefit because we have scaled up the [free flows] and that's beginning to show in our results.

The third one is the new products. It's been the most prolific year of new product launches. Already, about 56 have been launched, right? So all the factors put together, plus very close targeting of customers, or expanding the base as well as very clear targeting to our marketing divisions, all put together has given us this kind of growth.

And on the API side, I don't think we have disclosed any such numbers, so I don't know where you got the figure from of 30%.

Okay, and can you share how many market [?] data field force strength?

1,200 on our rolls, and 800 on the contract field force.

2800 and --?

2,000 totally.

Totally 2,000.

Okay, 1,200 on the rolls and 800 contract?

Yes.

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

Thank you.

Thank you.

Thank you, Mr. Kapadia. The next question comes from the line of Akshat Vyas from Emkay Global. Please go ahead.

Yes, good evening, sir. My question is regarding this operating margin. We have seen significant improvement in the press; operating margins almost by 260 bps. Is this margin sustainable going forward?

Yes, we have two or three quarters in which the base business has improved quite dramatically, and we believe that these margins are fairly sustainable going forward.

Okay, and the second thing like -- [Permal] is talking about growth in the Russian market. Do you see that 50% growth came because of (inaudible); that mainly growth was basically from the volume and the value.

I'll just re-phrase what I said. I said that linked to the devaluation, we took pricing increases, which accounts for more than 50% of the growth you've seen.

Okay. And what about the volume growth?

The volume growth is about 25%.

25%. Thank you very much, and that's all from myself.

Thank you. The next question comes from the line of Ujwal Shah from IDFC-SSKI. Please go ahead.

Hi, good evening. Thanks for taking the question. I have two questions. One is (a) does Sanofi now planning to take like Fexofenadine OTC, does it -- how does it -- how is it really playing out for us given that Fexofenadine still is a pretty relevant product for us in the US?

I think the OTC will only expand the market. I don't think it will cannibalize the prescription market.

But in terms of are you able to hold on, do you see that -- that won't be really -- that won't get impacted?

I don't think that will get impacted. It may even throw up some opportunities from the OTC perspective.

And you mention early on in the opening comments about like Fexofenadine combination launches. When do you see those happening?

First quarter to second quarter.

This would be both the combinations or --?

One of them firstly.

Okay. And lastly, you mentioned about the injectable facility, the [43] (inaudible). Have you started getting approvals for them from this authority, or when do you expect approvals?

We are awaiting some approvals. I think the FDA inspection is over; another inspection to go. It has to go through the process, and then we should see some approvals.

This would be a (inaudible) facility?

Yes.

Okay. Thanks very much.

Thank you, Mr. Shah. The next question comes from the line of Rahul Sharma from Karvy Stockbroking. Please go ahead.

I just wanted to know, do you think the run rate what we are talking in the domestic formulation space is sustainable going forward?

Yes, I believe it's sustainable, because if you see the clear month-on-month trend, quite consistently, we have been growing above the market growth rates, which also, I believe, is going to grow in industry. We'll continue to grow on the back of new product launches, and expansion of even the markets itself, right? So [individual] countries. So we actually believe it's sustainable.

At around [250] to [260] growth per quarter, basically?

Yes.

And Europe has been -- in the PSAI segment, Europe has been doing particularly well in the last two or three quarters. What can you attribute this to, and how do you foresee it going ahead?

So there are a few products for which we have a very high market share due to the process related issues, in the sense that we have a process which is non-infringing. As a result of that product and one or two other such products, the Europe share is higher.

But how long do you think you will be able to sustain this type of traction?

Well, we have several other products in the pipeline as well, so we believe that there will be -- the traction could be sustained.

Okay. And I just wanted clarity on the ForEx hedges. What rates we have basically contracted the hedges?

We are in the range of -- as an average, you could take 47 to 48. But the range is from 46 to 52.

Okay. And this will be on 394 million of forward covers?

This would be 394 million of options, primarily options for the next year alone.

Okay. And what about ForEx loans, would be -- how much on books as of now?

We have a euro loan of about EUR161 million.

Okay, nothing more than that? Okay. Thanks.

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

Hi. Good evening, everyone. My question is about the German business that once AOK and non-AOK tender business are fully operational, what would be the level of business that we can expect in Germany? Once the, say, 200 products we are doing -- that we did in the previous quarter?

I don't think we're giving precise numbers, but we expect this to shrink a little going forward.

Okay. When you say shrink a little, it contrasts from the sharp write-offs that we've been taking. If --

When I say a little, it's -- I'm not able to give you a range, of what we expect it to shrink.

Okay. If I were to ask more directly, would it be a significant shrinkage? Like you may not give me a number but --

I think it is significant because we expect it to be significant, and that is what has caused the write-off. But it is not going to be material to the Company as a whole. That's why I said little. But for Germany, it may be significant.

Okay. And the other question is about the US business, specifically effects over there. There seems to be a very sharp collapse in the market share. And you mentioned the context of US, there's a temporary slowdown. Are the two co-related, or in fact so it's going to remain --?

I think it's more a loss of the customer than the market shrinking. And that may be the shrink in our market share. But I don't think it has anything to do with the OTC or anything.

Okay. But do you think this much lower market share is going to go up, or this is where it's going to stabilize?

We hope to recover it as we improve everything that we're doing here; we hope to recover it. This was part of the collateral damage of the recall.

Okay, and just a very broad level question. This quarter was --

This is the operator. Sir, would it be possible for you to come back with follow-up questions as --?

Just one final question, if you don't mind.

Yes.

Okay. This quarter was -- and the quarter one was rather free of any one-offs and stuff like that. And we reported a net profit of roughly INR2.3 billion. Is this something that we should expect as the earnings power of the business and more normalized earnings?

I certainly think so. While we didn't have any one-offs, we did have some hits. Especially Germany was lower than projected internally, and the US also suffered somewhat. But it's fair to assume this number as a base number.

Excellent. Thank you so much.

Thank you.

Thank you. The next question comes from the line of [Pravin Shah] from [Dollar] Capital. Please go ahead.

Hi. Thanks for taking my question. Sir, just one small question. What is (inaudible) betapharm currently and what is the plan of [cutting it down], since you mentioned it in your presentation?

So betapharm currently has about 250 people, and we are in discussions with the works council to take this number closer to -- between 80 people to 100 people.

Okay, and this sharp down will happen by about -- in another 1.5 years timeframe roughly?

No, shorter than that. Maybe six months.

Oh, great. Okay. Thanks a lot. That was it.

Thank you, Mr. Shah. The next question comes from the line of Vikas Sonawale from Religare. Please go ahead.

Yes, hi. Thanks for taking my question. My question is on balance sheet. There is inconsistent improvement in balance sheet, in terms of net debt over the rough last five quarters time. To be precise, the net debt has gone down by about 60%. So going forward, how do you intend to look at the net debt level, or we could probably see stable number from here on?

The decrease in net debt is largely due to repayment of our euro loan that we've taken for acquisition of betapharm. We are on agreed prepayment schedule, and in the period of the next one year to two years, this loan will get completely repaid.

Okay. So let's say in another three quarters or four quarters, we can probably be a net debt zero company?

This has to be thought in terms of the aggressive capital plan that we have. We are building two large facilities for API and finished dosage. We're also enlisting in a biosimilar facility. Subject to this, I think the cash flow still remains quite strong.

Okay, great. That's great. One small question, on the UK market. I know it's a small market, but it was doing pretty well for the last two quarters. How has the growth been this quarter?

We will come back to you.

Okay. Final question, what is the general timeline now to take the biological drug from, let's say, your Indian market to [RW] market?

Some of it is happening already, (inaudible) for registration in a few markets. So, we should see some revenue coming in -- a small amount of revenue coming in this year; maybe increasing next year and, more significantly, the following year.

Okay, yes. Great. Thanks.

Thank you. The next question comes from the line of Sonal Gupta from UBS Securities. Please go ahead.

Question one is, could you tell us the gross margins for the two divisions for this quarter?

Yes. Gross margin for Global Generics is 60%, and PSAI is 31%.

Okay. And so, just to -- also, I want to understand both these write-offs. Your RoCE target, will it remain at 25%, or should we expect it to go up as and when you revise that?

We have guided to 25% basis, the March value and, therefore, it could be expected to be slightly highly than 25%. But it will not make too much of a difference because what we have written off is probably less than 10% of the capital employed.

Right; and on Germany, just to understand, your sales have over the last few quarters sustained at reasonable levels. Given that you think that the market probably will move completely towards tender, what percentage of sales do you think will come from the tender business? Or is there still some business that will be non-tendered based, or do you think it will be totally tender based?

A significant portion of that will necessarily move towards the tender based business. So only a small portion; maybe some of the OTC products and some portion of the business which is non-tender, that will continue to exist.

And do you intend to have a sales force post the restructure?

No, no. The sales force has gone.

Okay, thank you so much. I'll get back. Thank you.

Thank you, Mr. Gupta. The next question comes from the line of Rajesh Vora from Icici Securities. Please go ahead.

Good evening, gentlemen. Congrats on a good set of numbers. Mr. Prasad, the first -- you mention about the full year guidance of 10% will not be met, and the top line growth will be a low single digit. In the -- which means that in the first nine months, you have grown at 9% to $1.2 billion. So it has to be -- are you saying that lower than that number, is that what you're indicating? A decline in the growth rate?

The fourth quarter of last year was significantly higher because of the full effect of Sumatriptan.

Sure.

But relative to that the growth will come down.

Okay, okay

(Inaudible) it will get impacted.

Okay, okay. So for the full year, it will be single digit wherever it comes up?

Yes.

Yes. And you mention about $3 billion number; you stick to that goal of doubling roughly in the next two years.

Right.

What would be the key drivers of growth? Of course, you have a pretty good set of pipelines for FTFs and interesting opportunities. Beyond that, what are the growth drivers going to be?

Well, I just -- it is difficult to give you in such specific levels, but the large growth will come from our Global Generics markets. And US will partly be the largest driver of growth, and after that, in other of the markets. Also seeing significant growth in our Pharmaceutical Services & Active Ingredients business.

Okay, okay, and could you tell us on Allegra D-12, would it be two/three player scenario, or more players depending on what visibility you have today?

I don't think we can predict that very well.

Sure, and the last question on -- given what you've mentioned so far on the call on Germany business, what is the exchange of rates cut that we have seen so far in the recent time, and do you think significant drop further in the revenues potentially? What are we building on that number? Is it in excess of 20% more or less?

We can't use a block percentage like that. There are many variables in world; the tender, the competition, the molecule. Where you end up is a function of many things; like I don't want to hazard a guess and give you something --

Okay. Okay, thanks. All the best.

Thank you.

Thank you. The next question is a follow-up question from the line of Balaji Prasad from Goldman Sachs. Please go ahead.

Hi. Thank you for taking my follow-up question, gentlemen. I just had a couple of queries on balaglitazone. Firstly, I wanted to understand the level of glycemic control which are targeted, and how does this compare versus other (inaudible)?

Second question was, I wanted to understand also which stage of (inaudible) recruitment is the study in right now?

And lastly, I just wanted to see if you had any side effect profile which has been -- which has come about at this point of time?

So, we did a one phase 3 study of 400 patients. Glycemic control is comparable to (inaudible) for --

Okay.

And the safety profile, again, it's based on these 400 patients. It shows some level of improvement.

Okay.

Both on the weight gain as well as the bone density. But this has to be further studied in terms of clinical significance and statistical significance. So they had to do additional trials to demonstrate the safety.

The positioning would be that similar to the existing balaglitazone in terms of efficacy but with an improved safety profile.

Okay.

And this needs to be demonstrated in the phase 3.

Okay. Would you have any duration in mind as to how long this could take?

We are going to meet the regulators this month and we'll get input into how the client design would be. And after that, we will formulate our plans. Right now, we don't have [the finance], I'm afraid.

Okay, great. Good luck on this. Thank you.

Thank you so much.

Thank you. The next question comes from the line Bino Pathiparampil from Iifl. Please go ahead.

Hi. Thanks for taking the question. Just to dig a little deeper into the issue in the US, I have -- we see that there is a significant decline over the previous quarter's level of sale in the US. So when you said that you are working on some strategy to get back that business, is it over a few months period, or do you think it's like a two week/three week which you can fix up and then, and bag the customer?

We don't have any issue as such. It's just that our voluntary recall resulted in some slowdown on our side in terms of supplying the market, because we wanted to first be very sure of everything that we are doing in our operations. So we had to suspend shipments, we had introduce quality checks, control checks and corrective actions. We did all that and then subsequently we had an FDA inspection, and it went off quite well.

But as well, results supplied to the market got impacted, and naturally, customers hedged their positions. Now to recoup all that, it will take more than a quarter. It'll take a couple of quarters perhaps, and we are still in that process.

Okay.

It's not going to be a quick fix, but it will take a couple of quarters.

Okay; right, right. And the [schedule] in Russia over the last couple of quarters, you have been saying that some of the price increases that you took originally will have to be reversed as the ruble appreciated. So I -- we don't see any of that happening. Do you think won't need to do that, or are we going to see that in the coming quarters?

We don't see the need to reverse prices.

No, okay; right. And typically, housekeeping questions; the amortization of this quarter, about 37 crores or so, is that going to be the run rate for quarters ahead?

Yes, you can assume the same run rate for subsequent quarters.

Okay, and the CapEx for the first nine months of INR2.6 billion seems a little low based on your prior guidances. Is that true?

Yes, I think it will increase as you go through.

Okay, so for the full year, what will be your guidance?

I don't think we're giving guidance on CapEx.

Okay. Right, okay. Thanks.

Thank you. The next question is a follow-up question from the line Chris Nandoo from Quantum. Please go ahead.

I just wanted one figure. So how much would the insurance in the UK be part of the business as a percentage of the betapharm right now?

About half of it.

50%. Right? Hello.

Roughly 50%, yes.

Thank you.

Can we take the last two questions, please?

Thank you. The next question comes from the line of Sonal Gupta from UBS Securities. Please go ahead.

Yes, thanks. Just to understand on the GSL alliance, is this -- are all the sales going to be incremental, or are there some markets where you're sort of looking at getting out, and probably GSK, and transferring basically the product registration [doesn't] get transferred with GSK, and GSK gets the -- so is there some cannibalization of existing revenues?

There's no major cannibalization, but there is a shift of the existing dossiers, and some very minor sales from one of the countries. We'll probably shift to them. But it will be incremental. Largely, it'll be incremental.

Okay, great. Thank you.

Thank you, Mr. Gupta. The last question comes from the line of Nishant Patel from Proactive Universal Group. Please go ahead.

Hi. Thanks for taking my question. Just a quick one. What's been the growth in the European market ex-Germany?

Can we get back to you, Nishant, with that data, because there are two or three markets, and we'll try to get back to you. The IRS will get back to you.

Sure, sure. Thanks.

Thank you.

Thank you.

Thank you. I would now like to hand the floor to Mr. Upadhye and the management for closing comments.

Thank you all for joining Dr Reddy's management for the Quarter 3 (inaudible) earnings call. In case of any other queries, IR desk is available-- for clarification. Thank you, and good evening.

Thank you very much. On behalf of Dr. Reddy's Laboratories, that concludes this conference. Thank you for joining us, and you may now disconnect.