Dr Reddy's Laboratories Ltd (RDY) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Q3 FY'12 earnings conference call of Dr. Reddy's Laboratories Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kedar Upadhye. Thank you and over to you, sir.

Good morning and good evening to all. Welcome to Dr. Reddy's Q3 FY'12 earnings conference call for the quarter ended December 31, 2011. 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 the transcript shall be available on our website soon. The discussion and analysis in this call will be based on IFRS consolidated financials.

To discuss the business performance and outlook we have today GV Prasad our Chief Executive Officer; Satish Reddy, our Chief Operating Officer; Umang Vohra, our Chief Financial Officer; and the Investor Relations team.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be re-broadcasted or attributed in press or media outlet without the Company's express written consent.

Before we proceed with the call, I would like to remind everyone that the Safe Harbor language content in today's press release also pertains to this conference call and webcast. After the end of the call, in case any additional clarifications are required, please feel free to get in touch with Raghavender, Milan or myself.

I would now like to turn the call over to Mr. Prasad for his opening remarks.

Good evening and good morning to all participants. I welcome you to our Q3 FY'12 earnings call.

I am happy to announce that this quarter's results mark our highest-ever quarterly sales and profit performance. On the back of the highly anticipated launch of Olanzapine 20 mg in the US market this year, our revenues have grown by 46% and net profit has grown by 88% over the same period in the previous year. As you are aware, the 180-day exclusivity period for Olanzapine runs into the fourth quarter of this fiscal as well and we will benefit from its contribution in Q4, but not at the same level as Q3.

It has been our target to leverage the limited competition, high-margin opportunities consistently in the US market. These opportunities will be both in the form of 180-day exclusivity as well as difficult to develop and manufacture products, developing in longer-term sustainable revenue streams. Olanzapine launch is a key milestone for us in this journey. Our partnership with Teva for the distribution of Olanzapine 20 mg was also beneficial as a result of offering the full range of products to the marketplace.

Over the next six months we also have a number of other important launches lined up for the US market which will fuel our growth for the next fiscal year.

The organization, including manufacturing, supply chain and commercial teams, are adequately geared to tackle the increased business scale as well as the associated challenges. These launches are the result of the sustained R&D efforts and investments made over the last several years. This will also help us in building a growing and sustainable revenue base beyond FY'13.

I'll now hand over to Umang to discuss the quarter's financial performance. Umang.

Thank you, Prasad. Good morning and good evening to everyone. Let me begin with the key financial highlights. All the numbers, including those of the previous year in my section are covered at the convenience translation rate of INR53 per US dollar. Discussion in Satish's section will be based on performance in respective markets' local currency.

Our consolidated revenues at $522m for the quarter have registered a year-on-year growth of 46%. This included $99m of revenues related to our revenue share from our partner for Olanzapine 20 milligram. Growth for the nine months of this fiscal is at 29%. Excluding Olanzapine, the growth in the quarter over the previous year is close to 23%. Year on year we have also benefited from the rupee depreciation against most of the foreign currencies. However, this has to be seen in conjunction with the cash flow hedge loss of $21m booked in sales, primarily in relation to our hedges on account of Olanzapine.

Revenues from Global Generics are at $402m and grew by 57% for the quarter and 32% for the nine months, driven largely by the US market.

Revenues from the Pharmaceutical Services & Active Ingredients, which we shall refer to as PSAI in this call, at $105m, recorded a growth of 12% for the quarter and 16% for the nine months.

Consolidated gross profit margin for the quarter is at 60%. Gross profit margin for Global Generics and PSAI are at 66% and 35% respectively.

SG&A expenses, including amortization for this quarter, are at $145m, an increase of 20% over the previous year. This increase is largely attributable to manpower cost increase, higher distribution cost and the effect of rupee depreciation. The sequential increase that we see in these expenses is largely on account of rupee depreciation.

EBITDA at $174m is 33% of sales and grew by 127% over the previous year. EBITDA for nine months at $351m was at 27% to sales and grew by 59% over the previous year. Vis-a-vis Q2, the profit for the quarter has no impact on account of ForEx benefit due to the hedges which were explained earlier.

The effective tax rate of 34% for the quarter is on account of release of Olanzapine inventories in the US which is at a higher tax jurisdiction base. As indicated earlier, the effective tax rate for the full year will remain at 23%, which is almost the same rate for the nine months in the year.

Adjusting for the interest on bonus debentures, profit after tax for the quarter is at $98m, 19% of sales, with a year-on-year growth of 91%. Similarly, adjusted profit after tax for nine months is at $209m and has shown a growth of 44% over the previous year.

Key balance sheet highlights are as follows. Increase in operating working capital by $124m from the previous quarter is largely due to receivables of Olanzapine which are expected to be realized in the next quarter. Capital expenditure for nine months is at $94m.

Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $638m, largely hedged in the range of INR47 to INR48 per dollar. In addition, we have balance sheet hedges of $425m.

Our mark-to-market losses in our hedge reserve account in the balance sheet on account of cash flow hedges are approximately $85m as at December 31, 2011. The corresponding amount as of the current exchange rate of end January 2012 is much lower at $29m.

Net debt at $413m represents a net debt to equity ratio of 0.42.

As I end, I am happy to report that we were accorded the Gold Shield Award for Excellence in Financial Reporting in the manufacturing sector. This is the fifth consecutive award from the ICAI that we have received across the various categories of awards. With this, I now request Satish to take us through the key business highlights.

Thank you, Umang. I'll now cover the business highlights for each of our key markets.

Starting with the US Generics, revenues at $235m recorded strong year-on-year growth of 125%. A large part of this growth was driven by Olanzapine. The tie-up with Teva was beneficial to us as it helped us generate additional cash flows. This business growth was quite robust, driven by products such as Fondaparinux, Lansoprazole and Omeprazole magnesium OTC. I am pleased to see a steady ramp up in our antibiotics portfolio and also the Shreveport sales in line with our plans.

In the next six months we are gearing up for some important launches and we remain optimistic about the long-term growth opportunity in the market.

During the quarter we filed three ANDAs and now we have 75 -- 79 ANDAs pending approval with the US FDA, out of which 40 are Para IVs and ten are first-to-files.

Moving on to India, revenues for the quarter at INR333 crores, or $66m, representing year-on-year growth of 11%. This performance is in line with our expectations of the gradual increase in the growth rates. And we are hopeful of returning to industry growth in the coming quarters.

Our biosimilars portfolio continues to do well and it grew by 25% over the previous year. During the quarter we also launched six new products in India.

On Russia, with revenues of $54m, the growth in ruble terms was flat at 1%. This was largely on account of delayed onset of winter leading to lower off-take and constrained liquidity. We continue to maintain a conservative approach with our credit management policies in the market and hence the lower sales number. Our growth, as per Pharmexpert data, which is a market research agency in Russia, for the quarter of 23%, continues to be higher than the market. And our market rank as at December remains at number 12.

The performance in the third quarter does not worry us too much as we are seeing very robust customer orders in the fourth quarter. For example, in the month of January 2012 our sales grew by more than 50% year on year which is in line with our expectations. And we also expect February and March to be good months for us.

Talking about Europe Generics, revenues at EUR35m represents a marginal increase of 2% over the previous year. Revenue from Germany at EUR23m, remained flat compared to the previous year. Revenues from our Rest of Europe business grew at 5%.

Now moving on to the PSAI business, revenues for the quarter are at $111m. The revenues were flat year-on-year due to staggered customer orders over the coming quarter. In third quarter we filed seven DMFs including two each in North America and Europe. With this, the cumulative filings stand at 513 globally.

With this, I now would like to open the call for questions and answers -- for Q&A.

Thank you very much sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). The first question is from Ashwin Agarwal from Akash Ganga Investments. Please go ahead.

Congratulations to the management team on delivering an exceedingly robust performance.

Thank you.

And the US geography, as has been told in the opening commentary, has done very well and we expect even FY'13 to be very good in terms of market share gains, new product launches and exclusive products. Could you please add a color to what you said in the opening commentary, particularly for the US, post FY'13 how do you see that business shaping up and growing beyond the $1b tag?

So I didn't talk about $1b, but I certainly remain bullish about the US market. For FY'13 it will be another year -- period of good growth, based on the pipeline that is unfolding. FY'14 we should continue the growth momentum, but at reduced rates, since the base will be large enough, as well as the number of products going off-patent is likely to decline by FY'14.

Medium to longer term in the US market, I think we will have to diversify our portfolio and look at other [growth brands]; look at specialty generics, biosimilars, those kind of opportunities to drive growth. But the US will likely remain the largest market for Dr. Reddy's for a long time to come.

Could we expect products such as Fonda, which are not known going forward in next one, two three years in the US, which could drive reasonably good and sustainable growth?

The effort is to improve our product portfolio from a complexity, technology point of view. So we hope to add more such products to our pipeline.

Okay, thanks a lot. That's about it.

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

Yes, thanks for taking my question and congrats for the great set of numbers. My first question is, I just missed in the initial commentary you mentioned some partnership revenue from Teva on Zyprexa. If you can repeat that that will be great.

One product -- Teva has all the other strengths. We had the 20 mg and the ODT. So there is an authorized generic in the market. So, in order to effectively compete with the authorized generic, it is important to have a full range of products -- full range of the dose strength. So we collaborated with Teva so that we can effectively compete against the authorized generic. And this, we believe, has led to better than expected revenues.

Right. But did not you mention any number as profit from partnership? I thought you did, so if --

I think Umang mentioned the revenue, not the profit.

Yes, if you can --

$99m in revenues is what we mentioned.

From Zyprexa partnership, right?

That's right.

Okay. The second question is if you can just explain me better as to what is the net impact on, let's say, EBITDA because of ForEx, because you have booked at INR53, but you would also be having some costs in dollars. So how do we look at -- trying to understand how do we look at the margins due to foreign exchange impact.

So sequentially there should be no effect on account of ForEx in our EBITDA. That's because the ForEx benefit on account of the depreciation of the rupee will be offset by the hedges that we had taken for Olanzapine in the previous year. So the two are setting themselves off. There is no effect of ForEx sequentially, quarter on quarter. Versus the previous year, yes, there is an effect of ForEx, but that's been seen even in quarter two and in quarter one.

I see. But you translated the revenue at INR53, so vis-a-vis whatever we had in Q2, so, despite that, there is no impact of foreign exchange in --

So we will translate at INR53, but if we've taken hedges which are a lot -- are at rates which are significantly lower than that, that loss will get booked into our sales.

Okay. So you also had booked some -- yes, I can see that, ForEx losses into the books. Okay. So is it fair to say, is it -- the net foreign exchange that you have realized, is at about INR46, INR47?

I would say if you were to look at our P&L and say what is our average booking rate, roughly it will be closer to INR48 because the average rate for the period, just remember that is also around INR50, INR51 while the closing rate is [INR53].

Okay, fair enough. Thank you very much.

Thank you.

Thank you. The next question is from Manoj Garg from Edelweiss. Please go ahead.

Yes. Thanks for taking my question and congrats for a good set of numbers.

Thank you.

I just would like to understand that what was the average price erosion for Olanzapine because of this authorized generic being there in the market, if you can give some color on that.

We are not providing details exactly on product level, but it has behaved pretty much like any other product which has an authorized generic and a first-to-file. So it's in the range of about 40% to 50%.

40% to 50%. Fair enough. And the second question is with regard to Olanzapine. Again, when we booked the revenue for Olanzapine, was it on the same average rate of INR47, INR48 or Olanzapine we have hedged at much, much lower rate?

So our -- the Olanzapine rate is much lower because the hedges for that were taken in the previous year. And the rate booking for Olanzapine is close to INR45.

INR45 okay. Fair enough. That was from my side, and wish you all the best.

Thank you very much.

Thank you. The next question is from Sonal Gupta from UBS Securities. Please go ahead.

Yes hi. Thanks for taking my question. Just a couple of questions. One, I just wanted to understand there is a increase -- there is a net ForEx gain also in the other income, within the net finance income. So can you just explain where all are we seeing the impact of ForEx gains and losses.

That ForEx gain that you're seeing in the ForEx line of the P&L is on account of the difference between the invoiced rate and the closing rate.

Okay.

If the average invoicing rate, for example, was at INR50 odd for the quarter and the closing rate was at INR53, your receivables get re-stated at INR53. So that gives you a gain. But as against that we always take forwards and options, and I think that's the net effect of that gain.

And any hedges which were there in the balance sheet for this period have been recognized and they are in the top line?

So there are two types of hedges. One is the receivable hedge, which we call a balance sheet hedge. That gets recognized in this line. The other set of hedges are the cash flow hedges which go to the sales line.

Okay, the cash flow hedges which would also -- okay. They go into the sales line.

And the other thing, just on the financials, is that there is a increase in both debt as well as cash in this quarter. Could you just explain the reason for that?

So we have a couple of debts which are coming up for renewal now. And those will be repaid in this quarter, as a result of which, when we borrowed the $220m, we were balancing the short-term/long-term maturity profile of the debt. So the cash from the $220m is lying in the bank. It will repay the short-term debt that we were running, which was slightly higher than what we were comfortable with. So in the next quarter that will even out. Overall, net debt has gone down versus the last quarter.

Right. And just one final question from my side. In terms of the base business for the US, that is ex-Olanzapine, have we seen any change in revenues quarter on quarter given the different realization rates etc that have been recognized? So, in dollar terms, is there a change there on a quarter-on-quarter basis?

So ForEx impact will not impact the dollar numbers that we've booked. But we've seen, more or less, the quarter being at the same level as the previous quarter, excluding Olanzapine. And that's on account of the fact that there was [off-pricing] action on Tacrolimus which -- where we saw a new competitor in the market. So as a result of that, and that -- the effect of that has been considered. And, as a result of that, that's at the same level as quarter two.

Okay. Sorry just to -- so you're saying that then it will be roughly at the $135m odd level that we saw in the last quarter?

That's right, (multiple speakers)

Great. Thank you so much.

Thank you. The next question is from Bino Pathiparampil from IIFL. Please go ahead.

Again congrats on a great set of numbers. Just to follow up on the prior question, Umang, if I need to calculate your US sales in US dollars, I probably have to take the rupee number you have given and divide it by 47 or 48, whatever that booking rate is?

No, actually we can give you those numbers. The US numbers already we had mentioned in Satish's section, was at $235m. That included $99m of Olanzapine.

Okay. And this is at the actual rate?

This is at actual dollar billing, actual dollar billing.

Right, right. A follow-up question, like you have hedges for US dollar, do you have hedges for your other markets like Germany, Russia, etc., the impact of which is showing up in the break-up that you give in rupee terms?

No, because the euro, we are not extensive on the euro as a currency. We don't have too much of a net exposure, so we don't take too much of euro hedges. On the ruble we only do balance sheet hedging because it's difficult to forecast the rate going forward.

Great, great. Fine. So that's fine. Finally, Satish, I was just wondering about this product Plavix in the US. If you could give some color on what you think about when your launch could be, what could be the competitive dynamics around that?

So, Bino, we expect, we have mentioned before that we expect to launch this product next year. And this would be a [very generic] market.

Right. How many people do you expect to be launching on [Bimone]?

There are a fair number of approvals, Bino, tentative and there are a lot of filers. So it would behave like a normal generic market. But we are first to file on one of the strengths.

Right, right. Okay, great, I'll join back the queue.

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

Hi. Thanks for taking my question and congrats on a good set of numbers. Umang, my question was largely on the SG&A expenses. Where do you see the SG&A -- we are about on a -- if we exclude Zyprexa, we are on 27.5%, 28% of sales. And this has inched up over the last couple of years. Where do we see this thing stabilizing out for us?

I'd say that if you look at the YTD Q2 rate and the percentage there, YTD Q2 which is the previous quarter, that's roughly where we are on SG&A because you're seeing an effect of ForEx which would go away in the next quarter.

Right. But -- so 27%, 26.5% -- or 27% odd or thereabouts, that's going to be an optimal level for us? Do you see scope for any reductions, optimization on these levels as you go forward?

I think it should because the US revenue is not linear with respect to SG&A. So hopefully it would adjust downwards, but right now we are at 26% to 27%.

Right, because this is on the higher side when you compare the peer group -- just makes it -- and we've been talking about that we've done a lot of these one-time investments in Russia and at some stage it will start to come off. That impact hasn't quite been seen in the numbers yet, so I was wondering if we're going to see some dramatic reduction as we were to go forward on this.

It won't be dramatic, but there would be a gradual reduction as we go forward.

Okay, thanks. And on the Fondaparinux, how is the market share update been for us?

So the market share is about 18% on the prescription side.

Okay. And sorry, last question, we talked about these launches coming forward in the quarter and year ahead. Can you throw some more light on the -- if you can share some more information on these specific products that we're looking to launch and the timelines for the same?

Nitin, most of these products are already in public domain. We've spoken about ziprasidone, we've spoken about quetiapine.

We've spoken about possible launch of atorvastatin, etc.

Okay.

Most of these are in public domain.

But in terms of -- I guess questiapine also would be a fairly competitive launch for us, right?

Yes, yes.

Okay, fine. Thanks very much.

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

Yes, thanks. Just one question, Umang. On your reported gross margin just for the Global Generics segment, excluding Olanzapine, sequentially there is a decline, right? Is that only because the DEPB benefit is going away, or is there more than that?

I'll maybe answer it in a different way. I'd say that it's because of some amount of DEPB going out, but it's also because the mix of businesses have changed. So if you see, Russia this time has been slightly slower in terms of what Satish also explained earlier on the call. And, as a result of that, the average mix of gross profit is lower than what you would see. But structurally the gross profit in each of the geographies is at the same level as it was in quarter two. It's only the mix of businesses that is giving rise to this.

Got it. Okay. And the DEPB benefit that you've been quoting around -- in the previous calls, is around INR50 crores to INR60 crores annually. So that's the number that we still --

Yes, that's roughly what you could hold on to.

Okay. Just one question on the net interest cost. What you've been recording this quarter is around $3m as the net interest cost. Can you just tell, you have cash around $300m right now and gross debt of around $700m, what rate have you taken the debt and what rate is the cash invested?

So our debt, a large -- so there are two parts to our debt. The first is the long-term debt that we did last quarter, that's $220m. And we took that at LIBOR plus [185] basis points.

Sorry, LIBOR plus?

We have got some debt in terms of bonus debentures which we issued earlier. That's at a coupon of 1.25% and that's INR504 crores. That's the two long-term debts. All the others are short-term debts which are for working capital, which are generally in the dollar currency.

Okay. And most of the cash invested at around what level, approximately, 5% plus or less?

No, it should be more than 5%, but we are not giving exact details on that, but it's more than 5%. A large section of that is also invested in India. That's why you see more (multiple speakers).

Okay, got it. And just last question, your R&D has been tracking around 6% to 6.5% of sales, at least in the first half it was the same range, versus what you guided last year was around 7% to 7.5%. So would we see a higher number, expect a higher number next year, or is this the trend now going forward?

I think we'll maintain the range of 7% to 8% as the range going forward.

7% to 8%, okay. Sure. I will join back the queue. Thanks.

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

Yes, can you throw some light on how the Russian market has behaved, because you did indicate that the secondary sales are at 23%. And otherwise the business was a flat 1% growth. So what exactly has happened? Is there so much of de-stocking which you have done?

It's not just the de-stocking, Abhay. See what happened is -- that's why I tried to explain. See mainly the issue is the delayed season, the winter season right. And that's one thing, if you actually see the weather patterns through any of those public data, you can actually make out that it's delayed. Right? So I'm also saying it's not a matter of concern, that's why I specifically said about the January number, right, which normally we don't talk about. I was just clearly telling you that the January itself shows 50% increase in sales, and related to the conservatism on the purely sales part of it.

All I was trying to say about distribution is that because from the distribution also, because they've stocked up in anticipation of higher sales, it's a drag. And they also ended up in some kind of a liquidity crunch.

Okay, okay.

So our response in such situations is that we like to be very conservative, especially when it comes to receivables and things like that. So we deliberately held back some sales, and that's why you see the January number, right. So I'm saying demand is still there.

Yes, so basically from this quarter we could see sales ramp-up being quite robust for one or two more quarters, because of the delayed things, so it should pick up significantly in the current quarter and drive overall margins?

That's why I'm saying these growth rates which you have seen in the earlier part of the year (technical difficulty) continue. That's what I'm saying, [continue], yes.

Okay, that's -- the other one was on Fonda. Do we see now -- you've been saying that volume ramp up should happen. So should we see a significant ramp up in the current quarter, with your production constraints largely being addressed?

The production constraints are not fully addressed, but I think we might have enough material to slowly ramp up the market share.

Okay. One more question on Olanzapine. We launched it in late October, so the $100m is it three months of exclusivity; is it two months or is it four months? How do we take that roughly into our numbers?

It's roughly three months, Abhay, because there will also be some amount that the partner would have given to the channel. So it roughly corresponds to three months.

Okay, fine. Thank you.

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

Hi, good evening everyone. I think, Satish, I heard on CNBC talking about your OTC portfolio. If I'm not wrong, it's now in US $100m for nine months.

Yes, that's correct, Sameer.

Okay. And where do we see this by end of fiscal '13?

And second is on Lansoprazole OTC, if Perrigo's citizen petition filed in December has any implication for your filing?

So, Sameer, on the latter we are looking at it. As of now we think that the citizen's petition is against Perrigo. But we'll take -- but we're still evaluating it. We don't believe that there is anything other than what Perrigo would face for this product that would apply to us.

The OTC is what we're seeing in terms of FY'13 end. Maybe quarter four of FY'13 we could be tracking at the rate of, annualized about $200m a year.

Okay, wonderful. And the second question is for Fondaparinux. When do we expect the hospital segment launch? And second, when do we expect the production bottlenecks to be fully resolved?

I think it will take us another quarter or so, another three months or so to fully resolve all the bottlenecks.

And that's the time when you would be launching for hospital as well?

Yes.

Okay. And one final question on biosimilars. Which are the markets that you find attractive in emerging markets outside of India?

And second, where are we in terms of regulatory filing in those markets for Rituxan and Filgrastim?

I don't have a complete list of the countries that we are going after readily at this point. But South America, a few countries in South America are the focus area in addition to one or two countries in the Middle East. Collectively they are not huge. Maybe third, fourth year from now we will see a cumulative revenue of about $100m from emerging markets.

For biosimilars?

Yes, yes.

$100m and this includes India or --?

Yes, it includes India.

Okay. And versus this what would be the number for fiscal '12 for Biosimilars?

About close to $30m.

I see. And what's the timeline for us to go from $30m to $100m? Is that a year, two years or what's the timeframe we're looking at?

Two to three years.

Okay. Thank you so much.

Thank you.

Thank you. The next question is from Prakash Agarwal from RBS. Please go ahead.

Yes, good evening, sir. Sir, a question on Fondaparinux here. I just wanted to get some clarity on the filing status and approval for the European launch.

It's too early to comment. It's just I think in the process of filing this.

The exclusivity has not yet run out, Prakash, after which we would be filing it.

But it would be a FY'14 phenomena or it could be later as well?

I think filing would be FY'13. Launch could be a year or so later.

Okay. And on the gross margins if PSAI, could you share that number?

35%.

35%?

Yes.

And I just missed on the hedges. If you could repeat what is the outstanding hedges currently.

So the outstanding hedges are about $638m for the cash flow and $425m for the balance sheet hedges.

And this $638m is spread across how many quarters?

18 months.

Okay. And these are taken in the range of the present rates at INR49, INR50?

INR47.

Sorry.

INR47 to INR48 a dollar. That's the average rate.

Okay, perfect. And there was some comment on the DEPB INR50 to INR60 crore impact. Could you explain that as well?

So that's the average level of DEPB, that net DEPB deficit that we'll have because of the removal of the scheme. And it's watering down to a different scheme. That is for the annual level. The impact is INR50 to INR60 crores. So it's not a one quarter impact, it's an annual level. So first quarter it'll be about INR10 crores to INR15 crores or so.

Okay. And this has already started, this impact?

This has started and it's not significant to our overall margins.

Okay, got it. Thanks. I'll join back the queue.

Thank you. The next question is from Bhagwan Chaudhury from IndiaNivesh.

Yes, thanks for taking my question. Just one question is on the Olanzapine side. How much market share we have gained there and how we look forward in the next quarter? I just missed that comment. What can we expect, what kind of figures in the next quarter from this (technical difficulty)?

Can you repeat your question? We couldn't understand.

First is on Olanzapine side. How much market share we have achieved there and how we can look forward in the next quarter (inaudible)?

Bhagwan, market share as per the latest week is in excess of 45%. And what Prasad remarked is in quarter four we'll have the benefit as well because the 180-day exclusivity runs till quarter four. But obviously we won't be able to comment on the numbers.

Okay. And one on the -- there was a news some months back that we have some VRS scheme in Mexican facility. So have we booked some one-time loss or one-off in the SG&A or somewhere from that?

It was insignificant to our results and we have not even disclosed that as a separate adjustment to our financials. It's a very insignificant amount.

Okay. And sir, one final question that how we can look at the gross margin level and operating margin level if we are excluding the Olanzapine benefit and at what [percentage] level we can look?

Bhagwan, we don't mention product-wise gross margins. We don't comment on product wise gross margins, Bhagwan.

Okay, thank you.

Thank you. (Operator Instructions). The next question is from Ranjit Kapadia from Centrum Broking. Please go ahead.

Good evening and hearty congratulations for a good set of numbers. My question relates to the domestic market. Except this Stamlo with Omez-D, all other products are showing single-digit growth rate and Nice is showing almost 20% de-growth. So how we are going to address this issue and when we are going to have a market growth? We are aiming at market growth for domestic market. So what is the optimum level at which you can expect this growth? How fast you can expect this growth?

So I think, Ranjit, the numbers you are quoting are all Mass Division products, which is where I think we had earlier commented in two calls back that we had a problem with the territory alignment of our sales force. And that is work in progress.

Two quarters back we reported a growth of 5%; the last quarter we reported a growth of 9% and this quarter we're reporting 11%. We think it will take us a few more quarters, maybe one or two quarters more to get back to at least industry growth rate. But actions have been underway. It's more to do with sales force excellence and that's why in the Mass division, every product that you've named, whether it's Stamlo or Omez or it's Nice, it's all a product that goes through our Mass Division. And that's where the problem is. So we're correcting that.

Okay, sorry. And how about the new product introduction in the domestic market? We have not mentioned that. So are we active or we are slow on that front?

We are active. We haven't mentioned it this time because we won't give a number.

No, we have launched six products this quarter and cumulatively this year we have launched about 23 products. And a good part of this growth has come from new product launches.

Okay. Thank you and wish you all the very best.

Thank you.

Thank you. The next question is from Sonal Gupta from UBS Securities. Please go ahead.

Hi. Just on your guidance of FY'13 $2.7b, do we still stand by that? And do we have a strong visibility in terms of achieving those numbers?

Yes, I think we still stand by that and we will be providing further color to it maybe in our May/June post the result release. But as of now we stand by it.

And just could you clarify further on the R&D spend step-up to 7% to 8% which you're keeping for the future. If this involves -- what would drive this? Is this your expectation of biosimilar-related R&D cost etc?

It's a variety of things. We've stepped up R&D in generics also. There's also external partnership driven R&D and of course proprietary products and biosimilars.

Okay. And finally, could you share what is the CapEx for this year and what do you expect for next year?

We expect to come in with CapEx at about $125m to $130m odd level. We've already done -- YTD is $94m.

Okay, great. Thank you so much.

Thank you. The next question is from Ravi Agarwal from Standard Chartered Research. Please go ahead.

Yes, thanks for taking my question and congrats for a great set of numbers. Just a couple of questions. One is the revenues which we book from Teva. Is there a subsequent adjustment entry which happens afterwards for either charge-backs or for any amount which is accruing to Teva? Or is this a number which is net to us?

It is net to us. But going forward at the end of the 180-day exclusivity period there will be some adjustments. But nothing pertaining to this quarter.

So possibly in the first quarter next quarter we'll be taking some adjustments for this?

Possibly.

Would that be -- any quantification of what --?

It can't be quantified now.

As a percentage to --

No, it can't be quantified now.

Ravi, just to clarify the current quarter's revenues will not be adjusted downwards or upwards. This is the final confirmation that we have received from Teva.

Right. The second question was you're mentioning a $21m cash flow loss coming into the revenues and I presume it's essentially coming because of the fact that you've booked, you've taken hedges that have been at a lower rate of INR45 as you mentioned. So just, so if I have to look at the revenue on a rupee number -- hello.

Yes, you're there. We're hearing you.

Yes, if we are to look at these revenue numbers on a INR basis for the US, essentially would that imply you take $99m at INR45 and reduce that from the Q3 numbers?

If you were converting that to INR, yes, you would do that. If you were only looking at dollar then you would not do it because this is largely on account of conversion to INR.

Sure. And my final thing is you've given some OTC numbers in your presentation for Russia. If I could have like-to-like numbers for nine months last year, if it's possible.

Do we have that?

Ravi, we'll revert to you after the call.

Sure, thank you so much.

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

Thanks for taking me back again. Just a question on your Fuji Film tie-up for the Japanese market. Where are we in that transaction, i.e. have we signed the definitive agreement? And what are the key milestones that we should look forward to in the next couple of years?

We haven't signed the agreement yet. We are still in the process of developing a business plan. The next milestone would be a definitive agreement between them. But I don't think it will happen in the next three months; I think it will take longer than that.

Okay. And just a quick one on Olanzapine. It looks like the innovator has continued to hold a fairly sizeable market share, if I'm not wrong around 25%. So do you think your market share and pricing has pretty much stabilized for the balance part of about three odd months or do you think there can be some more changes over here?

Probably stable. It's probably stable from now on.

Okay, thank you so much.

Thank you. The next question is from Anshuman Gupta from Citigroup. Please go ahead.

Hi, this is Prashant here. Any update on the alliance with GSK in terms of registrations done or supplies, etc?

Nothing of significance. We continue to file and the sales now are very small because only one or two markets, one or two products are opened up. So nothing significant to report today.

And does this form a reasonable part of your fiscal '13 guidance or will it be very marginal even next year?

It will be marginal even next year.

Thanks a lot.

Thank you. The next question is from Hitesh Mahida from PUG Securities. Please go ahead.

Congratulations for excellent numbers. A couple of queries. What were the sales from the antibiotics portfolio in USA?

And sir, what's our view on the German market? How do we see things shaping up in future?

We don't give product level revenues, so we're not giving that break-up of the antibiotics.

The German market continues to be a tender-driven market with pricing significantly below. And that's continuing. There's no new development as such.

Okay, sir. Thanks a lot.

Thank you. The next question is from Surajit Pal from Elara Capital.

Yes, thanks for taking my questions. Umang, how do we see this, ex-Olanzapine, if I remove that $99m? So if I look at it that gives me roughly around $422m vis-a-vis your average in the first half is roughly around $445m. Is it flattish ex-Olanzapine?

Yes.

Do we look at it --?

Yes, because if you look at Russia, and the reason for that is largely driven by Russia. And if you look at Russia, it's largely flattish. And that's a pretty significant market. So we are flattish sequentially. We are slightly flattish sequentially.

Another thing is that you have mentioned the growth driver in US market. One key product which is missing in that list is Allegra D24. How Dr. Reddy is placed presently in that product?

We don't share that level of granularity on products and market share and price.

But definitely it's not a growth driver in current Q3 sales number.

It is not insignificant.

Thanks.

Thank you. The next question is from Koushik Pal from Kotak Mutual Fund. Please go ahead.

Yes, hi. Congrats for the (inaudible) excellent set of results. Most of my questions have been answered. I just wanted to have some color on the ROW growth. It has been very strong this quarter. There you did mention there is no effect of GSK. So what is -- is this currency or is it something else? What would be the growth in constant currency, if you can share?

So it's largely on account of South Africa and also we've seen Venezuela and actually Venezuela had a devaluation in quarter three of last year. But for quarter four, the rates are the same and therefore most of the growth in ROW was muted on account of the devaluation that happened in the previous year. But this trend in ROW should hopefully hold out because the markets are smaller and they're growing.

Okay. If I -- especially if I look at the last four quarters, the growth has been pretty muted. So on that base over the next three to four quarters can we expect a robust sort of a number?

Yes, I think we could look at possibly the average of -- we could look at growth at about 15% odd but not higher than that.

Okay. Secondly, on Olanzapine in fourth quarter, I know you cannot share any number. But qualitatively, what I'm really trying to understand is is there any level of channel stocking in Q3 which can affect on a run-rate basis our revenues in Q4?

Possibly. There will be some element of some stock so can't rule that out.

Okay. Okay, thanks. That's all from my side, thank you.

Thank you. The next question is from Arvind Bothra from Bank of America. Please go ahead.

Hi. Just a question on the PSAI business. If we look at it on a sequential basis we have a decline of 6%, whereas we did see some benefit from currency. Any comment on the outlook going forward as to the recovery?

That's a B2B business. There is bound to be some lumpiness on the business and it's hard to have a smooth curve in a business which is dependent on product launches. So depending on the product launches the business will (multiple speakers).

But on an annualized basis --

It's not a trend. On an annualized basis it will grow.

Okay, thanks.

Arvind, you should look at the YTD growth rate for that business and I think that's the number that we're pretty comfortable with.

Okay, that's helpful. Thanks.

Thank you. The next question is from Bino Pathiparampil from IIFL. Please go ahead.

Hi. Just to follow-up on the Glaxo deal. If we remember at the time of signing the deal we were all expecting to be a significant contributor to revenue by FY'13. So what has slowed down there and what happened to our plans? Is it because of GSK's loss of focus or is it some other procedural issues there?

Nothing like that and we didn't say it'll become significant in FY'13. I said we'll start having revenues from FY'13. And that will still continue.

What is significant? It depends on how what you consider as significant. It certainly will be tens of millions of dollars but it won't be hundreds of millions of dollars. And for that to be meaningful, over a billion plus revenue to generate, it's going to take some time.

Right, right. But it would still be tens of millions of dollars?

Right.

Okay. And second, on the biosimilars, your portfolio of biosimilars is probably one of the best in the world. But still I get a feeling that you are not that aggressive in going for active development or partnerships for the developed markets. So is it a part of your strategy that you will wait out a little bit more, do something on your own and before going all out to enter developed markets? Or are you really at it?

I think you should wait for announcements when they happen and I can't tell you how aggressive or not aggressive we are based on what we're doing today. But it certainly is a part of our ambition to be in the regulated markets.

Right. Okay, thanks.

Thank you. The next question is from Jorge Mauro from Legg Mason. Please go ahead.

Yes, hello. Thank you for taking my question. I wanted to ask regarding biosimilars. You have been very successful in India launching Rituximab. Could we expect some biosimilars launching in other emerging market countries where currently some innovator drugs do not have patent protection? And could that be a new driver for Dr. Reddy's in the future? Thank you.

Yes, we are in the process of registering rituxan and other biosimilars in several markets, several emerging markets where the regulation allows the registration as well as the patents allow the launch of the product. And like I said earlier, I think we are expecting in the next two to three years a revenue of about $100m from the portfolio in emerging markets.

And the strategy would be similar to the one in India, coming at roughly 50% discount to the innovator price?

I think it depends on the market. In some markets if there is competition, if it's driven by tenders it can change. In markets which are branded and de-tendered it could be higher.

Right. So far the experience in India how high you think you may get in terms of market share in the markets in which you are allowed to compete with the innovator.

It again depends on the adoption rate. Where there are incentives to save money, certainly the adoption rate is fast. And in India we have been as successful as the innovator in terms of volumes. So we expect to be successful where the system drives adoption.

Right. Thank you very much.

Thank you.

Thank you. The next question is from Prakash Agarwal from RBS. Please go ahead.

Thanks for taking my question again. A follow-up on Fondaparinux actually. Just trying and understanding this 18% market share is taking account of retail as well as hospitals or only the retail 40% market.

Prakash, we are -- this 18% market is for the entire molecule and currently we are only in the retail part of the segment.

Okay. So we have fairly good market share in the retail segment currently?

Yes.

That's right.

And in next three months you expect to come in the hospital segment as well?

Next three months we expect to address our manufacturing issues totally, after which the supply [will] ramp up.

Got it. And second question on this Olanzapine. I was just trying to understand the numbers, because what I understand it's around $900m kind of product. And if I do the price erosion that we just discussed around 40%, market share of around 40%, so the total number comes to around $100m, $120m. We already booked around $99m. So have we booked -- is it too front-loaded or is there something missing there?

But on the market share is about 60%. On the 20 -- you're talking only about the 20 milligram strength, right?

Yes.

Yes. So the market share is about 60% for our partner.

Okay. Did I not hear 45%?

No. That 40%, 40% to 45% was the price erosion.

Okay. So basically 60% market share and possibly it's quite front loaded as well, that makes sense?

We don't think so. We don't think so because I think this is in line with the estimates that we had earlier as well. So we don't think that it is front loaded. It's going as per what we had thought it would pan out to be.

Okay. So for the next quarter other than the little pricing erosion we don't see much of a diminutive value.

Yes. The only thing I will caveat there is that that little pricing erosion may be quite significant to the shelf stock which is lying in trade because exclusivity expires so you will make an assessment of shelf stock which is in trade.

And in that case do you set off, adjust the numbers and then report --

Yes, we will be reporting net like any other product, of shelf stock adjustment.

Okay. And just confirming you said the full year tax rate you're expecting around 23%.

That's right.

And next year you gave any guidance, 20%?

No, we'll be at the same levels.

23% plus.

That's right.

So US would continue to be a big chunk of our profits going forward?

That's right.

Okay. Thanks and all the best.

Thank you.

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

Thanks for taking the question again. Prasad, I just want to understand over the next two years from this quarter onwards and I guess for a while to come we'll be throwing up a lot of cash. Is there -- any thoughts about utilization of the cash? Are we looking at proactively to fill -- to fill in some strategic spaces in the road map? How do we see this whole -- we see the balance sheet actually accumulating cash as we go along or any thoughts about that?

First of all, there is some debt. We'll pay down the debt. We also have an investment program into clinical development of certain assets. So there is a fairly ambitious expansion program. So I don't see any -- that we are reserving the cash for really inorganic methods at this point or inorganic use at this point of time. But we'll be watching for opportunities which help us deepen our presence in our focus markets. If there's something interesting we'll look at it, but as of now we don't have a plan for that.

Okay, fine. Thanks very much.

Thank you. The next question is from Manoj Garg from Edelweiss. Please go ahead.

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

Thank you.

Thank you. Ladies and gentlemen we will take one last question from Rahul Sharma from Karvy Stock Broking. Please go ahead.

Yes, I just wanted clarity on the top products market share in the US markets. Olanzapine 20 milligrams, Olanzapine, Fondaparinux you've given. But Allegra D24, Tacrolimus and Lansoprazole.

Rahul, we'll take the question offline. I could give you the list of market share.

Okay, thanks. That's it.

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

Thank you all for joining Dr. Reddy's senior management on the quarter three FY'12 earnings call. In case of any additional clarifications, please feel free to get in touch with the Investor Relations Team. Thank you.

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