Dr Reddy's Laboratories Ltd (RDY) 2010 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Ltd. Q4 FY '11 Earnings Conference Call. As a reminder, for the duration of this conference, all participant lines will be in a 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 call is being recorded. I would now like to hand the conference over to Mr. Kedar Upadhye from Dr. Reddy's. Thank you and over to you, sir.

Thank you, Melipa. Good morning and good evening to all of our participants and welcome to Dr. Reddy's earnings conference call for the fourth Quarter and full Year ended March 31, 2011. 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 a live webcast of this call and a transcript shall be available on our website 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, GV 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 to the call, I would like to remind everyone of the Safe Harbor language contained in today's press release also pertains to this conference call and webcast. I would now like to turn the call over to Umang Vohra.

Thank you, Kedar. Good morning and good evening to everyone. I welcome you all on this call today. I will discuss the key financial highlights and for the purpose of these financial highlights, all the figures that are included in this session are translated to US dollars at a convenience rate of INR44.54 for US dollars.

The financial highlights of our performance are as follows. Consolidated revenue for the full year 2011 at $1.68 billion represents a year-on-year growth of 6%. Revenues for the fourth quarter are at $453 million and represents a year-on-year growth of 23% and a sequential quarter growth of 6%. Revenues on the global generics business stand at $1.2 billion for the year, representing a year-on-year growth of 10%.

Revenues from the pharmaceutical and active ingredient segment, which we will refer to during the call as PSAI, at $441 million for the year, represents a decline of 4% over the previous year. Gross profit margin for the year is at 54%. It was 52% in the previous year. This improvement is due to a favorable mix of high-margin products launched in the US. Gross margins for the global generic segment is up 65% versus 60% in the previous year, in line with higher contributions from our US business.

In the PSAI segment, gross margin is at 26% versus 33% in the previous year, largely due to price erosion of the portfolio of existing products and a de-growth in our CPS business segment. SG&A expenses, including amortizations for the year are at $532 million, an increase by 5% over the previous year. This increase is largely attributed to legal expenses in the US, OTC-related marketing spend in Russia and CIS, and new field post related expenditure in India.

We have also seen a benefit of lower salaries and employee-related spend post the restructuring in betapharm that we carried out last year. In our quarter three earnings call, we have mentioned about certain one-time expenses in that quarter. Correspondingly, SG&A expenses for the fourth quarter are $138 million and represents a sequential decline of $6 million from the previous quarter, which is quarter three.

R&D at $114 million for the year is at 7% of sales versus 5% of sales in the previous year. R&D for the quarter at $33 million is sequentially higher by $4 million over the previous quarter. This increase is on account of planned scale-up of R&D activities during the fourth quarter. Cumulatively, absolute R&D expenditures have increased by 33% this year.

During the quarter, we have some accounting and non-operating benefits, which we have excluded when reporting our adjusted tax, and I shall cover that later. In terms of what we have excluded, we have excluded the profit from the sale of land, which resulted in a profit of approximately $7 million. In addition, as part of the purchase price allocation accounting under IFRS for the acquisition of Gem Stone, the GSK penicillin facility, we recorded an amount of $1.6 million towards negative goodwill, which has been classed in other income. Adjusted EBITDA is at $369 million for the quarter -- for the year, which is 22% of sales. Adjusted EBITDA for this quarter is at $106 million and that has spurred a growth of 34% over previous year.

The annual effective tax rate for the year is at 11%. As we have been communicating throughout the year, this decline, in fact, reflects the benefit of higher weighted deduction on R&D expenditure granted in the union budget of 2010. Adjusted profit after tax for the year at $242 million is 14% of sales, and grew by 17%. Adjusted profit after tax for the quarter is at $69 million and represents an increase of 57% over the previous year.

Key balance sheet highlights are as follows. Our operating working capital increased by $206 million from the previous year. The increase in inventories is largely on account of anticipation of new launches in the next three to six months. We have also been increasing the proportion of sea shipments to optimize on the freight costs, and this cost is increasing from this cost.

Increase in receivables is also related to the large base effect of the current quarter sales, up -- of current quarter sales, both in emerging markets as well as the US. Capital expenditure for the year is at $198 million. Foreign currency cash flow hedge options for the next 18 months stands at $345 million as of this, hedged largely in the range of $45 to $47.

In addition to these, we have approximately $215 million of on-balance sheet hedges of receivables. Our current net debt is at $401 million, and net debt to equity is 0.39. The increase in net debt from the previous quarter is largely due to the issue of bonus debentures made in the quarter and funding for the acquisitions and collaboration of GSK's penicillin facility and various [closed on] land acquisitions that we made in the US. Both -- for both these acquisitions and the collaboration, we paid approximately $60 million. With this, I now hand over the call to Satish.

Thank you, Umang. Hello to everybody. I will now cover the business highlights. For this section, the analysis is based on performance in respective [rupee] currencies. So in fiscal 2011, we had a modest sales growth. The contribution from our emerging markets and North America help offset the decline in Europe.

Let me begin with the highlights of each of our focus markets, starting with North America generics. Revenue for the year of $470 million grew by 18% over the previous year. Revenues were $131 million for the fourth quarter and registered sequential growth of 23%. This demonstrates the fifth consecutive quarter of sequential growth.

During the last quarter, we launched three new products and we did the total number of new launches for the year is at 11. Market share for most of our products continued to hold steady or increase, at times ahead of what IMS [trend] indicator suggest. As you are aware, in the month of January, an earlier preliminary injunction on fexo-pseudo 24-hour strength was lifted.

This allowed us to launch the product under exclusivity period and this limited period launch contributed reasonably towards growth in the fourth quarter, prior to the fexofenadine molecule franchise, switching from prescription to OTC. We are still in litigation with the innovators on the bone [poster] in the court, and also expect to monetize the value from fexofenadine molecule family toward private label [OTC] business.

In fact our, fexofenadine immediate release OTC products has already been approved and launched in April, the first such launch in the market. During the year, we have filed 20 ANDAs and cumulatively we have 78 ANDAs pending approval in the US FDA, of which 37 are [power force] and 10 are [force to five].

Now moving on to India. revenues for the year are at [$262 million], or INR11,690 million, with year-on-year growth of 15% out of which volume growth contributed 11% and new products contributed 4%. For the quarter, revenues are at $61 million or INR2,752 million, presenting a growth of 5% over previous year. This includes adjustments on account of net recognition of revenues and certain pricing actions that were taken in the portfolio, our mix of growth would have been 10% for the quarter -- for the fourth quarter and 15% for the full year.

We're not really satisfied with this number, especially for the fourth quarter. However, we think Q4 performance is just an aberration and Q4 is generally weak for us. And we have also seen amount of bonus offers being higher in this particular quarter by some of our competitors, especially on the acute portfolio of products.

On a full-year basis, our reported growth continues to be in line with the market growth of 15% as for the one-year IMS data for MAT March 2011. During the year, in India, we also launched 48 products, including one biosimilar, Darbepoetin alfa. In Q3, we also announced the launch of PEG Grafeel, which is a trademark for our brand of pegfilgrastim. With this, we now have four products in our biosimilars portfolio in India, representing approximately 5% of our India sales.

Now moving on to Russia, revenues are at $196 million, recording a year-on-year growth of 29%. Revenues for the quarter at $48 million represents 39% growth over the previous year. This momentum for full-year is on the back of the contributions from new launches and volume increase of 32%, partially offset the marginal price decline. A growth 19% as for the Pharmexpert secondary sales data for field data for MAT March 2011 is higher than the industry growth of 7.5%.

Our rank in Russia currently stands at 15 and you have noticed that we have been outperforming the industry growth for the last several years. During the year, we launched seven new products, most of which were in license and in OTC sales. Our OTC sales are approximately 25% of our overall product portfolio and continue to grow steadily in line with our strategic intent.

Talking about Europe generics, revenues at EUR140 million declined by 13% over the previous year. The 41% growth in the rest of Europe was more than offset by the deep drop in Germany. Revenues in Germany for the year at EUR91 million declined by 17% last year due to the tender-based price compression. However, the measures taken in the previous year to restructure the bigger pharma organization has led to a significantly improvement to our operating cash flows.

In the recent tender, which was awarded by AOK, we are quite pleased with our performance. We have won the bid in 12 products across 24 logs and most of the molecules won by us are manufactured out of India. While the prices are lower for this tender, we believe this will help us strengthen our market presence in Germany. We expect the tender supplies to start in the current quarter, in June 2011.

Talking about the PSAI business, revenues for PSAI business for the year have remained flat over the previous year at $431 million. For the quarter, year-on-year growth of 14% and sequential growth of 10% were largely led by new launches in the active ingredients business. For the year, the active ingredients business grew modestly on the back of some new launches that was offset by pricing pressure of an existing base business.

Revenues from the pharmaceutical services segment declined sharply due to lower customer orders during the year. This can be partly attributed to optimization of investments by some of our customers in large pharma and biotech space. During this year we have filed specific [DMS], globally, including 19 in North America, seven in Europe and 13 in the rest of the world markets. With this, the cumulative filings stand at 46 globally. I now hand over to [Prasad] for his comments.

Thank you, Satish. Once again, I thank you all for joining this call today. Fiscal 2011 was a mixed year for us. We focused on consolidating several of our initiatives aimed at revenue growth and productivity of capital and resources. While we are not fully satisfied with our performance, we certainly gained traction towards realizing our strategic goals.

We recorded full year revenues of about $1.68 billion and an ROCE of 17.5%. The ROCE calculation excludes one-time benefits from the sale of lands and negative goodwill accrued in one of our acquisitions. This ROCE is slightly below the lower end of our guidance range due to the benefit of some high-value launches in the US business, sluggishness in the PSAI segment and other performance by the India business in the fourth quarter.

On this backdrop, we look forward to the next two years as years of scale up for us in terms of the number of launches, units to be manufactured and sold, revenue stretch and customer facing activities in the markets. We have invested significant resources to face the increasing challenges associated with the scale-up and we hope to be well positioned to realize the growth.

The outlook for FY '12 is positive. We expect the largest increment of growth to be contributed by our US generics business from the various high-value opportunities, such as olanzapine 20 and the exclusivity, Fondaparinux launch, fexofenadine OTC franchise and new customer orders at our Shreveport facility and new launches from the penicillin facility that we recently acquired from GSK.

We also expect continued momentum and above-industry performance from our emerging market geographies. The PSAI segment performance will largely be driven by the active ingredients business. The order book status has improved considerably in the last few months in this business.

These growth drivers give us the conviction, on the strength of our fiscal FY '12 performance, and as communicated on one of our earnings calls earlier, to some extent, our performance is contingent on regulatory approvals and litigation outcomes, which are sometimes subject to uncertainties and also to variability. In view of this, we will -- we prefer not to provide any yearly guidance. We believe we are on track to achieve our operating aspiration on our [field].

On the revenue front, for FY '13, our visibility of the base case forecasts suggests a roll-up of approximately $2.7 billion. To support this growth, we are investing significantly in fixed assets and we continue to debottleneck our manufacturing facilities. We are planning to increase annual capacity at our formulation facilities in India from 16 billion units at the end of last year to around 23 billion units by FY '13.

We have also been investing in our Shreveport facilities, with the objective of simplifying the supply chain complexities in the US. In our proprietary products segment, we see good progress on the portfolio. We recently launched our fourth biosimilar in India, PEG grafeel, and our multi-product strategy gives us the flexibility to scale up according to the [hilzine] market requirements.

The current capacity and the new cell culture manufacturing facilities and commission, later this year, will meet all our emerging market requirements through 2015. In the US branded space, as you are aware, we have a portfolio of three small products. The recent collaboration with Valeant to market a product called Cloderm, will bolster ongoing efforts to build a successful prescription branded portfolio.

And this year, we have initiated the Phase III study for our lead dermatology program for [Runeco Microcell]. And we also continue to build the data to support our CETP inhibitor, DRL 17822, and we are trying to initiate a Phase II study shortly. The outcomes of our efforts in business development and alliancing activities were quite productive this year. A summary of some of the transactions is as follows.

In Russia and other CIS markets, we entered into various end-licensing deals, largely for expansion of our OTC portfolio. This has helped us strengthen our market presence in the OTC business. In the dermatology space, as mentioned earlier, our collaboration with Valeant, will help us build up this franchise.

In US, the acquisition of GSK's penicillin facility fills an important gap in our portfolio in [anti-vatulex] market to a certain extent. Earlier this year, we have purchased a stake of our partner in the South African joint venture and converted it into a wholly owned subsidiary. South Africa is an important market for us, and we plan to increase our presence here, especially in the areas of CNS, oncology and women's health. With this, I would like to end here and thank you all for your attention. And now we can take questions from the participants.

Thank you. (Operator Instructions) We have the first question from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Yes. Thanks. So one question on [Elecor B24]. Is there any inventory, which is remaining in the channel, for which you may have to take an adjustment next quarter? Or everything excepting the one Sanofi launch you have taken back remaining inventory?

Almost all of the inventory is liquidated. We do not have any significant inventory that will have any effect on the next quarter.

Okay. It's just another question [eleregtel]. After the family has switched to OTC -- has undergone the OTC transition, what is the build-up growth in the market size for the entire family? After you [entergal] launch also?

It's too early to give you some numbers. There are no numbers out as yet. But we are tracking this and we provide these numbers to you later. But I think that will be expected to be about 25% to 30% decline.

Okay. That's fair enough. And if I just can ask one last question? The gross margin declined sequentially, despite sales of Allegra D-24 this quarter. Any particular reason there?

The mix may have played an issue. I think the Russia sales were very high to season, for Russia in quarter three. That may have been the reason why you've seen a sequential decline.

Oh, nothing beyond that. It was just the lower India sales and slightly weaker Russian sales? Okay. Thank you.

We can -- let's stick to questions, for two -- for each participant.

Sure. Ladies and gentlemen in order for the management to address all the questions in the question queue, we will request you to limit your questions to two per participant during the initial round. The next question is from the line of Bino Pathiparampil from IIFL Capital. Please go ahead.

Hi. Thanks for taking my question. First, I'm wondering if you have started recognizing any revenue from the penicillin facility in the US?

We have begun some billings in April, but the bulk of our revenue is expected around September or October of this year.

Okay. So there is nothing in the reported numbers now?

Nothing in this report.

Also, can I get an update on Fonda, of the EBIT rating for the quarters now?

We've been -- so we are still awaiting the FDA's decision on Fondaparinux. We believe we have submitted all the data that was required and we are awaiting decision by the FDA. So there is no change in status in terms of the approval status and what we know.

Right. But when was the last interaction?

This happens on a weekly basis but I think it's insignificant in terms of as of now.

Okay I'll join back the queue.

Thank you. The next question is from the line of Harresh Mehta, MP Advisors.

Yes thanks for taking my question. Just one question are you likely [to announce the profit on [geondon] on that [180] the exclusive deals this year.

I cannot comment on that. I'm sorry we cannot give you product related and futuristic comments.

Do you have the [180 day] exclusivity if that much can you confirm?

I'm sorry we cannot confirm that deal.

Okay fine I'll join back the queue.

Thank you. The next question is from the line of Hitesh Mahida from Marwadi Shares. Please go ahead.

Congratulations for good sales numbers? Just wanted to know historically we are growing the highest domestic market is concerned. So what are the reasons for such a low growth during the quarter and wanted to know market share as far as tacrolimus, lansoprazole and fexofenadine is concerned.

So I maybe explain the India related group. What we have seen in quarter four is definitely a lower growth compared to where we were nine months. We were growing at about 18% and this quarter has been at 5%. Without the exceptions that Satish had pointed out we think we would have grown to about 10% and those exceptions relate to pricing pressure and price actions taking on some of our portfolio products. Volume growth still remains for us stronger than the 5% that we have reported. It's also our understanding that this quarter has been slower for other companies as well.

Yes it takes on the question of market share the IMS reported market share for tacrolimus is about 28% of the generic sales lansoprazole is about 9%. You wanted some more products?

For fexofenadine

Fexofenadine is about 35%. [flentexodine] is about 35%

(inaudible - microphone unavailable) prescription.

This is a prescription RX product.

Okay sure thank you, thanks a lot.

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

Thanks for taking the question. My question the initial cost of base that you're running with in Q4 is it base we should assume is a recurring base or there are some sort of one offs even in this base for the quarter.

I think that could be a good base to consider. You'd have to take inflation into account going forward because [funding], equipment, et cetera would be necessitated in the quarter that we are right now.

Because in our country the fact that our top line grew about 6% or 7% and so this increased net yield seems to be a little on the higher side due to the fact that we've had a loss in controlling costs in this area over the last few years.

Yes I think what's also happening is there are OTC expenditures for the Russia diversification into OTCs is there that includes advertising on TV et cetera. Takes -- that expenditure comes a little before you begin to see commensurate revenues. And I think that this year has been pretty intensive in Russia on account of that which we had also pointed out in quarter three.

That and also our investments in India --

Field force.

Field force expansion which hasn't gone productive yet because of the product, the [meet time] and also preparing for all the growth that launches in the next two years has increased our SG&A.

Okay, secondly on this penicillin building that you bought from GSK what was exactly the strategic rationale behind acquisition of the business.

Well we acquired their brands and NDAs for US. These are declining brands because they've already been [genderfied]. Our plan is to launch, authorized [generics] of all the brands that they have registration and take a significant portion of the market share for these products as a generic. And thus increase the capacity utilization of this facility.

What is the size of the opportunity that you're going to be targeting in terms of these authorized generic launches?

I don't want to share that level of detail.

Oh okay thanks so much.

Thank you. The next question is from the line of Abhay Shanbhag from Deutsche Credit Bank. Please go ahead.

I'm sorry, (inaudible) [India] market by these actions that you've indicated, [beyond all] if any company do it, so is it only some discounts in the markets for a particular quarter or supplies action only continue for a longer period of time.

No sir I think we indicated price action not only on what we've taken but also what some of our competitors would have taken for the products that we sell. It was a composite of both okay. The second thing is we don't give any bonus offers as attractives. We don't do that because we believe it harms the market as well as influences the choice that patients could be compromised with. We have seen the bonus offers from other companies in this quarter have been higher.

Okay so going forward would expect our goals to turn back to markets levels of in the near term.

That's our expectation because we were in nine months at a growth rate of 18%.

Okay [next one] you did indicate a 25% to 30% revenue fall with the market going OTC. Is it entirely driven by prices or do generally volumes fall with the product going OTC?

[GlaxoKline], it is our understanding that [GlaxoKline] volumes should not drop. The market may compress a bit because of the pricing being a little lower I would also add that the innovator is doing a lot on the OTC space as well and that hopefully should benefit the generic companies.

One last thing on that (inaudible) $60 million you talked about on acquisitions. This was for GSK and which is the other one?

This was Cloderm and the GSK.

Okay, thank you.

Thank you. The next question is from the line of Girish Bakhru from HSBC. Please go ahead.

Yes, I was wondering if you can give more color on the 20 planned products in the US in FY12 or if you have some idea on if [deliver] the competition products.

We can't give you any products that specific information but I think it would be fair to assume that our filings going forward and from what we have been doing in the last two years do have a mix of -- a good mix of limited competition opportunities.

Alright. And my second question was on the broad initiatives in the non-tender market in the German region if we can get some sense on that if there would be potential declines or growth where would that come from?

It would be too early I think to talk about those initiatives. We have just started on those. So I think once we gain some traction we'll start talking about it.

Alright thanks a lot.

Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Yes thanks for the question. Receivables have gone up sequentially which geographic would they correspond to?

Largely the US. Also our API business has done particularly well in quarter four because -- and as a result of that the overall base of the business is moved from 1,800 crores to 2,800 crores on this quarter. Almost all of that would be as a reason for receivables increase.

Okay and then (inaudible) increase at $50 million all attributable to the $60 million you spent for the Cloderm and GSK penicillin?

That would be right.

Okay just last question on this. On the [AOP] contracts, the incremental -- because most of the molecules in these contracts where from the third contract. So the incremental price erosion can you just give us an idea if would it be more than 20% or less than 20%?

That's information we don't want to share that at this time.

Okay thanks then.

Thank you. The next question is from the line of Sonal Gupta with UBS securities. Please go ahead.

Alright thanks for taking my question. One was on Cloderm. What was the current size of your US proprietary products business and what's the sales force that you have there right now?

The current revenues are around about $11 million, $12 million. The sales force is about 40 plus people, 44, 45. And the Cloderm which would add another $10 million to that.

Okay and could you also tell me what is your sales force in India? And how much have you --?

4,000 plus Sonal.

And how much have you --?

The sales force and the managerial staff included it's about 4,000 plus.

Sales force alone would be about 4,000.

Sales force would be around 3,800.

And how much have you added this year?

We've added about 400 people in quarter three.

I think we should mention that there is maybe contracts also included in this.

Yes so this also includes people under contractual roles Sonal.

Okay and fine I'll get back in the queue thanks.

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

Hi good evening. Just wanted to be sure that I heard it correct. A target for fiscal 2013 sales is now been cut down from $3 billion to $2.7 billion?

We are not saying that the target has been cut down we said that our current forecast adds up to about $2.7 billion based on the projections we've made internally. We're still working towards the $3 billion.

Okay. And I just wanted to I'm not quite sure I fully understood why are we not giving any guidance for fiscal 2012?

Because the opinion is that most of our growth is going to come from the North American region. This is subject to regulatory approval, legal outcomes and all of that. So we are moving away from giving this kind of level or granular guidance because if results in guessing what's going to happen on the regulatory front and that's something we don't want to do.

Would the same not hold true for fiscal 2013?

No -- yes do you mean multi-year guidance based on certain assumptions so the $2.7 billion is what we believe that we have good visibility in terms of [achieving it] but we are moving away from year to year guidance.

Okay and just one final question. Umang explained why receivables have gone up but if I could just do some ball park number on a full year change in sales is about 440 crores. I've done a full year number and that yearly change in the receivables is 560 crores. So basically the delta in receivables is far more than delta in sales. So I'm not quite sure whether just fourth quarter US [attributable] in US sales or API sales could have led to this kind of increase in receivables. Is there something more to it?

No so let me explain that. Most of the increase that you've seen in terms of absolute sales is quarter four. So you've certainly seen a jump from 1,800 to 2,000 crores between the two sequential quarters.

And growth for the full year before this quarter increase was only about three odd percent and after this quarter increase we've shown that the growth has gone up by 6% on a full year basis. So even if you take our average DSO at a company level is about 80 to 90 days you add that almost all of the increase that happened in quarter four should logically be completely be in receivables that's one.

Second the late launch of fexo-pseudo is almost entirely added to it. So API, fexo-pseudo and the increases there have added to it. Also the Russian season finished in quarter three. And some of those receivables may are probably still outstanding.

Okay so which means that receivables should unwind in the next quarter and going forward. A few of these reasons would --

That's right, that's right, that's right.

Thank you so much.

Thank you. The next question is from the line of [Harresh Mehta] from Manna's Consultancy. Please go ahead.

Congratulations on giving good set of number. I just wanted to check on this fexofenadine plus pseudoephedrine what did the value of this product in the total sales per quarter and on the profit.

Harresh we don't disclose product specific revenue and profit numbers.

Thanks and can you expect that to continue in next quarter?

(inaudible - multiple speakers) or the product.

That product.

Product okay yes so as we explained this product has converted from RX to OTC. There was a switch which has happened from this product and all of our inventory US has been liquidated so we don't expect the RX portion of this product to continue in subsequent quarters but we do expect [product rollout] of the OTC from the coming quarter.

So this exclusivity that you may not come again. Something like that.

Yes.

Okay thank you.

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

Yes hi thanks for taking my question. Actually I have two questions. First on FY13 about [$1.7] billion. What would be the, let's say, the profit [to] achieve this (inaudible) to achieving this number, is about a really steep ramp up from the current levels.

So if you look at the risks I think the risks, I thing you address whatever risks falls within our control like manufacturing, the capacities, the supply chain, all of those. The risks which are not in our control like approval delays, some legal -- certain legal outcomes, these are things which could affect the numbers.

Okay it appears that it's largely [unpredictable] but were largely related to the US market. Would that be a --

Yes the major growth is coming from the US market and that's why?

I remember you mentioned I think one quarter of your revenues are from North America. So it's $900 million is what approximately you're aiming at in North America in the next two years.

Yes, yes

Okay, thanks. And the second question is most likely on a longer term basis because if you could help us understand the trajectory on R&D investment and CapEx because we're seeing a very high level of CapEx and what been anticipated. So if you can take us through the [four] quarters how the Company is preparing itself forward beyond FY'13 and anything on the M&A front that excites you at this point? The equipment not the equipment the investment trajectory over the next two to five years.

So if you look at capital investments they're happening in all different areas. We are building an (inaudible) which has both a API component to it as well as a finished [business] component to it. And that's a significant investment. We're also adding capacities in some of our exisiting plants and creating enrichment capacities for the products in production already. Then we are building a biologic facility which will address the scale of our plant as well as the manufacture of clinical trials [batches] for regulators market.

And apart from this we are looking at small sized acquisitions like you saw a couple of them last year. We're not looking at anything major right now. But the size that you saw [13 million, 15 million] range, things which can help us deepen our presence in key markets. It's something we are looking at on an ongoing basis. Beyond that, it will be hard for me to give you more color on M&A or anything else.

So possibly for CapEx, what you will be doing out the next two years will be primarily for things you commented beyond FY '13 or you need the CapEx for --

It's -- some of them even go beyond FY '13 they go to FY '15, FY '16 and so. So it's not only FY '13 but even growth beyond that is what we are creating capacity as well as capabilities.

So would it be fair to assume like FY '14 also you would see 800 clores, 900 clores, or kind of CapEx number?

FY '12 we will see that, but FY '13 maybe not that level.

Okay, it may come down, okay. Okay, thanks a lot and all the best.

Thank you. The next question is from the line of [Sanjit Supharia] from Sentrum Jhoking].

Congratulations for a good set of numbers. First question is related to supply deal with GSK, if you can give some update on that. And the second what is the outlook for the domestic market, ROC, because this quarter in the quarter some aberration was there. So going further how do you see the domestic market?

Well, I think we've already answered on the domestic market, but you hit an aberration and we expected to (inaudible) in the first quarter. Right, so that's all the domestic market. Now, as far as GSK, alliance is concerned, we have registered quite a few products through their lines, so on the sales it would be -- it's still -- some of it quick wins that's fortunately in the market right now.

But the other ones, especially when we launch -- when Glaxo launches in the larger markets like Mexico, Turkey in those kind of big markets and then if you give it a year after that that's when you see most of the redemption periods?

Are we expecting anything in this year or the next year, this coming year's case supply, any revenues are expected?

Small revenue already, but all I'm saying is in terms of something meaningful addition to revenues I'd say give it a little bit more time than that, maybe a year and a half, two years.

In the FY '13 year, can say that something would come in substantial?

Depends on what you call substantial, it will certainly be in the tens of millions range.

And if you can give some update on the (inaudible) because you have any news to say?

There is no new information.

Okay thank you very much and all the very best.

Thank you. The next question is from the line of Krishnendu Saha from Quantum Asset Management

Hello, thanks for taking my question. Just one question on the R&D side, how do you see the going ahead incentives increasing, so like your R&D expenditure is more for innovative and (inaudible) products and that's one. Number two is, do you see your [10, 15 percentage] growth in that going ahead?

So there is an all-round increase in R&D not just for [pricing products] or (inaudible). There has been a significant demonstrative ramp up in the global generics itself. And there is some external R&D work that they are doing for the generics business, for some niche products. And then there is some element of investment in clinical development of differentiated formulations as well as [MCE]. Biologics (inaudible) but not that significant.

But going forward (inaudible) and on. Do I see -- here, because you have one heading into Phase II and Phase III and --

You are calibrating our investment into this key R&D based on the portfolio. We are backing some significant flagship assets other assets we are partnering. So it's not a straightforward ramp up.

But we can expect the same kind of percentage of R&D expenditures going ahead?

It could vary a point here and there but in that magnitude.

Thank you, thank you.

The next question is from the line of Prakash Agarwal from RBS.

My first question is on the PSAI segment. We saw good growth for the fourth quarter but just wanted to have a sense in terms of is this the growth trend we could expect for next year as well, taking fourth quarter as a base?

In the sense you -- there are two components to this site. So one is on the EPA side of the business. So here again, there are product launches that take place as in when the customers pick up those large quantities. But when you (inaudible) so it will be difficult to say quarter-on-quarter what will be the growth pattern. You know how could [meet there]. That's one component.

The second one is the (inaudible) side of the business which is the one which did not perform well for the last year and that's something based on the number of new projects and the new business that we build, with customers that will start seeing a more gradual kinds of sales. So we can't specifically take a (inaudible) for that growth rate.

And the mix of EPAs, two-third of the PCI or one-third?

More than two-thirds.

And the growth was largely led on the European markets while we saw the huge patent expiries expected in the US market so is there any specific one-off which has happened in the Europe market or do we see an all-round improvement in various markets for the EPI?

(inaudible) it's a mix of everything Prikash.

Right. And next question on the tax rates, you said there's been, because of the budget thing we've got a lower tax rate of 11% but R&D would continue for next year and do we see a similar tax rate going forward or because the [Mat] you would see a higher tax rate of 15%, 16%?

For [Mat] it would anyway mean that we would have to pay tax, for the prescribed rate by the government. However, next year you could see that our tax rates would be slightly higher than this, but not the max rate, as one would see.

So 15%, 16% would be a fair guess.

Around that range would be roughly correct.

And last question on the land sale that you did, any details there and did you have similar land parcels which could result in future land sales?

(inaudible) in Mexico plant, which we sold, so we did not invest in the business of selling land parcels.

Okay, thank you. And all the best

The next question comes from the line of Chirag Talati from Espirito Santo.

Chirag Talati from Espirito Santo Yes, hi, thanks for taking the question. Two questions really. Firstly, on the [AOK] can you let us know what percentage of what tenders did you win?

We won about 17% of the [oral] tenders Chirag.

Thank you.

In front of units our wins are approximately 17% of the total molecules.

And secondly, on the penicillin plants can you confirm that the current agreement does not force you to buy APIs from Glaxo or their preferred supplier and how do you see yourself being very competitive given the current pricing scenario in penicillin's in the US?

Actually the Glaxo pricing were at least (inaudible) ingredient. The last competitor was (inaudible) out there. Our highly (inaudible) APIs which are widely available, we could always substitute.

There's a contractual agreement?

No, but there is a contractual obligation for us then to supply to (inaudible) the ingredient versus (inaudible) at the price available.

Okay great. Okay thank you.

The next question is from the line of K.C. Suri from Span Capital.

Thanks for taking my question. In response to the earlier query regarding R&D you mentioned something about an external R&D for [Gendex] for niche for (inaudible) throw some light on what do you mean by that?

We are working with other companies which have niche capabilities in areas that we don't have. So this contraction has been won from investments and (inaudible) for the deferred costs and lead to milestones in terms of outcomes. I don't want to give you any color on the specific product opportunities because that is sensitive from a competition point of view.

Right but those would essentially be your products co-marketed or their products and you just helping them on it.

Depends on the transaction but largely it's a development house if they don't have marketing, so we will market the product and we will give them a portion of the revenue (inaudible) or a combination of that.

And in your R&D pipeline what percentage of your products to be launched ahead would be products which are likely difficult to replicate or limited competition products? I mean, of course you've given that number on the first two flyers and the RFOs.

You know it's very difficult to give an answer to your question because some products which we think are very difficult end up with multiple filings sometimes. So I really don't want to hazard a guess there.

Okay, thanks then.

The next question is from the line of Jorge Mauro from Legg Mason.

Yes, it's Jorge Mauro from Legg Mason. Just a quick question, regarding these base case scenario, $2.7 billion FY '13, how much of this should we assume as recurring versus one-off kind of revenues, if you could share that?

So I think that since there are several launches in FY '13 as is with any particular year you would have to smooth it out to come to a conclusion on how much is recurring. So a good way to do that would be to take some kind of averages. We can't give you that product level information. Though we do think that that target would sit and probably grow beyond FY '13.

Okay, thank you very much.

The next question comes from Rahul Sharma from Karvy Stock Broking .

Could you give us market shares of products (inaudible) the last (inaudible) and (inaudible)?

Rahul, on an offline basis we will provide these numbers to you.

Okay thanks.

May we start, can you take the last two questions please.

The next question comes from Bino Pathiparampil of IIFL Capital.

First follow up question [Alegar B-24], what is the latest time line looking like at post approval, how will the ramp up be, will it be something similar to what we saw in Prilosec OTC ?

So the answer to the second part is we hope it is a little similar to Prilosec OTC, but we do not know which way it's going to go because it's a little different kind of a product. I think the -- we are accelerating as we indicated earlier, an approval to launch the product OTC.

And the sequential growth in Q4 is the US business, is it fair to assume that it is mostly a Alegra 24, Umang ?

There are other products as well, there's an effective [Lamperosol] there's an effective (inaudible) there's a continuing growth of (inaudible) so there are several other products other than just the Alegra which has led to that increase.

Great, yes. Thanks very much.

The next question is from the line of (inaudible) and [PTC Securities]. Please go ahead.

We just read a report in business standard that Dr. Reddy is in the race to buy Doktor Mom from JB Chemicals. Would you want to comment on it?

No, we don't want to comment on this because it's merely speculative information.

Okay. So are you looking at -- you said you are looking at taking over some companies, or smaller portfolios or -- in India, is that correct?

We didn't say in India.

Worldwide, right?

Yes.

Okay. Thanks.

Ladies and gentlemen we will take one last question from the line of Nitin Agarwal from IDFC Securities.

Thanks for taking the question again, I just wanted to get some thoughts on this RX to OTC business in terms of our experience over the last few products. And how do we see our competitiveness at least speaking when we look at Allegra and probably some other products that will come down the line because earlier you talked about a comprehensive start. Or rather this RX to OTC business being like a big component of your US global group starting and going forward?

I don't think it's a big component but it's a significant component. The business is attractive from the margin perspective. It has certain dynamics such as variations and variety in packaging so they do have a local packaging operation, contracted operation in the US and that adds some supply chain complexity.

The buildup of market share is slower than the (inaudible) prescription product generates, but overall it is sticky and the business is good and it's not a very crowded market. Of course the margins are slightly lower than prescription generated product business.

On Prilosec how is our success, how does our (inaudible) really attract been on that, till now, so how do you measure that in terms of what sort of market share are you able to get in the private label market on the product?

Actually, we're comfortable without performance there, it's quite good. I don't have the market share numbers, I mean it is too --

We would probably say that it is among the top three products that we have in the US and we are quite comfortable with where it is. And I think the last six to seven months have really increased our sales and share.

But do you see that -- you're still growing that product, the product has reached a stage where it's going to saturate out at these levels.

We are still growing it.

Thanks very much.

I would now like to hand the floor back to the management for closing comments. Please go ahead sir.

Thank you all for joining Dr. Reddy's management for this Quarter Four, FY '11 earnings call. In case of any queries please feel free to get in touch with the IR desk, we will be happy to resolve those queries. Thank you and goodbye.

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