Dr Reddy's Laboratories Ltd (RDY) 2013 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Q4 and full-year 2013 earnings conference call. As a reminder, for the duration of this conference, all participant lines will be in the listen-only mode. 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 of you and thank you for joining us today for Dr. Reddy's earnings call for the fourth quarter and full year ended March 31, 2013. 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 consolidated financials.

To discuss the business performance and outlook we have today, Satish Reddy, our Vice Chairman and Managing Director; Saumen Chakraborty, President and Chief Financial Officer; Abhijit Mukherjee, President and Head of Global Generics segment and the Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlet without the Company's express written consent.

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

Now I would like to turn the call over to Saumen Chakraborty, our CFO.

Thank you, Kedar. Good evening and good morning to everyone. Let me begin with the key financial highlights. For this section, all the figures are translated to US dollars at a convenience translation rate of INR54.52 to $1, which is the rate as on March 31, 2013.

Consolidated revenues for the year were at INR11,627 crores. We registered year-on-year growth of 20%. Excluding the $100m profit share from launch of generic olanzapine in previous year of FY12, the corresponding year-on-year growth stands at an impressive 26%.

Revenues for the quarter are at $613m, with year-on-year growth of 26%. The revenues from our Global Generics segment are at [$414m] and grew by 23%. This growth is largely driven by continued progress in North America and emerging market territories. Revenues from our Pharmaceutical Services and Active Ingredients segment, that is PSAI, at $187m with year-on-year growth of 36%.

Consolidated gross profit margin for the year is at 52.1%. Corresponding values for Global Generics and PSAI segment for the year are at 59% and 32.5% respectively. Adjusted for the non-recurring benefit from olanzapine revenues in previous year, our margins are largely stable.

Consolidated gross profit margin for the quarter is at 50.4%. Corresponding values for Global Generics and PSAI segment for the quarter are at 58% and 34% respectively.

SG&A expenses including amortization for the year are at $616m, representing 29% to revenues. Corresponding value for the quarter stands at $160m, representing 26% to revenues. So relative to the previous year, there is a fall of 100 bps indicating operating leverage.

The overall increase in absolute terms was primarily on account of normal year-on-year salary increments, the effect of rupee depreciation and OctoPlus acquisition-related expenses.

R&D costs for the year are at $141m representing 6.6% to consolidated revenues versus 6.1% in previous year. For the quarter, R&D costs are at $43m, which is 7% of sales. The increase in R&D expenses during the year was as planned and is in accordance with our strategy to expand our R&D activities across the focus segment.

As we have announced in the month of March, we benefited by an amount of $22.5m from one-time settlement done with Nordion Inc, which is formerly MDS Inc. The settlement is towards the damages sustained by us due to their breach of the then-existing laboratory services agreement for bioequivalance studies.

EBITDA for the year is at $510m, which is 24% of sales and grew by 9.5% over previous year. EBITDA for the quarter is at $170m, which is 28% of sales and grew by 37% over the previous year.

Adjusted for the year-specific events, that is olanzapine in the previous year and Nordion settlement in this year, our EBITDA margin has been stable. In fact it has gone up marginally.

Profit before tax for the year at $398m is 19% to revenues. PBT for the quarter at $144m is 23% to revenues. The tax rate for the year is 22.6%, which is similar to last year.

Key balance sheet highlights are as follows. Our working capital increased by $49m over previous year and is largely in line with the change in revenue mix across the market.

Capital expenditure for the year is at $123m, out of which the key projects include our injectables facility, SEZ facility and biosimilars expansion.

Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $480m, largely hedged around INR56 to INR59 to $1. In addition, we have balance sheet hedges of $350m.

Net debt at $267m represents a net debt to equity ratio of 0.2.

With this, I now request Satish to take us through the key business highlights.

Thank you, Saumen. Good evening and good morning to everyone on the call today.

The end of fiscal year 2013 in the month of March ended on a somber note with the passing away of our founder and Chairman, Dr. Anji Reddy, a profound loss for the organization but Dr. Reddy has left behind a lasting legacy of innovation and achievement that will continue to inspire everyone at Dr. Reddy's.

The financial year 2013 was a peak year for Dr. Reddy's in terms of opportunities for revenue growth and margin improvement. After ending the fourth quarter with the highest-ever quarterly revenues to date, we closed FY13 at $2.3b at average realized rate across multiple currencies, which represents a growth of 20% over the previous year.

For the quarter we have seen a healthy performance across key territories, the United States and emerging markets in the Global Generics segment and the overall PSAI segment. Especially India which had concerns on growth earlier on, I'm happy to inform that over the last six months we have demonstrated above market growth in a very sustained manner.

However, through the year, the Global Generics overall also had its fair share of challenges in terms of adverse market dynamics with price erosions and regulatory constraints that affected new product launches. However, we see a great opportunity for growth in the years ahead as we deliver on our strategy with complex generics in a focused manner.

Let me now take you through some of the specific business highlights for each of our key markets. Please note that in this section, all references to numbers are in respective local currencies at respective periods average exchange rates.

Starting with the North America business, revenues for the quarter are at $214m which represents a healthy sequential growth of 20% and year-on-year growth of 22%. In January, we launched Finasteride 1 milligram tablets with 180-day marketing exclusivity. Currently, we hold around 78% of the market on this product in prescription terms. We expect the sales of Finasteride to normalize from the first quarter of fiscal 2014.

For metoprolol, we are now close to 13% of the market share. There has been similar progress for other products as well. Revenues for the year are at $738m, which reflects a year-on-year growth of 29% if you adjust the previous year's one-time benefit of olanzapine. While we continue enhancing our portfolio and customer franchise, the headwinds of increased pricing pressure and competitive dynamics remain.

Coming to India business, I'm happy to note the specific interventions that we made over the past several quarters in the areas of sales force realignment, brand promotions, etc. have shown the desired results.

Attrition, which is one of the key lead indicators, is down significantly related to the previous year. New product introductions have also picked up in terms of productivity of launches. 24 new brands have been introduced and our biosimilars portfolio in India grew by 25% led by the flagship brand of Reditux.

On an annual basis in India we have registered a 13% growth. IMS reported 13.7% growth for Dr. Reddy's as against the Indian pharmaceutical market growth of 10.2%. We shall continue our focus towards strengthening our portfolio and identifying niche opportunities.

On the emerging markets front, Russia continues to be our most important market with revenues of $258m which is a year-on-year growth of 27%. Besides Russia, CIS and the rest of the world contributed $154m, with a year-on-year growth of 37%. Of this Ukraine, South Africa, Venezuela and Australia have shown significant growth in financial year '13.

OTC continues to be our focus along with the expansion of the prescription product portfolio. OTC now stands at 34% of the total revenue which is a superior growth over the previous year. We expect this growth momentum to continue in the emerging markets on the back of increased serviceability to these territories, additional OTC opportunities and other new product launches.

In Europe, we have transitioned our business model towards a simplified and lean structure. We are also executing plans to change our business mix to deliver threshold level profitability from the region. Our FY13 revenues stood at EUR110m, which showed a decline of 12% over the previous year, which was led largely by the continuing price pressure in the external environment?

Moving on to PSAI segment, we have been able to demonstrate strong growth for the second year in a row. Revenues for the quarter are at $188m, reflecting a 26% year-on-year growth. Revenues for the year are at $565m, which is a 14% year-on-year growth.

One of the most important growth catalysts in the segment for this year has been the custom Pharmaceutical Services business. Over the past two, three years, this business segment has been able to convert meaningful opportunities into a sustainable growth story. Along with the external revenue growth, the PSAI segment continues to be an important component of the vertical integration advantage by providing valuable support to our Generics business by making it cost competitive. Overall we expect continued growth in the PSAI on the back of new product launches and new contracts.

Against this background of the financial year 2013, we believe that the financial year 2014 will present us with an interesting set of opportunities for continued growth across all our businesses. Over the past three years, we have invested significant management time as well as resources in driving operational excellence across the Company.

As you may be aware, in our journey of high growth and rapid expansion some years ago, we faced challenges in our operations but I am happy to state that with the enormous effort that we have put in over the past three years, after embarking on transformational initiatives, we have emerged not only stronger but we are well prepared to embrace the next phase of growth in the coming years.

During fiscal 2014, our focus will continue in building a high quality differentiated portfolio and nurturing strong customer relationships across the markets. I am hopeful that the journey onwards will be interesting and rewarding to all our stakeholders.

As you may be aware, we have moved away from giving yearly financial guidance, due to the inherent variability of the product approvals and launches. While we may not get into specifics on financial targets, we remain extremely confident on delivering growth on the generics opportunity in both the branded and unbranded markets.

With this, I would now like to open the session for Q&A.

Thank you very much, sir. We will now begin the question and answer session. (Operator Instructions). The first question is from the line of Anant Padmanabhan from Cowen & Company. Please go ahead.

Yes, thank you and good evening. I had a couple of questions. I realize you're not providing guidance, but consensus appears to be -- for fiscal 2014 appears to be expecting about 10% to 12% revenue growth. So first I was wondering if you could maybe qualitatively comment on that expectation. Thank you.

Right. Like I said we're not being specific about what the guidance is. But again if you look at the various segments in which we compete, which have the potential for growth, definitely there's significant room for growth. The only reason we're not being very specific even as you suggested qualitatively is also because of this whole variability that we are seeing. For example, even last year for example, when we expected some high value products to be launched, they got deferred. And if that happens again next year, so it might lead to some pressures.

But we don't want to comment on that. But specifically to say that is the growth possible on a much higher base. I think it's clearly out there.

Okay. And then -- thank you. And then I have one bigger picture question, which is with Umang now in the US, I was wondering if you could talk about your broader aspirations in the US market, maybe two to three years down. It looks like there's a strategy in place for growing the OTC business, oncology injectables and dermatology. So which of these businesses is a key long-term focus for you? Thank you.

Abhijit.

Yes, this is Abhijit here. I think the focus area for US would be we are picking up products, which are difficult to make with less competitive pressure, complex products. And specifically in the area of injectables, I think we are investing both in R&D as well as capability in terms of developing products and taking to the market. The front end, development of the front end, we already launched a few products. So that would be another key area.

OTC is an area of growth, but not -- it wouldn't be really driving the North American growth. I think the complex generics, injectables and there as we go along into the next two, three years, there'll be other complex products in other delivery platforms. It could be patches, could be other delayed-release products, could be topical, both steroidal and non-steroidal and some of those areas.

And is there any appetite to grow inorganically?

We are always looking for inorganic opportunities but it has to have relevance, relevance to the business. And so we have specific areas in our strategy pathway that we have identified that -- which are the relevant areas. And if there is a fit which we are always looking around for, we should certainly go for that.

Great, thank you.

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

Thank you, I have two questions. First, on Finasteride 1 mg, is there any royalty that you're paying to the innovator? And in the opening remarks when you said that you expect sales to normalize in 1Q '14, does that mean that most of the 180-days exclusivity sales you've already booked in this quarter?

So let me clarify that this was a settlement product but we are not disclosing as such what is the stance of that settlement. Second thing, this is actually an out-of-pocket kind of a prescription product market. So the kind of margin you expect from Finasteride is actually at par with some other good products that we have. So it will not be in line of, like what you will otherwise expect from a six-months exclusivity.

And the comment that you made about sales being normalizing in 1Q '14.

So I think whenever we launch a product in the first quarter, there is always higher sales and it's usual to expect the second quarter to normalize to some extent. So that's what we are trying to signal here. I think the Q4 was the launch quarter for this product and Q1 is the follow-on quarter.

Okay. And my second question is on the Russian market. Just two sub-questions there. One is what percentage of your Russian sales today are under price control portfolio as of let's say, end of March '13.

And secondly, when do you start supplying from a facility in Russia? Today you're shipping from India but when do you have to by law have to start supplying from a facility in Russia?

So Anubhav, around 55% to 60% of our Russian products are under the essential drug list. And we didn't get your comment on our Russian facility. We do not have a --

He says there is a law, but I don't think there is a law.

There is no clarity at the moment that you have to produce locally. There is some discussions in progress that the government-funded products would first get into some difficulty in terms of, if is there local manufacturing available then that will be given priority. A very small portion of our business falls in that category and in the current context we don't perceive this to be a major risk.

Thank you, I'll join back the queue.

Thank you. The next question is from the line of Ashish Thakkar from CIMB Securities. Please go ahead.

Yes, hi, good evening. This is Prakash from CIMB. Just wanted to have a sense on R&D expense. It's been very strong and we are able to see the ramp-up, 10 filings for the quarter, taking the total to 18 for the year. Just wanted to know your thoughts, should we continue to see this 18 to 20 filings on an ongoing basis and which means that R&D expense would be around 7% going forward, of sales.

Actually last time also we said that our R&D is going to go up north of 7%. We said it will go up going forward but at the same time we also indicated that we do not expect it to go beyond a single digit.

And in terms of the total number of filings, that is the kind of numbers we have in our yearly kind of filings plan.

But could you give a qualitative mix of the filings in terms of it would have included Para IVs, FTFs or niches?

For the -- whatever we have filed so far, we can give the numbers. We have actually overall accumulated 65 pending ANDAs, out of which 38 are Para IVs.

No, I understand that. It's there in the press release. For the 18 that you filed this year, if you could give the color.

So I think the future filings, as I just mentioned, I think would be around the complex products. They would be injectables, delayed-release products and all that. So one of the reasons that we would be seeing a slight inching up of R&D expense is some of these products need differentiated clinical expenditure. And some of these products are also partnered with various companies around the world. All capabilities we do not have in house. We have some capabilities. We need to plug that on with some of the capabilities in different parts of the world. But the end game is to get to the products which are of lesser competition and which is slightly inching up the R&D product for good reason.

Okay. And any comment there because we see most of the Indian pharma companies, those who have reported so far, doing around 15 to 20 filings and a filing takes around 2.5 to 3 years to get approval. And by the time we see approvals coming in, do you think that niches could be commoditized? Any comments there.

We don't think so. I think niches will always -- there will always be that room to go for products which will be of lesser competitive nature. Having said so, I mean this is always -- there is always a possibility that it would see some more competition. But we are picking up products which we think are the difficult ones. There could be you know one or two more players, but it is certainly not going to be an Atorvastatin or a Montelukast or products like that, you know.

Sure, my second question on gross margins. We had this 58% gross margins versus 60% in the last quarter. I understand for PSAI, you said margins are not that great, but I would have assumed that the margin sequentially would not have declined. Any reasons, particular reasons?

So, it will definitely depend on the products as well as market mix. And then there have been some inventory write-offs for the dropped or some delayed products.

So you mean to say pricing pressure in the US generics?

No, I didn't say the pricing pressure. I am saying there is -- the overall margin depends on the products and market mix. If suppose in Russia, the mix and the overall thing is lower for -- that affects in a particular quarter. But at the same time as I said, there will be -- even this specific quarter there has been some adjustment in inventory write-off due to the dropped products and some delayed products.

So 60% is the right number to look at going forward.

Prakash, our gross margin will depend on a number of factors and it's very tough to predict.

Okay, got it. I'll jump back --

But it will be in this range, yes.

Range, that's what I was asking. Okay, great. Thanks.

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

Hi. Coming to the US market, you mentioned that there were a few high value products that couldn't get approved in FY13. Is it -- in the normal course, can we expect for approval of some of these in FY14?

I mean normal course is a very generalized term. These things are not in our control. We hope so. But having said that these are as I said, some of these are complex products with difficult pathways, whether it's regulatory or intellectual property. It's not easy to comment on exactly when that would happen. Hope that happens quickly.

Right. And the domestic market growth this quarter per se was a bit weak, although for the year it's okay. So was there anything into that or was it just a fluctuation in the channel inventory or so?

Nothing specific, Bino. If you actually see the quarter, it's generally been low for most companies, right. So I would not see it as anything unusual.

Okay, right. And if I could just push in one more, the entire $22.5m, is that all in other operating income?

No. Please go ahead.

So out of $22.5m, Bino, $2m is credited in R&D line and $20.5m is credited in the other income line.

$2m in R&D. For the quarter?

Yes. So this is entirely for the quarter. $22.5m received in the month of March which we have booked in quarter four, out of which as I said $2m is in R&D, $20.5m is in other income line.

Okay. So actually your R&D expense for the quarter should be taken up by $2m.

Yes.

Okay, great. Thank you.

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

Yes, hi. Just on the Russia CIS, if I look at Russia separately, QOQ there has been some decline and CIS has jumped from INR70 crores to INR95 crores. Is that a new base or is there some one-off in the CIS sales?

So CIS, I think we are experiencing strong growth especially Ukraine which is the largest of the CIS countries. Kazakh is also dong well. So we are quite optimistic about the CIS markets. Having said that there is also -- we are continuously on the lookout of assets in licensing and one such deal is through. Not that that's the only reason for the upswing. That's one of the reasons which has gone in, in last quarter. But overall we are quite optimistic in CIS markets and also the other emerging market as well.

Right. So this run-rate can ideally continue right? We can project.

There are seasonal -- as you know these branded generic markets always display seasonal behavior. But if you track our earlier quarterly trends, I think we should certainly build further on that.

Right. And just on the US side, any color you can give on Reclast? When do we see more product approvals from the competition and (multiple speakers).

I'm afraid not. We can't talk about when competition is coming in. At the moment it's a two-player market as you know. We went in first followed by another company. But I won't be able to give you updates on who's coming in next and when.

Fine. And just lastly, on the progress with biosimilars, where are we in terms of launching or filing in Russia or in other emerging markets?

So again we are progressing on our biosimilars in emerging markets. There are small markets we have launched and the revenue is not so meaningful in terms of smaller markets like Myanmar, Vietnam, some of the other countries. On the major market, I think the file is progressing.

Can you comment on Russia specifically, if it's something which is close or would it still take one or one and a half years time?

On the regulatory front, I don't think it's fair to comment on timelines.

All right, thank you.

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

Hi, thanks and good evening, everyone. Just starting with, would Zumeta be a big contributor in this quarter, a meaningful contributor for you?

Zumeta was launched in Q1 as you know and Reclast was launched in Q2. Sorry, Q4. Zumeta was in Q4 and Reclast in Q1. So Zumeta I think has become -- more players have come in but we have a formidable share. We were the first, it was a day one launch for us. We have very good share in the product. I think all of it has not come in public domain but soon it will show up in the public domain. So it's going to be meaningful for us.

Okay. And secondly, again coming back to the R&D question. You just announced that you're again setting up R&D in the US. I think three years or four years back you had shut down your R&D effort in the US, so just want to understand as to what's going on. And does the R&D -- I mean because previously you guided for R&D being between 7% to 8%. So is that something that we should expect or do you think that number, it has risks to the upside rather than the downside?

Okay, so the previous R&D that was shut down was to do with [NC] research right, so that has no bearing on what we're trying to do now. So, the current one that we're talking about is a small development lab for oral solid dosage forms that we're setting up in the US. So that doesn't raise the cost significantly you know, just in terms of infrastructure. It's just part of our whole effort of globalizing R&D because to give it the kind of horsepower that we require for delivering high value products. That's why it's being done.

Right. And just and when would we see the impact of the -- given that we have the OctoPlus integration also happening, so where do you see R&D really peaking in terms of -- as a percentage of sales really peaking?

So it's difficult to comment just exactly based on this OctoPlus as well as Finasteride because if you take the overall R&D expense of the Company, it also includes the spend that goes on in proprietary products. And as and when you see more and more products progressing towards clinical trials, you would also see an increase in that. So if you say in terms of absolute peak, it's difficult to predict that right. So it's predicated on the events. But all we're able to at least tell you is that from the current level of say, 7% of sales we still expect it to be in single digits even for the next two, three years at least.

Okay.

Even beyond that.

Right. And just in terms of you named some delivery platforms earlier in the call. So are you already starting filing for these products or these are still in development phase?

You're talking of overall? Yes, I think there are already --

Topical --

Yes, there are quite a few in development phase. Few should get ready for filing towards the end of the financial year. And as we speak, some have been filed through -- from our partners. There are some products which are filed from our partners. But then a partnership product would have revenue sharing, some sort of deal.

Right. And just last, could you comment on the CapEx for this year? Thanks.

For the year the CapEx is $123m.

Sorry for FY14, what is your expectation?

We said the range is INR500 crores to INR600 crores.

Okay, thank you so much.

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

Thanks. Good evening, everyone. First question, I know you are refraining from giving any financial guidance. But for some of the businesses which have shown traditionally a stable growth, I'm referring to India, Russia maybe PSAI, is there anything to say that that piece of growth will not continue? Would it be any different from what we have seen in the recent past?

Nothing to suggest that, Sameer. I think that growth momentum we expect it to continue.

Okay. So I think the bigger variability is coming from US I guess.

I was more referring from what happens in the US you know because that's where the big growth is. So one or two product approvals which get delayed once in a while tends to push everything. So we didn't want to comment on that bit. If you're asking about other markets and the other PSAI business, I think the growth momentum should continue.

Okay. And given the fact that we have a lot more focus on complex generics, is it possible to just share something qualitatively on what could be the possible rollout? Something like one to two products per annum is what we should expect going forward in the next three four years.

Yes, that's a fair expectation. Having said that, there is regulatory hurdles as you know Sameer. So -- but that's a fair expectation.

Okay. And is our entire complex generic effort focused on US or do you think there could be meaningful upside from the other geographies as well?

The products are leveraged, wherever it is applicable. Like EU certainly would have some spillover effect. But as you know the pricing in the EU in many of the complex products as well is a fraction of -- it's sometimes 50% of US. The regulatory pathway is more challenging at times. So those are the challenges of getting value out of complex products in other geographies. But there could be some spillover even in some emerging markets as well. But the large part of it would come from US.

Okay, excellent. And just on the US pricing environment, just philosophically I'm trying to understand the market dynamics. Even if there is no new competitor for your base business, do you end up seeing some price decline or in that case the price remains stable?

So there're two things happening in the US market. One is, you're probably aware that the customers are consolidating and then that has a paramount impact on -- in terms of the way they approach the bidding, the selection of suppliers. They're trying to leverage scale to derive some value out of it. So all that is happening and much of it is in public domain in terms of the various retailers and what they're doing in terms of increasing their footprint in various parts of the world, in US consolidation itself. So that's one factor which is causing some erosion in prices.

And secondly, of course there are new players coming in. Specifically in our case again, there is a lot in public domain on Lansoprazole, on Tacrolimus. So there are players -- Ziprasidone players have come in. So while as market share gets protected, the value goes down. I think that's going to be a sort of feature of US market for all quarters and for all players.

Okay. And just to understand is customer mix now fully digested or do you think there's some more pain left? Wholesaler versus retailer as a customer, the change, the shift that you've been seeing?

You mean the consolidation of the customers?

The impact of the consolidation. If there's no more consolidation then all your orders have been reset at a price and now this is going to be the new base to start with. Or there's more pain left?

By and large for the year, for the first point. The second part as you know as people come in, it will have its own implication. But as far as the first point is concerned by and large for the year you are probably aware of the large retailers, etc. So by and large for the year I think it's done. But the impact is not seen and it would be seen as we go into next quarters. But overall I think we are -- there is competitive pressure but I think we are taking it as part of the business framework in North America.

Okay, thank you very much.

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

Yes, good evening and thanks for taking my question. Just would like to understand about the ROW market. Like we have a consistent rate of around INR130 crores, INR135 crores kind of quarterly run rate in ROW market. I just would like to understand that how the GSK deal is ramping up and are we seeing some traction over there?

Look the GSK deal is a very small percentage of the overall emerging markets revenue which we have. So it's a very specific deal tailored for certain products in certain markets. So it's not a very large meaningful part of the whole revenue today. As we go along it will ramp up to a certain extent, but even in three years it's not going to be very significant part of the revenue.

Okay. And Mr. Chakraborty, you have indicated that there was some inventory write-off during the quarter. Can you quantify that amount, if possible?

We do not really specifically quantify as such. I just indicated some of the dropped and delayed products. The inventory write offs also has an impact on the gross margin.

Okay. And the third question from my end like basically, if you look at the SG&A expenditures, on a sequential basis despite there was around 16% kind of growth in the top line, we have almost seen the flat SG&A kind of expenditures. So are we seeing that operating leverage coming in the system and probably this run rate is going to sustain going forward?

We said there is a 100 bps improvement in the SG&A. But despite of course certain increases, which has being happening in the normal course in terms of the annual increase that we talked about. And also there are specifics. I also said about the effect of rupee depreciation. That definitely has an impact on SG&A as well apart from giving us some benefits on the revenue side. And I also spoke about one-time acquisition-related expense.

But despite those higher expenditure and all we were able to contain our SG&A costs. So I just want to understand that is it going to be the run rate going forward?

So of course we expect operating leverage. But having said that there'll be again -- there'll be annual increases that will be there.

Right. And the last question from my side sir, like what would be the tax rate for the year going forward FY14?

So we can only talk about a range. We have been normally talking about a range of 20% to 23% kind of thing.

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

Thank you.

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

Thanks for taking my question. Satish, on the India business, I guess we've done our fair bit of catch-up as far as growth is concerned over the last quarters or so. But when you look at the business, take a three- to four-year view of the business, do you see the character of the business materially changing in terms of the growth trajectory, given the fact that this is one big difference as far as we and some of the better -- some of the faster growing peers in the space is really concerned, the pace at which we're growing in domestic business?

Yes, it will change. The answer is yes, right. So the question is at what rate will it really clip on all that. I mean that's something we have to wait and see because if you have seen the kind of challenges that we faced, a lot of it our own internal doing in the past. What I was trying to indicate was that's been reversed from what we conveyed at the beginning of the year. So that's moving very well.

Now like you said, there is competition that is growing at a faster rate. So we're not the only people. Although definitely if you've seen a couple of months, we are one of the fastest growing companies. But having said that, to really grow much above the market growth rate, I mean to really widen the gap from the current market growth rate and then grow much above that a series of steps have already been put in place. Some have been piloted, they're working well. Some of it has to do with new products. Some of it has to do with some realignment that we did on the field force.

So all of it, for it to play out, we just have to watch maybe the next two quarters before we can really say that in the next three years, which is the timeframe that you're looking, at can we grow significantly faster than the competition. So I would still wait for the next two quarters.

That's a fair point. But I guess in some of the plans that you talked about, is it practically possible for us to grow like the 18%, 20% growth rates which some of our larger peers have been able to achieve for the last few years? Or is the structure of the business such that we will not be able to hit those kind of numbers given the structure of our business?

Eventually yes, of course. So all I was trying to indicate was one of the major events is obviously going to be this pricing policy being notified.

Right.

Right, so its impact on the market, exactly how things are going to settle down. So that's why I'm just sounding a little bit of caution saying that let's watch for the next two quarters how it settles down. And then really look at how much more than the market rate can we grow.

Thanks, this is helpful.

Secondly, on the ROW business, I know we've sort of -- we restructured the business some time back and we focused on a bunch of businesses. And you mentioned four geographies which have been doing extremely well for you. So again when you look out the next two to three years so are we looking to consolidate these businesses? Trying to grow especially in these geographies? Or are we looking to add some more geographies our business also?

So these were the geographies where we've been present earlier, right. So the kind of efforts that we put in over the past year or two, that has led to a growth in these markets, right. So these are nothing new. So any of these markets that we've talked about South Africa, Venezuela, Australia, New Zealand. So we expect to continue the growth momentum because a lot of attention is being to these markets. So we don't expect additional markets to add to this. So from these markets itself we continue to grow.

So you're not looking at some of these newer markets like Mexico and Brazil which --

No, we're not.

Okay.

And lastly, Saumen, on the receivables one sees there has been a steady increase in the receivables over the last -- receivable days over the last three to four years. Is there a conscious strategy for the same or how do we see this thing playing out for us?

So if I compare last year the DSO as such has not increased.

At least the numbers which I have indicate it's gone up from 58 odd days to about 87 odd days over the last three years.

Three, four years.

Yes.

So would you like to comment?

So it's a function of the business mix, Nitin. And one country where we had to align our receivable days in line with the market reality was Russia where approximately one more month of receivable has been invested in the market.

But around this 85 to 90 days, is it where we should expect the DSO to stabilize now?

We do expect our DSO to stabilize at the current levels at least within the next 12 to 18 months.

Okay. And if I can squeeze in a last one. On the API business, Satish, how do we see this business playing out for us? We had these big years for two years when a lot of patent drugs went off patent. Now going forward, the number of expiries are going to reduce. So is this going to hamper the growth of this business? Obviously we have grown at a very, very fast pace over the last two years.

I think the growth drivers are in various areas for the API business specifically. So in the past if you look at -- basically look at the markets where we were competing in and the number of customers that we used to have, there are a variety of them, right. So lot of work has been done in terms of consolidating the customers that whom we are going to serve. So we made a choice on that.

Also in terms of the markets, that we are stepping up our resources and also some of the technologies that we are investing in. And also making sure that we're able to compete quite aggressively in the market. A lot of steps have been taken.

So if I add all these things together certainly there's growth to be expected from the API business. But that's something you have to wait for now things to roll out because this is also some kind of a cyclical growth in this business. You can't expect that every quarter will be the same as the previous quarter in terms of growth.

Okay, thanks very much. Best of luck.

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

(technical difficulty) set of numbers. My question relates to biosimilars. What is the strategy to enter in the regulated market of US, Europe and Japan?

So this is part of the Merck Serono deal that we have done. So that's how it's going to progress into these markets.

And when can you expect a substantial amount of revenues coming from this business, from the regulated market?

There's still time for that; there's still quite some time, four five years at least.

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

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

Yes. Thanks for taking my question. You mentioned there are 65 ANDAs pending. Can you quantify how many you would classify as complex or limited competition in this pipeline?

Again directionally we are moving towards complex products in relative terms. No numbers, Saion. I think we won't be able to give you an exact break-up of -- and firstly the definition of complex itself is a broad definition. How do you exactly say this is fully complex, this is half complex and this is not complex. Directionally we are moving in that direction where products -- we are trying to go for products of less -- assets of less competition through various means, whether it's manufacturing complexity, whether it is development complexity, whether it is regulatory complexity, whether it is clinical trial requirement or it is intellectual property.

Yes, but you would be classifying -- when you identify these opportunities, right, your expectations could be two/three player markets. Is that the way you look at it, given the complexities involved? How do you go about defining a particular opportunity as limited competition?

Whichever asset gives us sustainable revenue on a, at least, two-year period, let's say, so that would be complex. So that would naturally come with lesser number of players. These 65 you allude to, some of it is historical. Going ahead the selection is largely towards products which we think, hopefully, would attract less players. As you progress there are not large blockbuster targets as we all know. So the choice would be a little more sharper towards these. But these are all assumptions. As we actually hit the finishing line, we would actually know where we are actually.

So actually you mentioned that there have been some slippages in terms of gaining approvals on time on some of these products. And you did mention, I think, one or two such opportunities you would see going forward. So over the last one year, in your interaction with the FDA, how confident you are that these things would come through, say in FY '14 that you would have two more launches which would have limited competition?

There are always expectations. Again -- sorry. Go ahead.

Yes. Is it something that you need to do in terms of doing more studies or data, or it's just that the assessment is taking more time? Where is the bottleneck at this point?

In most cases I think we are, by and large, responding in reasonable period. I think the restructuring with GDUFA and all that is taking a little bit of time. I think it will get -- it will be in right speed soon; we hope so. But at the moment I think it is going slow; not so much for a lot of new studies or new things which we need to do. There are of course, there are some questions here and there, but, yes, not too much.

Okay. So it's more administrative in nature in that sense.

We would guess so.

Okay. And on biosimilar, so what's the pipeline for launch in India now? So what's the pipeline and what's the sequence of launch that we expect in India?

We don't discuss product specific issues here.

Okay. Can you, number of projects, can you disclose that, that you have currently?

There are about five or six, but specifically we won't be able to say which ones and when do we expect to launch them. That we won't be able to comment.

Okay, no issues. And finally can you share the cash flow hedge loss or gain number for the quarter?

Saion, this quarter we booked about INR28 crores of the hedge loss.

INR28 crores. Okay thanks.

(multiple speakers) last quarter. Last quarter we booked about INR55 crores. So because of the increase in the net delivered rate, (multiple speakers) is coming down quarter on quarter.

So next quarter you expect it to reverse?

We won't comment on that. That would depend on the --

Because your outstanding hedges I think you mentioned INR56 crores to INR59 crores or something right?

It will depend on the current (inaudible) run rate.

Okay. Okay, thanks a lot. Thanks.

Thank you. The next question is from the line of Monica Joshi from Avendus Securities. Please go ahead.

Yes, hi. Good evening. Just one question, directionally where do you think is Lunesta as the case going? I believe you had a summary judgment in your favor. So how do you, as a company, now progress on Lunesta and do you think that this would be somewhere close to an opportunity in FY '14?

Under litigation, Monica. I think we won't be able to comment on this; under litigation at the moment.

Okay, fair enough. On the other product, on Metoprolol, if you could share what is now your expectation? Suppose one more player or two more players enter the market, just hypothetically, how much do you see that the market could shrink further?

So market has shrunk to a reasonable level actually because with our entry, our 15% market share carving out did take some toll on the market itself. So another player coming in, anyone's guess I would -- there is -- it's not -- it is a good product, but it is not absolutely super product for few more players to come in.

Okay, thank you so much.

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

Yes, hi. Thanks again for taking my question. On the PSAI side are there one-off revenues linked to exclusivity related API supplies or anything which is driving up the quarter or --

So earlier also we have said we should not judge the PSAI performance on quarter-on-quarter basis. We should more look at yearly basis, the performance, because there could be fluctuations from one quarter to another quarter.

Right, but on a whole-year basis you think -- from the commentary, you think there is sustainable growth of close to double digit possible in this business?

We have been growing and, of course, there are new customers that also we are acquiring.

The possibility is there. We don't rule --

The possibility is there.

We are not saying no to that, but again it depends on the contracts and the customers and things like that also.

Right. And just one question on, again last year you had given a growth guidance and potentially a number of around 2.4, 2.5 which was -- your 2013, FY '13 was a big year. So if you look back at the guidance that you gave in FY '09 versus -- and then last year, so what has really changed in terms of have there been some product opportunities that you were not able to capitalize or were there some products that genericized much more than what you expected? How would you look at that? And would it be possible for you now to give a three to five review for the business, for the next three to five years.

So it's difficult to quantify exactly which led to what kind of erosion, right. So, for example, we clearly said that when it came to the US market, which is really a substantial part of the sale, some delays in approvals, some products where we expected lesser amount of competition there were more of that, right. So there were a host of factors which led to that. Right? So all of -- even now if you ask me about say three to five year business direction, what kind of growth and all that, all we can say is at least, in the areas where it's a stable market -- like Sameer had asked before -- these double digit growths are sustainable, certainly. Right? So if you take the Indian market or if you take the Russian market or in some of the emerging markets where it's branded, it's pretty much possible.

But when it comes to the other parts of the business, so there are these high-value products, there is dependency on factors sometimes which are not in our control like the regulatory issues that we face. That's the reason why we're not able to specifically guide you to say that this is what it's going to be every year, right, while these uncertainties do exist and the variability exists.

Right. And if I could take one more question, on the OTC, the US OTC business, you said that it may not be a major driver of growth, while there is still a growth opportunity. But just want to understand, I believe the market in the US on the OTC side is pretty big, so what is clearly -- and given that you have strong capabilities on API and manufacturing, what is really the challenge to scale up that business? Is it relationships, is it -- I understand the margins might not be as attractive as generics, but then it is probably a longer-term business, right? So --

The issue is products. In Rx business there are lot of products one can file and aspire to get approval. Here there are not -- as we speak, probably Nexium could be the next launch. Otherwise there are not whole lot of OTC switches one has seen. Even the last switch of Lansoprazole was not a great success in the market; not just for us, we have good market share. So market share, customer relationship is not the issue, but there are not so many products. There's a lot of talk of future switches happening. There are statements made by lot of companies saying that they see a growth. Being an active Rx player in the US market, I think, as the switches happen, we would be better positioned; we can say that. But today as we speak there are not whole lot of products which are available for revenue from the OTC.

And also, just quickly to conclude, I think this is also a cyclical business for us. Q4 was the allergy season, although it was subdued this year. But going into Q1 that part of it would be moderated.

Right. Thanks a lot. Thank you for so much for taking my questions.

Thank you. Ladies and gentlemen, due to time constraints only one last question can be taken. The last question will be from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Thanks. Just on the GDUFA, I guess right now the approval time by FDA is maybe anywhere from 35 to 36 months. I think they think that they can bring it down to 12 months over, whatever, three years or so. Is this going to be good for you, good for the industry or not so good?

Well, I think 12 month I would say probably is an aspirational figure. Let's see how it pans out. But more importantly I think there is a great degree of rigor which is coming in, so people -- the companies which are going to use QBD and other development methods which are much more scientific would reap benefits. We'll see whether we are in one of those -- our efforts are on. But I don't see it's a negative really.

When I say negative in the sense that for certain products you have only three or four players in the market because of FDA's resource constraint, unable to approve more people. So that kind of luxury of low-competition market you may not have, if at all there are people in the queue. So I was coming from that point of view.

Yes, for the plain oral solids, yes. But since the rigor of review is going up substantially, there would be difficult questions asked, and the development is not in right way there would be differentiation. Those, whatever, X months, whether it's 12, 14 or 18 or 20, would be applicable to companies who have done the work very, very well. So there would be differentiation, I guess.

Okay. And just one question, Satish, you talked about longer-term growth being there, even though you're not quantifying, but you are quite optimistic about it. Just on the margins, where we are right now, whatever ballpark, 18%, 20% at operating level, over next three, five years what could be the broad trend for the margins?

Certainly improvement on the existing base, Sameer. Again difficult to quantify, but the way we are moving in terms of the, markets, the business, the kind of products that we have chosen, there's certainly room for improvement there.

Okay, excellent. Thank you.

Thank you. Ladies and gentlemen, that was the last question. I would now like to hand over the floor to Mr. Kedar Upadhye. Over to you sir.

Thank you all for joining Dr. Reddy's senior management for Q4, FY '13 earnings call. In case of any additional clarifications, please feel free to get in touch with Investor Relations team. Thank you and good day.

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