Dr Reddy's Laboratories Ltd (RDY) 2011 Q1 法說會逐字稿

Ladies and gentleman, good day and welcome to the Dr. Reddy's Laboratories Limited Q1 FY'12 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. At this time, I would like to turn the conference over to Mr. Kedar Upadhye from Dr. Reddy's. Thank you and over to you.

Thank you, Melissa. Good morning and good evening to all the participants. Welcome to Dr. Reddy's earnings conference call for the quarter ending June 20, 2011, which is the first quarter of fiscal 2012.

Earlier during the day, we have released our results, 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 and analysis in this call will be based on IFRS and consolidated financials.

To discuss the business performance and outlook, we have 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 outlet without the Company's expressed written consent.

Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and webcast. After the end of the call, in case any additional clarification is required, please feel free to get in touch with Rago, Milan or myself. I would now like to turn the call over to Umang

Thanks, Kedar. Good morning and good evening to everyone. I welcome you all in this call today. I will discuss the key financial highlights. For this section, all the figures are translated to US dollars at a convenience rate of INR44.59 for $1.

Our consolidated revenues in this quarter grew by 18% on a year-on-year basis to $444 million. Global Generics recorded revenues $323 million, a strong growth of 21%. Pharmaceutical Services and Active Ingredients, which we will call PSAI in this call, grew revenues by 7% to $108 million.

A gross profit margin for this quarter is at 53% and the margins remain roughly the same, both at the segment and the overall level when compared to the previous year. SG&A expenses, including amortization for the quarter are at $152 million, an increase of 23% over the previous year. This increase is attributable to the following factors, annual inflationary increase in manpower across the core business.

The step up in the OTC related selling and marketing costs in Russia, in line with a strategic intend to expand the OTC portfolio, and the general overhead in the US, due to the recently acquired Bristol penicillin facility. R&D costs at $27 million for the quarter, show a planned increase of 21% over the previous year.

Included in our financials this time are interest and bonus credentials of approximately $3 million, which we believe is an indirect form of dividend to the shareholders. A one-time charge of $3 million on account of a voluntary retirement scheme floated by the Company and adjusting for both of these factors are adjusted EBITDA at $97 million, represents 22% of sales and has registered a growth of 27% over the same period previous year.

In this quarter, we made required shipments to the US from India in anticipation of our launches. This has triggered a tax benefit in line with the IFRS mandated treatment for unrealized profits from these stocks. The tax charge at the India entities rate of 32% was more than offset by the tax credit of the US entities rate of 38%, resulting in a net credit of all the inventory shipped out of India.

Hence, the reported effective tax rate for the quarter is 4%. Adjusted for those benefits, it would have been 16%. On a full year basis, we expect the annualized effective tax rate to be around 21%, driven largely by Olanzapine's related exclusivities in quarter three and quarter four. Adjusted corporate after tax for the quarter normalizing for the 16% tax rate is $56 million and is up 13% of sales.

Key balance sheet highlights are as follows. Our operating working capital has increased marginally by $20 million from the previous year. The increase in inventories in anticipation of new launches was partially offset by the release in receivables. Capital expenditure for the quarter is at $41 million.

Foreign currency cash flow hedges in the form of derivatives and offsetting loans are at $410 million as of date, hedged largely in the range of a piece INR45 to INR47 a dollar. In addition to this, we have approximately $236 million of balance sheet hedges of net receivables. Our current net debt is at $414 million, and the net debt to equity is at 0.38. With this, I now request Satish to take us through the business highlights.

Thank you Umang. This, I think, was somewhat of a mixed quarter for us. While North America and Russia, CIS market demonstrated strong growth, India formulations was below our expectations, and the PSAI segment growth of 7% was in line with expectations.

I will now cover the business highlights for each of our key markets. The performance analysis was based on the respective local currencies. Starting with North America Generics, we recorded an impressive year-on-year growth of 51%, recording revenues of $129 million, and are quite delighted with the continued progress in our North America generics business.

Our key limited competition products, tacrolimus and lansoprazole, continued their strong performance and sequential market share improvement. In this quarter, we have a benefit from the initial launch revenues of fexofenadine OTC. We now have five customers for this product, and the uptake is quite encouraging.

Other key products in the portfolio, such as omeprazole prescription and omeprazole magnesium OTC, have also acquired an impressive increase in the market shares over the last one year. We have also become more in sync from the newly aquired Bristol penicillin facility, with four SKU launches this quarter. We expect this business to scale up after the third quarter, with launches of some of the larger SKUs.

During the quarter, we also launched five new products in our regular prescription portfolio. We have now got an approval for OTC switch for Fexo-Pseudo combination products and launch preparations are underway.

During the quarter, we have filed three ANDAs and cumulatively, we now have 76 ANDAs pending approval to the USFDA of which 36 for Para IVs and 11 are First-To-Files.

Moving onto India, revenues for the quarter are INR2.936 billion, or $66 million, which represents a year-on-year growth of 6%. The performance in this quarter was below our expectations, largely due to some pressures on our top brands. While we continue to get impacted by the price compression resulting from competitive activities, it's less than what we have seen in quarter four from the previous year.

In the last 1.5 year, we also expanded and reorganized our field force deployment, which is yet to see the desired results. While we're not satisfied with the start of the year, we hope to recover the lost ground in the second half of the year.

During the quarter, we have also launched 12 new products. Our recent launches of biosimilars are doing well, and our overall biosimilars portfolio, which is now 7% of India sales, has grown at an impressive rate of 69% over the previous year.

The Russia business continues its steady growth with revenues of $56 million for the quarter, and the year-on-year growth of 23%. Our secondary sales growth of 70% for the moving annual total of mid-2011 is much higher than the industry growth rate of 6.5%. Our rank in Russia currently stands at number 13. This growth was largely driven by volume growth in our OTC products and key prescription products.

The OTC segment was present for almost 40% of the Russia market, and as part of our strategic intent to increase our presence, we have been investing in brand promotional activities in this space. As a result of this, our OTC portfolio is now at 30% of the sales, from about 35% about a year back.

Talking about Europe generics, revenues are at EUR28 million, which is a decline of 11% over the previous year. Revenues in Germany for the quarter are at EUR19 million, which is a decline of 17%, which is due to continuing tender based pricing pressures. In June, we have commenced our supplies towards the recently awarded AOK tender.

Despite winning a few high volume products, we expect the margins to remain subdued due to the low pricing. Revenues from rest of Europe grew marginally on the back of out-licensed products.

Move now on to the PSAI business. Revenues for the quarter are at $108 million, showing a year-on-year growth of 8%. Active Ingredients business grew very well on the back on new launches. But revenues from the pharmaceuticals services declined sharply due to the temporary suspension of sales in our Mexico facility for the import alert.

However, we expect to resume our supplies of one of our major products, which is Naproxen API, is exempt from this import alert. In our active ingredients segment, we are seeing good pipeline workings around certain large molecules, and the business is expected to show higher growth. However, in the pharmaceuticals services segment, the outcome had dependent on the progression of one or two partner's trials, which we may see by the year end. However, the business environment for this segment still remains challenging.

During this quarter, we have filed nine DMFs globally, including two in North America, one in Europe, and the rest in other markets, because the cumulative filings standards 495 globally. I now hand it over to Prasad for his closing.

Thank you, Satish. As Satish explained, this was a mixed quarter for us, and we will continue to work on strengthening our market positions. I am, however, extremely happy with the progress in our North American generics business.

Apart from the impressive growth, we've also seen a number of positive developments recently, culminating in the accrual of fondaparinux which has been launched now, after its long-awaited approval. The products will have a phased launch into the pipeline -- into the customer pipeline over the coming quarters.

As you are aware, the development process for this product was quite complex. And, we would like to acknowledge the contribution of the entire development team and our technology partner Alchemia in this regard.

Similar to this product, are reducing generic R&D efforts is increasingly focused on complex molecules. We may not see a trend of a high number of filings as earlier, but the complexity and market potential are expected to be much higher. As a result, our R&D costs are likely to move up in the coming years, not only on account of the booked complex generics portfolio, but also increased investment in proprietary products and biosimiliars.

We also plan to launch another limited competition product, Fexofenadine-pseudoephedrine higher strength in the OTC segment in the second quarter. We expect the second half of this year to have a higher growth and profit relative to the first half. This will be driven by olanzapine 20 mg under exclusivity, and new SKU launches from our Bristol penicillin facility in the Augmentin and Amoxil range, ramp up in the market shares of [wonder] pharma and the OTC launch of Fexofenadine-pseudoephedrine higher strength.

While we derive the benefits from these positive developments, we also need to focus on some immediate challenges. Apart from sluggish growth in our India formulations business, another immediate priority for us is for us to resolve the issues raised in the warning letter by the USFDA on our Mexico facility.

As indicated in the import alert, Naproxen, which is our key product from this site, has been exempted. And we have sent our responses to the warning letter in the end of June, and are working closely with the FDA to seek clarifications and resolve the issues, so that the import alert may be lifted. With this, I would now like to open the call for questions and answers.

Thank you. Ladies and gentlemen, we will now begin with a question-and-answer session. (Operator Instructions). The first question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Yes, hi. Thanks for taking my question. I have a question on the domestic market because towards the mid of the last quarter, we were expecting that the growth would revive after a muted Q4, but that hasn't happened. So, can you throw some more light as to why the growth has been sluggish in India? What steps are we taking and how do you see growth reviving from a one to two year perspective?

Okay, the growth has been disappointing, yes we indicated that -- thing should improve from this year, this financial year onwards, but the quarter one results have not, certainly, reflected that, right? So, we do express a sense of disappointment over that. So, if I were to look into some of the reasons why and what do we expect going forward?

So, reasons, if you look at it, there is some initiatives that we are undertaken about, say, two years back. One was field force expansion. We also wanted to redeploy some of the [people] and all that. But, I think the deployment, as well as expansion, have not yielded the sales increases that we expected it would. But, I think that's one issue which needs to be still tackled, and we're still working on that, right? So, that's one.

As far as the other initiative goes, the expansion to rural markets, started off well -- there was a good scale up in the previous year. There's been some issues with take in terms of field force attrition and things like that, which was, somewhat, beyond our control, right? That's something we also had to anticipate.

So, while these are two primary reasons in terms of where we have failed, first quarter was also hit with, somewhat lower growth in some of the top brands, that's another issue. So, these are broadly what I see as the issues for the first quarter, compared to, say, what we anticipated in the previous quarter.

Now, while it's a work in a progress in terms of trying to sort out the execution issue, I would expect that things to start looking up in the second quarter, sorry, in the second half of the year. So, this will be based on some of the interventions which we have started plugging in early enough in this quarter. But, again, I would still like to see the performance of the second quarter. Once that improves, I will be able to comment more on that. I would be -- able to say with much more confidence on what happens in the second half, which I'm sure will definitely start recovering.

Okay, and just one more question. Have you seen an authorized generic in Fonda yet?

Not yet, but we've heard of possible (inaudible) generic.

Okay. Thank you.

Thank you. The next question is from the line of [Beni Nadeiv] from Edelweiss

Yes, good evening and thanks for taking my question. Just to pick -- I am caution further. Have you seen any pricing placement in the domestic market? Because, for one of your [report] like Pfizer has come out with almost [50%] of your pricing. So, do you see that [MNC] is coming out with ready investing pricing and it's affecting the overall, you know, pricing strategy in the Indian market?

It's not just MNC, I think even among the Indian companies and all that are [see] the industry itself are built an intense pricing that is happening to various products. So, obviously, it does affect the market share, you know, and that's something we will see, yes.

And, have you also taken some price corrections [whatever] at your level [balance]?

It is one of the leading products (inaudible) basis.

Okay, and what could be the worst impact because of the Nimesulide, because there was some confusion in the market and fully -- how impacted your growth on the market?

The (inaudible) I think from the time the EMEA had put in some restrictions on the past, especially the issues on the [pedic] suspension which we had become quite some time back. I think the recent email report also has the -- clarified, in terms of the benefits of Nimesulide, except for chronic usage of that, which is something which we already implemented quite some time in the past.

But, I think the whole activity, especially by competition, by also putting in false propaganda, which we are also in one case, actually, successfully gone to court to restrain them. So, this is something which has also seen degrowth in this molecule compared to the past. But, that's something they've definitely seen in this molecule.

Okay. And, the second thing I wanted to ask, what could be the depreciation and amortization impact because of the stuff has taken the US for this quarter?

It should be $1 million to $1.5 million.

Okay. Thank you, that's all from my side.

Thank you.

Thank you. The next question is from the line of Ranjit Kapadia from Centrum Broking. Please, go ahead.

Good evening. My question relates to the domestic market, if you can throw some light on the sales force and how much your sales force was EBITDA in the last year. And anything in the guidance for FY'12?

First of all we have not guided for FY'12.

Sorry, FY'13. FY'13 have $2.7 billion dollars, the guidance. And whether it's changed or whether you are revising upward that?

But, that still remain, there's no change because of what we have seen just because of the Indian market growth in the first quarter. That's no indication of any revision or any change. We'll still stick to our guidance, what we have indicated. In terms of the field force that you were asking, I think last year, we added quite significantly fair to the field force, and it was about 500 numbers. Yes, 500 field force is what we had added.

Added?

Yes.

And, what is the current strength now?

Total would be about 3,800.

3,800. And when do you feel that there's potential of the 500 people will be available to us?

I think it's difficult to just comment saying that just because we added field force that all net sales are going to increase, that's not what I was intending to say. So, it is about field force which was added in different marketing divisions, and also the field force strategies that we employ and the execution that happens after that. So, it's a combination of various things, you know, which I have said that on execution, we have not performed up to expectations.

And, what is the attrition rate in the field force, currently?

It's about 25%, Ranjit. Across, a little bit varies, but overall it's about 25%.

Okay, thank you very much, and I wish you all the very best.

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

Thanks. Firstly, what will be sales contribution and how much does it cost on the new GSK facility?

Sales is about $2 million and the cost of the facility, because we haven't scaled up, is about $5 million.

$5 million, and how much of peak sales are you expecting from this?

This will peak in quarter three, and I think it could go, as an average run rate of almost about $8 million to $10 million.

Okay.

At quarter three, right? But, this is a seasonal product, so you will be begin to see the variations between quarter one and quarter three. As a full year average, a good rate would be about $5 million-odd per month.

Okay. What's your view on the German pharma market? You are not (inaudible) started AOK supplies, do you expect sales growth this year?

Sales will definitely not grow because I -- we've already indicated in the last year result that price decline. We continue for this year. Right, so what you have seen in the first quarter is the trend even for the rest of the year because the view on the market is that AOK tender we also got good products with increasing volumes, as an outcome of that. But, because the pricing pressures, that's why you see the decline.

Okay. And, what would be a market share in Lansoprazole, Tacrolimus, fexofenadine and omeprazole?

Hitesh we'll can share these numbers offline with you

Okay, sir. Thanks, and all the best.

Thank you. The next question is from the line Sushant Dalmia from Pinc Research. Please, go ahead.

Thanks for taking my question. Just one question in terms of the housekeeping. So, this I suppose this $3 million of the VRS have seen in SG&A cost and interest and bonus, debentures have [slabien] financial expenses that will be right?

Yes, I am just clarifying the VRS. It's 70% in the manufacturing costs and 30% in the SG&A.

Okay.

Right? And, there's interest in the interest line. The bonus debentures in the interest.

Okay.

Finance and commission, yes.

Thank you, sir.

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

Hi, when you said the Fonda will be launched in a phased manner over the quarters, can we go a little deeper into that, why you said, phased and what is the time period in which you expect to achieve the best market share?

So, part of the reason this is going to be a slow phase is because of the complexity of manufacturing this product. So, it involves nearly 16 steps of manufacturing. And hence, you know, when you've launched the product, I think we'll be able to fully explore it, the market share of the product three months from now.

Okay, great. Today, there was an FDA [list] that you got an approval for, Palonosetron Hydrochloride which --

Tentative approval, yes.

It's tentative, okay, great. And a little bit before, did I hear that you said you already got the approval?

Yes, we have received the approval. We should be -- we are hoping to launch.

Okay, great, great. And, finally, on housekeeping, which is condition from the previous question, in the calculation of EBITDA, you have an added back interest of about [INR22 crores] in your present lease, whereas the interest in your P&L is only about INR4 or INR5 crores. So, what is the disconnect there?

So, Bino the interest in the P&L is actually the net finance expense. So, that includes foreign gain also. You could see the last page of the press release it will give all the components adding up to what is there.

Bino we had a 16 [pillars] ForEx gain this quarter.

Right, so the EBITDA number that you have given us includes that ForEx?

That's right, yes.

Okay, perfect. Thank you.

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

Thank you, good evening everyone. Just wanted to get a sense on -- we've seen a weak trend in terms of growth as other CIS markets, other than Russia and also in the ROW markets, I think they had seen sort weaker even last -- over the last couple of quarters. So, I just wanted to get a sense on what's happening there.

A couple of markets had devaluation, right? So, Venezuela was one and also Belarus which is -- we're talking about steep devaluation of the currency. So, that's one impact of what has happened, and that's what the issue is.

Other than that, I don't think there's too much that we're concerned about right now.

Okay, okay. Thank you.

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

Yes, hi. Just on Fonda, I don't know if I wanted to understand if there is any difference in the, basically, if there are different channels where Fonda is more taken from -- it's probably based -- hospital based channel, which probably direct more. Can you give me more color on that?

Yes. So, Fonda's split about 60% hospital, and 40% retail and wholesale.

Okay, 60% is hospital.

That's right.

Okay. And, I know, of course, US launch is pretty much priority right now, but any update on the new filing, where does it stand right now?

We are not providing an update on that as yet. Well the data exclusivity runs till next year, Girish.

I understand the data exclusivities till 2012, but, filing would, of course, be in preparation, right?

Yes, we are not commenting on that right now, but it is our plan to try to monetize Fondaparinux as much as we can across the board.

Okay, okay. And, I just wanted some more color on the US. The US sales, of course, has been pretty strong. Of course, on the OTC launch has been there. But, how has been the launches, say, in higher strength and also to be in some of the launches, which were pretty recent? How have been the market shares there and what is the color on where the base sales might actually go to, say, by the end of the year, excluding Fonda exclusive launches that will be coming in the later half of the year?

These products are highly competitive because very large number of players launching a product. So, I don't think they form a significant [problem for us].

Okay, alright. I'll jump back in the queue. Thanks.

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

Taking this question forward on Fondaparinux so you said 60% is hospitals, 40% is also retail. Right now, in the press release, you are indicating that you were targeting wholesale retail. So is that what you will start off right now? Targeting 40% of the market?

Yes, that's right.

And what do you see, then, in three months' time, you would then target to the balance of the market? In terms of our hospital distribution because this is -- you don't really have too many injectables in place. So what sort of tie-up marketing target you would have to take this product forward?

So this one is a little bit different from the rest of the products that stand in the hospitals. So it doesn't require that kind of special GPO type of an organization.

And what sort of market share can we presume, say, about the margin for next year? Can we assume a 30%, 35% market share build-up? Or -- April, May, June of next year, or will it take longer to reach market shares like that?

Abhay, we are not commenting on that, as yet.

Oh. The last one was on Russia. You indicated 30% is OTC now. How much was hospitals as a percentage of your Russian revenues?

Less than 5% would be hospitals. And we have plans to see what products we could pick and choose to increase that portfolio and prepare it for the biosimilars and the other non-quality products that we'll be launching in the near future.

Okay. Any outlook on the Russian pricing? Is there any transition? Is there any expectation of any price changes or structural changes on the Russian markets?

We haven't heard anything in this quarter, which is significantly different from the previous quarters. However, we will continue to maintain the standard. We don't see anything drastic happening in Russia, except that the long-term trend of that market would be to probably correct a bit in terms of pricing.

Okay. Fine. Thank you.

Thank you. The next question is from the line of Bhagwan Chaudhary from India Nivesh Securities. Please go ahead.

Yes, thanks. All my questions have been answered. Thank you.

Thank you.

Thank you.

The next question is from the line of Ravi Agarwal from Standard Chartered. Please go ahead.

Yes, thanks for this call. Just a question on the GSK penicillin facility. I forgot, non-recognition $5 million on a monthly basis as a regular client, right?

No, that's quarterly. That's quarterly. $5 million is only -- there are two things I indicated. $5 million was the cost that we had in this quarter.

Right.

And the average sales that I mentioned on a subsequent question was $5 million per month.

So average seems on the [steady] (inaudible) around $5 million.

Can be $5 million, but it would stretch between $2 million and $8 million, depending on the season.

Depending on the season, yes?

Yes. But the cost is $5 million, roughly, per quarter. So what we have shown in this quarter is $5 million cost.

Okay. Just going on into a question on the penicillin facility, I do believe one of the reasons for acquiring the facility was also to take part in the tender businesses, which come up in the US. Any thoughts you want to share about whether you could actually see some upside in terms of revenues from tenders in that facility for this year?

As of now, I think we should go with the $50 million, on an annualized basis, okay (inaudible - microphone inaccessible).

Okay. The second question is on the ROW markets and the growth of around 6%. When do we actually see the benefits from the GSK alliance for the emerging markets actually beginning to flow, in terms of some of the numbers that are out of the markets? You have some sales coming from some markets last year.

Meaningful numbers for 2014.

Okay. Thank you so much.

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

Yes, thanks. I just want to understand the SG&A bar slightly better. When you say for the Bristol facility that costs just $5 million, is that all the fixed costs, which is included in SG&A?

No, SG&A has about $2 million.

Okay. So if you just look at SG&A sequentially, excluding the amortization part, this increases roughly around $10 million. So $2 million for the Bristol facility. So when you ramp up, the -- let's say the -- for the full year sales of $50 million on the -- from the Bristol facility, what could the SG&A component look like?

I still think the SG&A would change at close --.

It's fully factored in there?

That's right.

So can we -- should we consider this as a base, a true base, to go forward, for the SG&A part? Or is there some more cost other than this, could be added -- other than factoring the normal increase in personnel costs every year?

This could be considered as base, except where the quarters where we might have the same on OTC in Russia and other one-time expenses.

So that incremental spend on OTC in Russia would be for the future products. But for the current products that you have in the market, the expenses are very much there in the numbers? Would that be [fairly clear]?

The one for existing products, the timing of various campaigns might be straight across various quarters.

Okay. Just to understand this exactly better, then this first quarter, on the higher side or a much lower side? In terms of OTC expense? And what portion are you doing -- for example, if I look at SG&A number, it's something like 631 growth for this quarter, excluding the SG&A and the impact on the others. What is it -- OTC expenditures is part of this? Just to try to understand this part slightly better.

We aren't guiding to that level of granularity, but if you were to look at, maybe, a quarter three or quarter four and a quarter one, right? Quarter three of last year, quarter four of this -- of last year and quarter one of this year.

Okay.

You will come to a rough average around the level that you are talking about.

Okay. That's helpful. And this exclusion was just on the India? There's not -- just -- you did mention about several products. But on therapy business, can you just guide which therapies are you facing the mix and pricing pressure? Is it like more in the acute side? And within the acute is like (inaudible) infected, gastric, GI, can you help with that kind of sector broader outlook?

It's more on the acute and the cardio side.

Okay. And not much of pressure on the (inaudible) infective in both?

The R&D infective doesn't really affect us too much because we don't have too big a portfolio on that.

Okay. And just one more question. On the gross margin on the PSA segment, like, sequentially they were down from 27% to 24% level. Why is it only being imported? Because imported essentially, for you guys, you came in at the end of the quarter, right? So what was the essential reason? Was it just the problem with the service business?

Yes, it was a service business problem. And it was slightly higher input costs, which have, after the [pool] is corrected, have begun to even out.

Okay. And just the last question here. On the tax rate, for this -- the true tax rate for this quarter is something like 17.5%? I guess you are --.

Oh, that's right. 16% is the true tax rate for this quarter.

Okay. And just for the base business, when you -- for the quarter, wasn't it guided to 21%. But for the base business, is 16% the more representative number or something higher is more representative of that?

16% is the more representative for base case.

Okay. Okay. Thanks, I'm done with my questions.

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

Hi. Good evening. Can you update us on the two industrial accidents that had happened in December and then one after that, in which we had two deaths each? Specifically, have regulators visited your boiler room facility after that? And could this culminate into something more serious like a warning letter or [import lot] or something like that?

Two of the accidents took place in our APS facility. One was a fire accident, another one was a nitrogen caused asphyxiation in a confined space. Both of these have been investigated. In one case, we would apply to a short of notice, another one, the proceedings are going on. We expect some investigation and some regulatory action on this. But nothing which should stop manufacturing or any financial influence -- impact as such. But there could be some action by the department.

Which department are you referring to? Is it a local authority or is it general?

The state authorities. Locally, it would be state authorities.

State authorities.

The [record] factories which come from the Ministry of Labor.

Okay. But ever since then, did you have regulators from foreign countries visiting and --?

No, it has no implication on foreign regulators. They have no jurisdiction over this.

Would [FDA] at some point in time come over here and do inspection?

It has nothing to do with the quality of the product. It was an industrial accident involving people and equipment. So there is no product involvement.

Okay. And just can I -- update on some of the [shift port], certainly the ramp up that you mentioned on previous calls. Has that started or when should we expect that?

So part of the ramp up for us -- part of the shift of manufacturing from here to there has slowed down because we've got additional business throughput that is to our customers, from some of the products that are used there already, when we purchased that facility. And so, hence, the shift from India has been slowing down. But it is actually being fully utilized now and we're actually expanding the facility.

So in quarter two, we should see some revenue on account of that.

Okay. And I assume that you've had a good Fexofenadine OTC launch. Has this been good enough to make up for what you have lost in the Rx setting on a value basis?

Yes, it could be, Sameer. On a full-year basis, it could be.

Okay. Just one final question, on Fonda pricing, is it something that is more or less in line with what happens when the one-player market dynamics, outside generic, which is generated with this 20%, 30% erosion? Or is it something different than that?

We hope it will be realized.

Okay. Thank you very much.

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

Thanks for taking my questions. A couple of them. One is on the biosimilars strength. Even in the analyst call, you stressed quite a bit upon our capabilities of biosimilars and the -- and that being a medium-term growth driver. So beyond the launch that you've done in India, how do you see the biosimilar road map really going out for us over the next two to three years?

So we have started listing the product in markets, which will allow us to register products on the basis of the clinical trials we've done in India and some marginal additional trials. So that revenue, I think, will become significant by 2014 or so.

But the real value, and nothing will happen when the products are launched in the US, European and European markets. So for this we have to do much bigger trials. And our plan is to partner with somebody who has the expertise to do large-scale clinical trials as well as retail and market the product in these geographies.

So we are -- in the meanwhile, we are progressing the product we ride under [TMA]. And the EMEA meetings, we have requested for a meeting with the USFDA and the process of registering and doing the clinical trials is continuing. We will not wait for a partner, but we believe that the full potential of the past few biosimilars from the Dr. Reddy's portfolio, they have not delivered a strong partner.

So -- but these patents have to expire, we have to do the trials to file. So they are a little bit away, 2016. 2016 onwards.

But how -- could you put the rest of the world opportunity be for you in terms of these -- for these products?

I hate to put numbers, but they'll be significant.

Okay. And so any -- in terms of India, how many new products in this price are you looking to launch over the next -- so you've already launched four. So how do you see that playing out in India per se?

I think we should launch another product in the next four months. And that will be 12 months.

Okay. And on the US business, you said we've got about $129 million sales for the current quarter. So barring the launches, that will come incrementally for the existing budget product. Is that like a base that --?

Yes.

It's pretty much safe to assume that.

Yes. Pretty much safe to assume that.

And in terms of the pace of market, the market share additions are there on Lanso and Tacro, is it still significant upside left in terms of more market share gains? Or are we currently maxing out on market share gains that you can have on these products?

Some products, there is room, headroom, left. But not all.

Okay. And so lastly, how many products are you looking to launch more -- during the year, going forward?

It's something like 10 to 12 products.

Yes, about 10 in the US.

And barring the two or three that you talked about, in terms of the niche opportunity, the rest of them -- all of them are going to be [blended] now? Or are there are there going to be some interesting opportunities -- some interesting launches, even in the ones that we haven't really especially mentioned?

I wish I could predict that with great accuracy, because sometimes what we think is a plain [relevant answer] ought to be a big remard. And sometimes what we believe is a big one turns to be a really competitive product. So, but I do think that there are significant possibilities, though.

Thanks and best of luck.

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

Yes. Just one question on the Mexico facility and the impact of import alert. Given that now you're allowed to market naproxen, what is the overall yearly impact that you see because of the import alert?

See, roughly from the Mexico facility, we have a sale of -- on an average, about $60 million a year. Right? So you're looking at naproxen, which is half of that. And you have named some of the products.

Yes.

Also, that's the extent of -- that you should take this for the [GSM].

Around $30 million?

30 is full year, by the way. So --.

Okay. On an annualized basis, it will be around $30 million?

Yes.

Okay. On the R&D costs, I've heard -- you mentioned about increased or a step-up in R&D spend, because of the complex filings, the biosimilars and top rated products. What is the level of R&D spending that you could expect? What is the level of step-up that you are kind of looking at, in absolute levels?

Yes, I think in the past, we used to be at around [6%] for sales. During the first quarter, we were roughly around that. I think what we have generally guided that normally we see about [7%] of sales. That's what we expect it to be. Which is quite significant of a step-up because we have seen the sales increasing and then we are seeing clear participation of [a million], half increase on top of that. So.

Yes. So basically you're talking about $2.7 million in FY'13. So we could expect around 7% of that to be R&D spend?

That's right. 7% to 7.5%, Saion.

Okay.

On some of the biosimilar trials of it.

Okay. Okay. Okay. Thanks a lot.

Thank you. The next question is from the line of Surajit Pal from Elara. Please go ahead.

Yes. Thanks for taking my questions. I would just, as you said, it is that you will be targeting 40% of Fonda market in the US, which is mainly retail and wholesalers and 60% are split in land, seems to be very injectable products. So I was thinking that since there has been talk about AG and if AG is given to any established hospital generic guise, like I'm not mentioning any names, like those who are already at the levels in the US, do you think that will have a dent on the potential revenue from the -- for your products?

We don't think so. For several reasons, because like I mentioned before, this is not a complete DPO type of a product and we are vertical on this product.

Yes.

And we have the best cost solution on that.

Okay. So you believe any established guy in top three, hospital distributor in US if they got the AG. It will not impact your potential revenues even in a hospital setting?

No. You see, any AG will impact our potential revenue.

Yes.

But we are quite confident of retaining the relatively large market share over time.

Okay. Another point is that, as you were saying, is that you were also putting money on proprietary technology either through rerouting the expenditure. And going by that kind of niche product as Fonda has, are you planning or do you have in your pipeline of similar carbohydrate synthesis based products, which is pretty complex in nature, and your team has done a fantastic job, in scaling up of kind of successful doing. So do you have any product in pipeline or any expectation in the next two years' time?

Do we have products in our pipeline, which are very complicated.

Yes.

And require characterization, like Fonda requires.

Okay.

And we have got a nice emerging pipeline.

Yes. Thank you.

Thank you.

Thank you. The next question is from the line of Prakash Aggarwal from RBS. Please go ahead.

Yes, hi. Good evening, sir. So just one question on the gross margin side, if you look at 1Q '12 and 1Q '11, not much improvement in spite of a few large, high-value, high-margin products being there for the last three quarters, two to three quarters. So any particular reason or is it because of the lower domestic business growth, which is, again, a high-margin product for you?

Prakash there is -- it is a function of a variety of factors, partly the cost of the new factory in the US. That portion has come in the cost of goods sold, that is one factor. Secondly, what you rightly mentioned is the proportion of India is a bit lower this quarter. So it's a result of a number of -- several factors, like this.

Okay. And just going to Russia, we are all aware of this pharma, 2020, which is spread across three to four step functions. Especially talking about 2013 to '17, where it aims to replace 50% of imported generic drugs with locally produced products. Is there a strategy, which we have, in terms of buying out a local body or setting up our own facilities? Because what I understand, we are currently a marketing company in Russia?

Well, we -- so it's still -- we still have to wait to see how we actually plays out. Right? So it's not as simple as just stating that this is what the government wants to do and it just happens overnight type of thing.

So there will be a lead time, by the time it will happen, and then I think each company will formulate its own strategy. So currently we don't have any immediate plans to acquire anything local or any such thing. There are several options to us, which we are still evaluating. As things keep progressing, we will take a stand on that. But there is no telling hurry to get into any more on that.

Okay. And on the tax rate, I think I missed something. What Umang said was 15% on an annualized basis? Or 21%, given [dollar] on the (inaudible) being on the second half?

Yes, so let's say without olanzapine, we're at 16%, or with olanzapine we are at 21%.

On a full year basis?

That's right. And that's why this quarter is what we've normalized to 16%.

Okay. So going forward, you would see a much higher tax rate than the annualized 16%?

You would see the higher than 16% in the quarters where we have the exclusivity.

Right.

And around 16% in the quarters that we don't have.

Perfect. And any more the color you could give on Lipitor? Last week you had a 30-month stay, around, May or something. Can you tell us some more like that?

We cannot comment on that right now. We choose not to comment on that, please.

But we are definitely there in that product, that's what I wanted to understand.

Yes, we are on that product. And -- but I can't comment on the exact dynamics of this right now.

Okay. Thanks. That's all for myself. All the best. Thank you.

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

Yes, thanks. A lot of my questions have been answered. Can you hear me?

Mr. Mehta, just stay online. The management's line is disconnected. We are trying to reach them, sir.

Okay.

Mr. Nimish Mehta from MP Advisors. Do you have any questions?

Yes. Just one question. I actually missed the number already mentioned from the Bristol penicillin facility. How much sales have you booked for this quarter, if you could just repeat it?

For -- we have $4 million.

$4 million? Okay. From penicillin. Okay. Thanks. Thank you very much.

Thank you. The next question is from the line of [Ashwin Agarwal] from [Arcash Conga] Investments. Please go ahead.

Good evening, everyone. I have a general question. Indian companies were very, very high in quality, but recently we have seen many Indian companies, in general, getting FDA warnings. So have FDA regulations become much more stringent?

I would just say, Ashwin, that FDA scrutiny generally has increased.

Okay.

Over the past, say, couple of years. As we stated [in tech], I don't think it's targeted just at Indian companies, it's generally for all of the companies, it has happened. The European market companies, actually, you have seen large international companies.

Right.

A lot of these companies are [actually chased].

One more observation I have seen, that the time gap between a warning letter and import alert has reduced significantly. Any reason that they don't want companies to fill the pipeline in the US, which you can market? Or what has been the reason?

I do not particularly why you got that [standard really], so I can't comment on it. It's something that the regulators should answer.

Okay. Okay. All the very best.

Thank you.

Thank you. The next question is from the line of Chirag Talati from Espirito Santo. Please go ahead.

My questions, I have two questions. Could you, firstly, if we look at your annual report, your DPB and your netted credit have gone up materially this year, as a percentage of sales. How should we look at it going forward? Could that -- a decline in those credits have an impact on your margin for, say, FY '12, FY '13?

I'm sorry, could you repeat your question? We didn't get the last part of it. Could you just repeat it please?

Yes. So I mean, if you look at your annual report for FY '11, then the -- the EPD credits and the other relevant credits have gone up materially as a percentage of sales. Almost double, more than double. How should we look at it going forward? I mean, if that goes down, could we see it hurting your margins for, say, FY '12 and FY '13? How should we look at it?

Not materially. It should not impact our margins materially because I think the government will also announce a separate scheme or extend the BBTA scheme with possibly a higher rate. So we don't expect too much of an impact on margins. However the numbers that you are seeing in our annual report are also an outcome of what we sold in terms of Fexo-pseudo into the market. So for the jump that you've seen includes that.

Okay. Thank you. And one question, could you update us on how do you see -- how you think the business has evolved for Promius Pharma as a whole? And how do you see that going forward? And some update on your terbinafin product, for which you have Phase III already enrolled?

So the terbinafin trials are ongoing. We do not have an early lead. We have not got an early lead kind of a methodology for that trial and we hope to receive data from that over the next one years. On proprietary products, our business is approximately $20 million in size. And we had a stay -- are hoping to add more from our pipeline to take that higher as we go along.

How -- you are quite prudent, so how should we see the potential of that product in terms of peak sales going forward?

We aren't guiding to that as we had, Chirag. So we have to -- we're not guiding by each product sale, but the rationale for that acquisition was to have -- to enable to be a little bit more critically sized on the Promius.

Okay. Yes. Thanks that answers my questions. Thank you.

Thank you. Ladies and gentlemen, due to time constraints, we will take one last question from the line of [Lydia Bharti] from IDBI Mutual Fund. Please go ahead. Ms. Bharti, please go ahead with your question. Your line has been unmuted.

Yes. Thanks a lot. Just on the margin front, you said from June onwards, you have actually started supplying for the AOK tenders. What -- how much of an erosion are you going -- are you seeing going forward? Or is this -- are the margins that are being made this time sustainable? What's your take on this?

Lydia, we don't comment on the specific margins related to the AOK tender.

Yes.

But what we said is for the award on Germany business [patches], from the year-on-year price compression, we could see some margin stick. Although I don't know what unconsolidated financials -- we don't think there will be any noticeable impact.

Okay. Okay. And also on the annual average figure, you said around $5 million for the GSK penicillin facility. Does that include one you told you will launch from quarter three? Does that include the $60 million or annual figure include that?

Yes, so it might be paid in that respective quarter in which the launch happens. So what we said, the monthly range could vary. And on our -- on an average basis, it could settle down to around $5 million or so. But again, this is a forward-looking statement, so -- .

Okay.

Yes.

Okay. And on the R&D focus, if you could just emphasize on the -- I know you focused the P&L you were looking at going forward? You said your filings are going to come down and it will be a more complex product-based finance. So if you could see and provide value focus right now?

Yes, with regard to the -- from the US side, it will be more dictated by the patent expiries and as of now we don't have any therapy buy-outs in the portfolio. But from a complicated perspective, we would like to increase the proportion of characterization led products, with [excel rights] we imply.

Okay. Okay. And also on the devaluation of currency, which happened in some of the markets you mentioned, are you actually changing the strategy towards now -- towards your hedging policy. You are -- you will -- you -- does the impact flow through other quarters, also how would that pay out?

Yes, for the specific markets, we press this devaluation challenge are Venezuela and Belarus. And we don't believe the cost effective hedging solution is available for this market. And the market devaluation has already happened. Obviously the effects will flow through in the coming quarters.

Okay. Thank you. Thank you so much, that was all from my side.

Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the floor back to the management for closing comments. Please go ahead, sir.

We thank you all for joining Dr. Reddy's senior management for the earnings conference call for quarter one FY '12. In case you need any additional clarifications, please feel free to get in touch with Rago, Milan or myself. Thank you and good evening to all of you.

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