Dr Reddy's Laboratories Ltd (RDY) 2011 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Limited Q3 FY'11 earnings conference call. As a reminder for the duration of this conference all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kedar Upadhye from Dr. Reddy Laboratories. Thank you and over to you, sir.

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, 2010. Earlier during the day we have released the unaudited consolidated financial results under IFRS and the same are also posted on our website. We are conducting the live webcast of this call and the transcripts will be available on our websites soon. The discussion in this call will be based on IFRS consolidated financials.

To discuss the business performance and outlook we have on the call today Satish Reddy, our Chief Operating Officer and Umang Vohra, our Chief Financial Officer. Our CEO G.V. Prasad is traveling today to Davos for a pre-scheduled engagement in the World Economic Forum after today's Board meeting and press interaction and hence he has not been able to join today's call.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlet 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 meeting also pertains to this conference call and the webcast.

I would now like to turn the call over to Umang Vohra.

Good morning and good evening to everyone. I welcome all of you on this call today. I will discuss key financial highlights for this quarter. All the figures referred to in this section are translated to US dollars at a convenience rate of INR44.8 per US dollar. For the purpose of business highlights in Satish's section, the analysis is based on performance in respective local currencies.

The financial highlights are as follows. Consolidated revenues for the quarter are at $424m and represent a year-on-year growth of 10% and a sequential growth of 2%. Revenues from our Global Generics business stand at $303m for the quarter, representing a year-on-year growth of 16%. Revenues from the Pharmaceutical Services and Active Ingredients segment at $111m for the quarter represent a decline of 5% over last year.

Gross profit margin for the quarter is at 55% versus 51% a year back. This improved margin reflects the contribution from new products launched in the US this year in our Generics segment. Gross margins for the Global Generics and PSAI segment are at 65% and 28% versus 60% and 31% respectively in the previous year.

This quarter, expenses include certain items which are non-routine in nature and total up to approximately $9m. These are as follows. A, there are expenses pertaining to our OTC business in Russia. You will recall that we had committed to building a strong OTC portfolio in Russia. This quarter has seen a higher spend on the top four OTC products from our franchise, in line with the season at Russia. B, in addition, we refinanced the Betapharm loan in this quarter and, as a result, had to take a non-cash charge pertaining to debt origination costs which were capitalized on our balance sheet in line with accounting literature at the time of taking the first Beta loan. Thirdly, our spend on litigation in the US has been high especially on the Fexofenadine related litigations of which we expect outcomes very shortly.

Apart from the above, in the India business we have seen an increase in manpower and associated spends on account on field force expansion done in the --- done over the last one year.

Total SG&A expenses including amortization charges for the quarter and the expenses that I had mentioned to you earlier is at $142m representing a year-on-year increase of 17%. The year-on-year SG&A increase for nine months is only 5% which again reflects the nature of this quarter having certain one-time expenses.

R&D at $29m for the quarter is at 7% of sales and represents a year-on-year growth of 46%. This increase is on account of a significant scale-up in our R&D activities in this year. And going forward this upward bias may continue to a certain extent and we do expect to keep R&D at about 7% to 7.5% of sales.

EBITDA at $90m for the quarter is 21% of sales representing a year-on-year growth of 10%. EBITDA for the nine months of this fiscal is $261m and is also at 21% of sales.

We expect the effective full year tax rate to be approximately 11% to 12%. In this quarter the higher R&D charge and build up of inventory for new launches in the US had an impact on tax workings which reduced the effective tax rate for the quarter. In quarter four we expect the tax rate to catch up due to the anticipated launches, and we expect to end the year at 11% to 12% effective tax rate.

Profit after tax is at $61m and represents 14% of sales and a year-on-year growth of 19% adjusting for the impairment charges in the previous year. Profit for the nine months of this fiscal is at $172m and is at 14% of sales.

This quarter our operating working capital increased by $24m during the quarter. Capital expenditure for the quarter is $52m and $139m for the nine months of the year.

Foreign currency cash flow hedge options for the next 15 months stand at $540m as of date, hedged largely in the range of INR47 to INR48 to a dollar.

Our current net debt is at $216m and net debt to equity ratio is 0.20. I will now request Satish to please cover the business highlights.

Thanks, Umang. Welcome, everyone on the call. As mentioned earlier, Prasad is traveling today to Davos; hence he has not been able to join our today's call.

Before we talk about the performance for the quarter, I also wanted to share the news that just came in. Dr. Reddy, our Chairman, has been awarded one of the highest civilian honors in the country, Padma Bhushan.

Our performance in the nine months of the current fiscal I would say is somewhat mixed. We have launched a number of low-competition products in the US and delivered strong growth across the key markets of India, Russia and other rest of the world countries in Global Generics. The benefit from these launches and growth was partly offset by decline in PSAI and Germany. During this period we have been investing for future growth through higher R&D, spends for OTC portfolio in Russia and field force expansion in India. In addition, as announced in November, we have also agreed to acquire GSK's penicillin facility in the US.

Our performance for the full year will be shaped to an extent by the developments in Q4 for Fexofenadine Pseudoephedrine higher strength product and Fondaparinux. The case hearing for Fexo Pseudo is scheduled to start by the end of this month. We remain confident about our non-infringing position and expect to receive the final judgment before the end of this fiscal.

On Fondaparinux, the US FDA audits of our partner's facilities scheduled as part of the ANDA review process are complete. We continue to work with the agency for the completion of the balance procedural part of the ANDA review process. While the launches of both these products were delayed compared to our earlier expected launch dates, we are confident that we will benefit from the limited competition opportunity.

If we are able to monetize the Fexo Pseudo opportunity for a part of Q4 then we will be near the upper range of the ROC guidance range that we had communicated earlier. In case the outcome of the case is unfavorable or uncertain until the year end, we may end up in lower than the ROC guidance range.

I will now cover the highlights for each of our focus markets. Starting with North America Generics, it recorded revenues of $106m for the quarter which represents a year-on-year growth of 66% and a sequential growth of 12%. This has been the fourth consecutive quarter to demonstrate sequential growth of approximately $10m each quarter. This growth is a result of market share expansion of our base business as well as new launches and is in spite of the delays in the launches of Fondaparinux and Fexo Pseudo referred earlier.

Let me provide more context on our base business in the US. In our May 2010 earnings call, we mentioned that our strategy will include gaining share in our key vertically-integrated products. We are pleased to see increasing share in several products such as Fexofenadine at 21%, Omeprazole prescription products at 16% and Ciprofloxacin at 22% based on IMS data ending November 2010. For these and several other products our contracted market shares are higher than reported IMS shares. Also the IMS tracking tends to have a bit of a lag factor.

We have been also reinforcing our confidence in Omeprazole magnesium OTC despite a slow initial ramp up. We are now pleased to observe that in this quarter this product was among our top three revenue generators and the product still continues to grow.

We have launched seven new products in this fiscal year to date, three of which were late quarter three launches, including an exclusivity launch of Zafirlukast and second wave launches of Lansoprazole and Valacyclovir. Our initial contracted market share numbers for these products are encouraging and will be reflected in IMS numbers in the coming months.

Q4 will also see a full quarter of sales for all these three products. Our launch of Zafirlukast generated lower-than-expected sales due to the surprise entry of an authorized generic. However, we continue to hold a high share of the volumes in this niche market, and additional competitors post the 180-day exclusivity period could be limited.

During the quarter we filed six ANDAs, and we now have 74 ANDAs pending approval at the US FDA of which 32 are Para IVs and 12 are first-to-file. These outcomes in Q3 for the US business demonstrate our ability to launch new products successfully and consolidate shares in key molecules.

Moving on to India, revenues for the quarter are at INR301 crore, or $67m which represents a 14% year-on-year growth. Revenues are lower than Q2 due to expanded -- due to the expected season effect. The year-on-year growth in the current quarter was led by volume growth and 8% -- by volume growth of 8% and contribution from new products launched in the last one year of 6%. During this quarter we have launched 16 new products in India. Year-to-date the growth for India has been at 19%.

Our biosimilars portfolio continues to grow strongly with a year-on-year growth of 18% 'til date this year. It has been three years since we launched Reditux. And we are glad that it is now a top-five brand in India and is still growing steadily. Our recent biosimilar launch, Cresp is also promising, especially after the launch in oncology segment in this quarter. In addition, we expect an approval and launch of our fourth biosimilar in the coming months.

Now moving on to Russia, the revenues are at $54m (sic -- see press release) recording a year-on-year growth of [11%] and sequential growth of 11%. The growth on the high base of the previous year is led by the volume growth across products. Our market rank is 13th as per Pharmexpert data for the year to date, November 2010.

Our secondary sales growth of 21% in value and [33%] in volume terms for the year-to-date November 2010 exceeded the market growth of 8% in value and 12% in volume terms during the same period.

Our launches in the last few quarters have been doing well on the back of effective branding and marketing efforts. Going forward, we expect a higher mix of OTC and in-license products in our portfolio.

Europe Generics recorded revenues of EUR25m representing a decline of 7% (sic - see press release). Betapharm recorded revenues of EUR23m, representing a year-on-year decline of 24% due to price erosions caused by tenders this year. Our operating profit at Betapharm 'til date is higher relative to previous year largely on account of actions taken for the SG&A optimization in the previous year.

In December this quarter the results of the AOK tender in Germany were announced and could win only three products from this tender. While this is disappointing to us, we had in fact bid at prices which are in line with the margin and profitability thresholds that we had set for ourselves. We are also focusing our growth on products beyond the tender now with some launches expected soon.

Moving on to the PSAI business, revenues at $111m was flat on a year-to-year basis due to the sluggishness in that services segment. The sequential growth of 12% was largely led on the back of new launches and an improved order book status in Active Ingredients business.

This quarter we filed nine DMFs that include two US DMFs. Cumulatively the total DMFs stand at 436 and it includes 159 US DMFs.

With this I would like to end my part of the presentation and thank you all for your attention. We can now begin the Q&A session.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). The first question is from the line of Ranjit Kapadia of HDFC Securities. Please go ahead.

My question relates to this settlement with AstraZeneca for these two products Nexium, esomeprazole and Accolate. Is supply of API included in the Nexium launch because this launch is 2014 onwards?

No, it is not. It's not included for that.

And then the Zafirlukast we have launched in November '10 at risk, and now the product is without the risk. So is there any possibility of getting, for this period from November to two months, any -- compensation to be paid.

No, there is no compensation to be paid. The product is no longer at risk.

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

Thank you.

Thank you, Mr. Kapadia. Our next question is from the line of Hitesh Mahida from Marwadi Shares. Please go ahead.

Congratulations, sirs, for a good set of numbers.

Thank you.

I just wanted to know how much one-time litigation amount have you paid, litigation settlement amount?

We have not paid any litigation settlement amount as yet.

Okay.

What I had mentioned in the script that we had communicated the expenditure on our legal litigation has been high in this quarter.

Okay. And how [much] was the refinanced Betapharm loan?

The Betapharm loan has been refinanced. It was about EUR120m earlier. We've refinanced it to about $110m right now. And it's been refinanced at rates which are more attractive than what the earlier euro loan was. We are not communicating exactly what component of the total cost that I mentioned to you was on account of the Beta refinancing, but you could look at the P&L and probably make an impression of it.

Okay, okay. Thank you. And I wanted to know what's our market share as far as tacrolimus is concerned?

Yes, it's about 16%.

16%. Okay, sir, thanks. That's it from my side.

Thank you, Mr. Mahida. Our next question is from the line of Kartik Mehta of Daiwa. Please go ahead.

If you could explain the low tax rate first.

And we have had several one-off upsides in this year. So if we look at the pipeline with Fondaparinux and D24 which could be there effectively for the next year entirely, can you guys share if the YoY growth for the US business for FY'12, would it be somewhere between 15% to 20%. Or can you share some thoughts on that?

We won't be able to give you any specific sales guidance as per (technical difficulty) for next year, right. Having said that, I think this year what we are trying to say is the growth is also led by limited competition products. So you cannot absolutely count it as one-off upsides, right. So that's what it is. And Umang, can you also explain the tax rate?

Yes. So what's happened in this quarter is that we've had a much higher R&D element to the expenses and as you know, we get a rate reduction on R&D which is allowed by the Indian government. Also, simultaneously, we have further launches that are to take place in the US including the ones that we launched in late quarter three like Lansoprazole, etc. There have been inventories built up in the US. And as a result of these inventories being built up in the US, there are some tax adjustments that need to be made in order to eliminate the profit that's lying in these inventories, because these are largely inter-company transactions and that makes a difference to the tax rates. Overall for the full year we're committing to 12%, as we said earlier, and quarter four will catch up as a result of this.

So this 12% is for FY'12 also?

No, FY'11. FY'11 is 12%.

Okay. And on the CapEx I guess that is for the plant acquisition, can you share what amount of revenues and when would you record that?

Well, the CapEx has already been accounted, the revenues from this -- since this CapEx has been incurred for expansion in our existing facilities as well as the SEZ. Depending on where the CapEx is spent, some of the revenues may come in in a shorter period, whereas the SEZ revenues typically would take about a year or so --

No, I was asking in particular about the plant that we acquired in the US.

Yes, the --

Any timeline when that revenues would be recorded, or have you started recording anything or --

No, we haven't started recording anything. This would be recorded in the next fiscal.

In the next fiscal?

Yes.

Thank you.

Thank you, Mr. Mehta. Our next question is from the line of Krishen Sud of Sivik. Please go ahead.

Yes, hi. It's Krishen Sud from Sivik. Two questions please. One, can you shed some more light on Germany? Are you expecting a sequential improvement from here? Is the business profitable post these tender losses?

And the second question is on Lipitor. Are you expecting to be a participant in the US Lipitor market after the six-month exclusivity? Thank you.

Yes, we will be a participant on the Lipitor, post exclusivity. That is correct.

On Germany the situation is like this. Although we have talked about the overall sales growth going down, and that's a result of what's happening in the market, which is post this process of tender, all that has happened in the market, what we have seen is a steep erosion in prices. And that's something that we have to live with. The market has been totally unsettled because of that. So quarter on quarter obviously you're seeing that kind of a decline as compared to the previous year. That's the reality.

What we have done is, over a period of time we have also taken steps to reduce the SG&A, as a result of which in terms of profit we're doing okay sequentially as far as the quarters are concerned. For example, last year you would have seen a higher expense on SG&A because of higher manpower. But we don't have that this year. So lower sales, but it is still a profitable operation. Going forward I think, based on more tender events, or in spite of the disappointing AOK tender result, coupled with the fact that we are trying out a few initiatives to also address the non-tender market, so this would start [righting the growth], but you have to give it a few more quarters for that to materialize.

Okay, thank you.

Thank you, Mr. Sud. Our next question is from the line of Bhagwan Chaudhary of IndiaNivesh Securities. Please go ahead.

Yes. Can you update on this Allegra D24, what the market size you are expecting? And one more product that Fondaparinux.

So Allegra D24 is approximately $200m innovator product. And at generic prices this would obviously be lower. We are expecting -- the court case starts hearing on January 31. And we expect that hopefully in this quarter it would get resolved.

Fondaparinux is approximately a $300m product, again at innovator price.

What's the update of this Fondaparinux, by what time you are expecting --?

Our partner's facilities have been inspected and we are awaiting -- we've been in discussions with the FDA. We are awaiting an approval on this product.

Thank you. And what about this ANDAs, how many ANDAs you have filed this quarter?

We have filed about six ANDAs in this quarter, Bhagwan.

Okay.

Can we please restrict the questions to one or maximum two?

Yes, yes.

Yes, thanks.

Should we move on to the next question, sir?

Yes, yes.

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

Yes, hi. Thanks for taking my question. I have two questions. First of all on Nexium, I understand as per the settlement that Dr. Reddy's will be launching the product on the same day on which Ranbaxy also going to launch. So can you just explain as to how can this happen given that Ranbaxy has 180-day exclusivity and Dr. Reddy's does not enjoy 180-day exclusivity.

No, we are not going to comment on competition and their part of the settlement. All we can say is if there is a 180-day exclusivity then obviously it is implied that we will have to launch after that.

Okay. So this is subject to the 180-day exclusivity.

That's right.

Okay. I understand. And second I wanted to also know as to when do you expect generic competition in the usual Allegra, Fexofenadine, because we were expecting from this month, but I understand nothing is coming right now.

We do not expect generic competition for Fexofenadine D24, which is Allegra D24.

I am talking about usual -- it is currently at-risk launch. And all the --

You are talking about base Fexofenadine?

Yes.

So base Fexofenadine, which is an at-risk launch already has generic competition.

Already has generic.

Yes.

Not at-risk competition?

Yes.

Okay, okay. And finally on Accolate, you mentioned that you are expecting after 180 day me-too generics to enter. But our understanding was that because it was a non-infringement, maybe others will have to wait. So anything that you can comment as to where am I missing?

We do not want to comment on that and -- we'd rather not comment on that.

Okay, fine. Okay, thank you. I'll join back in the queue.

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

Hi. Thanks for taking my question. Just a question on the Russian domestic markets, despite the higher spend on OTC and marketing, Russia growth seems to have tapered off after several quarters of stellar performance. So what has happened historically in this quarter has been a very strong quarter as well. So what has happened this quarter?

The same with domestic market, despite the sales force being ramped up, we see a slowing growth rate there. So what is your expectation for the full year?

Okay. The two issues are slightly disconnected. The OTC spend that we talked about is to expand on our OTC sales in a much more classic way than what we did before, so which means there will be more marketing spend on advertising and things like that. So that's the OTC spend in Russia. And the field force expansion in India is also to do with our therapeutic and geographic expansion. So that's something -- these are disconnected from the sales issue that you're talking about.

As far as sales are concerned, Russia does look low because of the high base that we had last year. That's something that is to be noted. But overall if you see in terms of the market growth trends, our growth as compared to the market, these indicators are looking really good as per the market research data.

As far as India is concerned, it's more to do with the seasonal effect. Like I've also said, if I see the cumulative growth for the first nine months, that's at 19% which is definitely above the market growth rate.

Right. So the domestic market you think you can maintain a yearly 20% rate, 19% to 20%?

Yes, we expect about an 18% to 20% on a full year basis, Bino, and that's been pretty consistent with the way we've communicated in the past two, three quarters.

Right, right. And in Russia is there any lag impact of the price control?

No. I think also, Bino, it would be good -- because in Russia what happened in quarter three of last year, on account of what was happening in terms of pricing control, etc., that was a fairly large quarter for most companies including us. So we're seeing this growth that you're seeing in this quarter over a very large base of the previous year's quarter.

One final question on the exceptional SG&A of the quarter. Do you mean to say that the entire $9m is unlikely to -- should be taken off from a quarterly run rate going forward?

That is right. That would be right. And we would also say that in every quarter three it's likely that you'll probably have a slightly higher expense curve because that's the season in Russia and that tends to result in the -- an increase in the SG&A.

Right. Thank you very much.

Thank you, sir. Our next question is from the line of Manoj Garg of Edelweiss Capital. Please go ahead.

Thanks for taking my question. This question is pertaining to your limited competition products in the US market. I just wanted to understand the overall market with regard to Tacrolimus and how is the price erosion and kind of market share, so you mentioned around 16%. So effectively if you look at from the [planned] innovator price, what kind of price erosion you have seen so far in that market.

Manoj, for Tacrolimus we have seen Watson coming in for one strength and Mylan getting approval for all the strengths. Typically what we have experienced for this product is it takes a bit of time for the new entrant to acquire market shares. So over -- probably for a couple of quarters we could expect a stable market share. However, on the pricing point of view, there is not a significant erosion.

Okay. So when we talk about the 16% market share, is that the market share of the new prescription?

It's a total market share. So the generic market share will be roughly 30%.

30% of the overall -- (multiple speakers)

-- market share.

Okay. And with regard to Omeprazole, though we have been inching up quarter after quarter, is it fair to assume that now the quarterly run rate is somewhere in the range of around $10m to $12m?

It is approximately in that range, Manoj. What happens is from an external data perspective, a large part of our customer data does not get captured in the IRI database, the Nielsen database. But the run rate could be approximately in the range which you mentioned.

Okay. And just my last question before I get into the queue, despite when I adjust that $9m one-time kind of expenditure in SG&A, I think if you look at it, even on a sequential basis, the SG&A is higher by 5%, 6%. So is it largely attributed to higher expenditure with regard to OTC in the Russian market or is there something more to read there?

Can you repeat your question please?

Like if I look at after adjusting this $9m from the SG&A, sequentially the SG&A cost has gone up by 5%, 6%.

That's right.

So is it largely attributed to the higher expenditure for spending on OTC portfolio in Russia, or there is something more to read there?

No, if you adjust the $9m, it is my belief that you will come to roughly the same SG&A percentage as you had in the half one of the year.

But like in terms of absolute number, if you see, it has gone up from INR530 crores to INR565 crores.

Yes, okay. So you're asking -- so that is on account of higher -- slightly higher expenditure on India as I mentioned in the script that I read out. We've seen an increase in manpower and associated expense on account of field force expansion. Also for India, this quarter also has conference spends which are probably slightly higher.

Okay. And how many medical reps you have added during the quarter or maybe in last nine months in India?

We've added totally 400. I don't believe we added any reps in the last quarter.

Okay. That's all from my side. All the best.

Thank you.

Thank you, Mr. Garg. Our next question is from the line of Suryadeep Das of Centrum Broking. Please go ahead.

Hi, sir. Thanks for taking my questions. I had a question regarding the Russian market, regarding the deal you have with Cipla and Vitabiotics. I just wanted to have some color as to whether these deals are already in progress. And if yes, then what kind of traction are products like Jointace and Dietrim seeing right now?

Sales for the Cipla's products have already started, they've already commenced. For this year we won't have the full benefit of that but next year, we will have the benefit of the full year of that.

And for the Vitabiotics products?

Also I think it's -- we've started. Sales have just commenced on that.

Okay. And just one more question. I just wanted to know if you have any tax guidance for this fiscal.

We have -- for tax we are saying it will be about 12%.

On an annualized basis?

That's right.

Okay, thanks a lot.

Thank you, Mr. Das. Our next question is from the line of Prakash Agarwal of RBS. Please go ahead.

Yes, good evening, sir. The question relates to the gas leaks that happened in December. Any updates there?

So I think it's -- the issue is being somewhat exaggerated in the media. But the issue is clearly that whatever happened that evening, the Factory Inspectorate, which is the statutory authority has given us a notice. We have responded to the notice and we expect to hear further -- to hear further from them. So there are no further updates to that.

But the production facilities are all functional and there's no --?

It's all functional. We've only been restricted just on that particular clean room not to produce, which was the only thing affected there. So beyond that everything is functioning normally. It's just one clean room out of -- there may be 10, 15 clean rooms in that area. It's just one clean room which was affected.

Perfect. And sir, the second question is on the PSAI segment, we've seen a good improvement in the margins as well as the decline has been much lower than expected. So clearly in your press release you're mentioning, but any particular products or what has actually happened? Can you elaborate there please?

We don't give product guidance. But I can tell you that the order book in the API business has significantly improved. And this quarter, we've seen a fair number of products which are being -- which have been added.

The second thing is also in the last -- in the first nine months, we've decongested capacity in each of these plants, which was limiting our off-take. So the capacity is in place; the order book's improved; some of the new products are tracking well. And we're actually expecting API to do also relatively well in quarter four.

Okay. And looking at the fluctuations in margins from 31% to 22% and now back to 28%, what kind of margins do we assume going forward?

I would tend to think -- we don't guide for margins. But I think the historical averages of in the range of 28% to 31% would be probably the right averages to look at.

And last question on the euro. Basically we just had an update from you on the ForEx exposure, but that's largely the US. Do we also hedge our euro sales or sales in Germany or they are all in dollar terms?

No, the sales in Germany are in euro terms. Up 'til now we have not had to hedge this because on a net cash basis we were -- we had very little or very marginal exposures due to the interest and debt principal repayments in euros itself.

Right.

However, now that we've moved this debt to dollars, so the dollar leg is not an issue. But the euro leg now will have -- we will be taking a look at it from a hedging perspective for our next year strategy.

Okay. You said it's a dollar-denominated debt, so it's a LIBOR plus something is it?

That's right. It's a LIBOR plus 60 to 90 basis. And we've -- for us this is a natural hedge with our business.

Perfect. Thank you so much.

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

Hi. Thanks for taking my question. I just wanted to check on Prevacid, if you can give us some idea of the competitive situation out there. And how do you see the product really shaping out over the next couple of quarters?

On Lansoprazole, there are about four players now in the market, Nitin, four to five players in the market. And we could expect a stable market share in the next couple of quarters.

And what's the kind of market share have we been able to get in the initial -- Zafirlukast, it's a very early launch, it's early days yet for the launch, but what's the kind of --

So we have launched it in the month of October, so it's early for the IMS to reflect this number, the market share number.

Okay. So I guess the -- but in terms of the full impact of the product is yet to be felt in the numbers even for -- Q4 is when probably the full impact of the numbers is going to be reflected for Lansoprazole.

That's right. What Satish referred to is that all these three launches, Lansoprazole, Zafirlukast and Valacyclovir are sort of late quarter launches in this quarter. So the full benefit of the quarterly sales will get reflected in the quarter four.

Okay. And secondly, when you look forward in FY'12 we've got those two products, Fonda as well as Allegra D24, we've got -- we'll probably get some visibility as we go along. When we see the full year -- the remaining FY'12, clearly the next one year forward, which are our other launches, product launches where you're relatively comfortable or clear about? Are the visibility very much there on those launches, on some of these limited competition products.

As of now we're mentioning only Allegra D24 and Fondaparinux. We do have a few other products in the pipeline but we have not been public about it.

Okay. Okay, thanks very much.

Thank you, Mr. Agarwal. Our next question is from the line of Sameer Baisiwala of Morgan Stanley.

Hi, good evening. Just on the US market, I'm just wondering if we see sequentially our revenues are up $7m. But what we have is Lansoprazole which is a fairly sizeable market, middle of October launch Omeprazole OTC ramping up plus base business market share gains and a little bit of Accolate towards the end of the quarter. So all four of these put together translates into just $7m sequential revenue growth. Is there -- how do you explain this?

Sameer, we are looking at $11m, as $95m of last quarter to $106m in this quarter.

The sequential I'm talking of.

That's sequential only I'm mentioning. We're looking at $95m moving to $106m. That's about $11m. We've also had pricing pressure on Amlodipine Benazepril. So there have been some adjustments even in terms of stock in trade on account of Amlodipine Benazepril which has reduced the increase that we have seen.

Okay. But $7m could jolly well be $11m. But I would have expected with the launching of so many catalysts, the rise still should have been fairly more meaningful. So is that something that we should expect in the fourth quarter?

Yes, I think it's a valid point, Sameer. The issue is that we've launched both Lansoprazole as well as Zafirlukast has been -- even though we've launched them in October, the off-take has really taken off only in December, on account of stock in the trade. And therefore I think you would be able to see a bigger effect of this in quarter four.

Okay. And the other question is on Lipitor. You mentioned that you would be launching this post 180-day exclusivity. Is it irrespective of the outcome of your court case? In the sense, would you -- if the court decision is not delivered, would you still be launching it at risk at that point in time?

I doubt that there would be -- we won't comment on it. But it would be hard to believe that there would be a launch at risk for such a big product.

Okay. And the final question is on R&D spend. You are taking it up fairly meaningfully and almost going towards 7% to 7.5% of sales including next year. Which component of the business are we really spending? Is it (multiple speakers) --

There are two, three areas, Sameer. There are two to three areas. So first, obviously, it's in the generic products itself, to scale up filings and the products that we're working on.

Now, the second thing is also on the biologics space because as we start now working towards regulated markets and more scale-up of the number of products that we're working on, that would also see an increase. That's the second part of it.

The third is the proprietary products. So we also talked about earlier, we gave an indication that at least two INDs is what we'll keeping filing every year, from the products in that proprietary products space. So if you bunch it all together, you would actually see this R&D spend, which has been somewhat low in the first half, reflecting very low, but that's something that's getting scaled up as this year concludes. And then as we move out to next year, that's how it will be. So that's why we're saying 7% to 8% is what you should expect as a percentage of sales.

Okay, thank you.

Thank you, Mr. Baisiwala. Our next question is from the line of Sushant Dalmia of Pioneer Investcorp.

Thanks, my question has been answered.

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

Hi, thanks. Partly my questions have been answered. Just on PSAI, can you elaborate, you've earlier been guiding for about a single digit, sort of a mid-single digit growth, but clearly things have been much slower. So anything in terms of visibility for next year? How do you see this business shaping up for next year?

I think the main issue is about the services part of the segment. API looks all right. We have seen the products gain traction and everything looks fine. Really on the services side of the business, I think the pick-up will take longer than what we anticipated, because as you know we serve innovative customers, on the pipeline services as well as on product services. So pipeline services is what got really hit.

And by the time we really start building up that side of the business, it could be a slow ramp up. So I'm not expecting anything positive to report on that at least for the next few quarters. Whereas on the API side, I think things are looking good as of now.

But shouldn't the API be a majority of your business? I think probably predominantly it should be API, right?

It is. It is about two-thirds of that business, yes.

Okay, fine. And sure, thanks a lot.

Thank you, Mr. Gupta. Our next question is from the line of Akshay Shah of Quest Investments. Please go ahead.

Good evening, sir. I just want to check something. There has been a lot of hue and cry about DPCO flexing its arm in India, especially from the multinational companies. If you look at Germany, you're talking about it being a tender market. I think the UK is also moving to become a tender market. Plus there have been reports of asking for discounts on list prices and so on and so forth. Is that another form of DPCO which is emerging in those global markets?

Are you talking about Europe specifically?

Yes, I would think so. And perhaps would this disease spread to the US then?

See obviously in Europe, I think it's the issue of also the healthcare reforms that were carried out in Germany because the spends were extremely high. So it was something which the government undertook. And you're right, it is spreading to other parts of Europe, in the sense that Netherlands also has this kind of a tender system and things like that.

But let me say, the generic penetration in some European markets, I think it's steadily increased over a period of time. Italy, Spain for example would fall into this category.

Now I think the US is a slightly different story from what you see in Europe. So I don't anticipate at least in the immediate future that this kind of a thing will happen.

Okay, thank you. That's all I have. Thank you.

Thank you, Mr. Shah. Our next question is from the line of Chirag Talati of Espirito Santo. Please go ahead.

Hi, thanks. My questions have been answered.

Thank you. Our next question is from the line of Ranvir Singh of Brics Securities. Please go ahead.

Yes, hi. Thanks for taking my question. Can you just give an update of Balaglitazone and other [MC] product pipeline?

Yes, on Balaglitazone, there's no notable progress that we have to report. The status is the same as the end of last quarter. We are looking for a partner. The study results of the Phase II trial that we have done are not, as we have mentioned earlier, not very significant in terms of claiming a differentiation for that product. But we're still looking for a partner for the territories.

On the rest of the MC pipeline, we still have, as Pratap had mentioned in his earlier transcript in the last quarter, there are -- there is a Phase III asset for which the recruitment is ongoing for a Phase III trial. And there are other differentiated formulations that we are working on which are in Phase I. Both these products are in the dermatology space and there are several other concepts that are being explored.

Yes. And you talked about fourth biosimilar product. So whether that product will be launched in India or outside India?

Fourth launch is slated for India this quarter.

Okay. Another question related to your revenues target, it seems to be we need a very high growth to reach that revenue target. So what exactly would let to achieve that $3b on revenue.

I think there are several factors to that. One is obviously the growth in the emerging markets which is quite significant and all our initiatives, whether it's the focus on the OTC in Russia or whether it's the high growth that we've seen in that market or whether it's India in terms of all the initiatives that we've taken. So one is that leg of the growth.

The main one obviously will be the United States. So with the limited competition products and also some of the opportunities that we have in the next couple of years, we feel fairly confident that we could get to the target, like we've also said in the past. So it's something that we are looking at the target at $3b, but it could be a little bit here and there. But obviously there's tremendous growth opportunities and we're still quite committed to the figure right now.

Okay, thanks a lot. That's it from my side.

Thank you, Mr. Singh. Our next question is from the line of Neelkanth Mishra of Credit Suisse.

Yes, hi. A follow up on that $3b question, so now that Nexium is likely to be a 2014 opportunity, does it significantly impact your target for FY'13?

That's why we've not totally taken it on granular detail, talking product by product and adding it up that way. We're just looking at overall growth opportunities in each one of these, the new product launches, cumulatively. And also there may be a little bit of gap which we'll obviously fill through certain business development efforts and things like that. So I can't specifically say that --

Okay. I was just trying to be cute. The second is on Lipitor. Actually what happens if -- we've been very curious to find out what will happen if Ranbaxy's AIP doesn't get resolved, because it's just been announced that Mylan has also settled on Lipitor with Pfizer. You haven't settled yet, right?

No, we have not settled on Lipitor with anyone.

Yes. But in case Ranbaxy's AIP issue does not get resolved, so what happens to the exclusivity? Could you throw some light on that?

Neelkanth, it's very fluid. Your guess will be as good as ours on Lipitor. So I think it's better that we -- I think it's very fluid the way things -- there are too many moving parts to that equation now.

Okay, thank you.

Thank you, Mr. Mishra. Our next question is from the line of Arvind Bothra of Bank of America. Please go ahead.

Hi. I'm not sure if I missed it earlier but I just wanted to get little bit more color on the GSK alliance. What kind of revenue visibility do we have and can we expect some color on how that is going to shape up?

Not much to report right now, Arvind, because what's happening is GSK, now, all we have said is that the number of dossiers filed it's already about close to more than 100 now.

But in terms of anything meaningful to report on sales, you probably have to give it some more time. Because all these are in emerging markets, they are in the branded space; it takes time for the brand to build up. It normally takes about a couple of years before you see the peak sales. So I guess you should just hang on for some more time before you really see something meaningful in terms of numbers.

So maybe towards end of fiscal '12 is when we can see some separate numbers on that front?

Probably. That's why I said, it all depends on the number of launches and the markets in which they get launched. So I would still hang on for maybe a year and a half or so at least.

Okay, fair enough. Thanks so much.

Thank you, Mr. Bothra. Our next question is from the line of [Alok Banwal] of Deutsche Bank. Please go ahead.

Hi, this is Abhay here. Just taking up on an earlier question, typically we generally see like in the first month of launch, of a generic launch, three to four months of sales are generally dumped on to the distribution chain and sales are recorded. But in your case you say that the pick-up is a bit slower. So is there any difference that you have done now as compared to what you used to do in the past?

No difference, Abhay. I think what's happened is that we're also seeing action where the trade is fairly full before, once the generic enters. And it's difficult to capture share on that. There's no change in any practices. I just think this is a market dynamic which is evolving.

Okay. So even for future now, typically in the first one or two months, we may not see too much of a revenue booking happening for most generic companies. So would that be a change we should take it forward, going forward for all companies?

I think on a 12-month basis it should equate. So it depends on when you start it. But over a 12-month period it should begin to equate up.

Okay. But typically, we generally see companies getting a bit more aggressive in the first few weeks, which you are now saying is not the case now.

I want to make a distinction here, Abhay. If you see products for which there is already generic competition, the time to gain market share is longer. But if you're the first entrant, it's relatively easier to get it. So depending on the product, this dynamic will play out.

Okay. The second thing was on the OTC cost, you did mention that $9m is a one-time thing. Typically the belief that we have is that OTC marketing cost will be more recurring in nature unlike in case of RX, where there's a lot of sampling, free samples and all that which is done. So are there -- can you just describe why this may be a bit more one-time cost because it seems to be a very large amount? A large part of it seems to be on that side.

So Abhay, what's going to happen is this OTC it's not like a new thing that we started right. So it's not like a new launch of products or not like a new [therapeutic]. Basically in the past the products that we took through this route, was a lot of activity more at the retail level. So it's more like products -- you can call it like junction products, so moving from prescription into OTC kind of thing.

What we are talking about now is because we see there's a huge potential for growth in this space, we are more going through the classic route of obviously advertising and those kind of things that are being done. So these are not done throughout the year. There will be campaigns carried out at different points of time. Cetirizine, for example, is a seasonal product. So in that season, you would do this kind of a spend.

So that's why we're saying that this is not something which is going to recur every year, but this is an initiative that we've taken to ramp up the OTC sales. You should see it more in terms of that light than looking at a completely new activity, which requires huge amounts of spend and things like that.

So what you're saying is the ramp up in revenues will be over a period of time. A lot of the advertisement has been more upfront, which is more going to be seasonal in nature, so to that extent it may not recur.

That's right. And also in the beginning of a product lifecycle, for an OTC product advertising tends to be a lot higher. And once the brand image is created, it tends to dip a bit.

Okay. And is this largely on the Russian side or have you started spending something on the Allegra OTC also?

No, this is all Russia.

Okay, fine. Thank you.

Thank you, Mr. Banwal. Our next question is from the line of Chirag Dagli of ICICI Securities. Please go ahead.

Rochelle?

Yes, sir.

This would be -- we will take one more question after this, so you might want to just announce that to them. And we will take this question and another question after that.

Sure, sir. Actually the participants have already heard you on the call.

Okay, thank you.

You're welcome. Please go ahead, Mr. Dagli.

Sir, thank you for taking my question. I just wanted to understand in detail your gross margins. They seem to be fairly robust this quarter, 55% odd. Is this the kind of number that you think we should model for the years coming forward, given that you will have fairly good US business from the niche products, etc?

I think -- we don't guide on margins. But in a quarter where you've had a significant number of launches, margins tend to be higher. So if you look at historical average it's generally in the range of 55% to 60%. If you look at an average when we are launching new products, it generally moves from 60% to 65%. So depending on the new product launch activity in the quarter, I think the margin fluctuates.

Is there an element of foreign exchange on the inventory in this or --?

No, because there's not been a substantial movement in foreign exchange for the quarter.

That would have been adverse I would imagine. Okay, that explains it. Thank you so much.

Thank you, Mr. Dagli. Our last question is from the line of Alok Dalal of MF Global. Please go ahead.

Yes, thanks for taking my questions. Sir, any tax guidance for FY'12?

No, we haven't given a tax guidance as yet for FY'12.

Okay. And would you be looking at a similar CapEx spend of around INR400 crores for FY'12 as well?

Yes. We do expect that our CapEx spend for the next year will be similar to the current year.

Okay. And could you share what is the contribution of OTC business for US sales now?

We can send that data to you. We don't have it readily with us right now.

Okay, thank you so much.

Thank you, Mr. Dalal.

Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference over to the management to add closing comments.

Thank you all for joining Dr. Reddy's management on this earnings call. I request to get in touch with the IR desk for any pending queries. Thank you.

Thank you, members of the management team. 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.