Dr Reddy's Laboratories Ltd (RDY) 2014 Q1 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Q1 FY14 earnings conference call. As a reminder, all participants' lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions) Please note that this conference is being recorded. I now 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 quarter one of FY14. 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 Business; 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 expressed written consent. Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and 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 convenient translation rate of INR59.52 to a dollar, which is the rate as of 30 June, 2013. Consolidated revenues for the quarter were $478 million, we registered year-on-year growth of 12%. Revenues from our Global Generics segment are at $368 million and grew by 15%. This growth is largely driven by continuous progress in North America and emerging market territories. Revenues from our Pharmaceutical Services and Active Ingredients segment, that is the PSAI segment, are at $99 million with year-on-year growth of 6%.

Consolidated gross profit margin for the quarter is at 52.8%, which is largely in line with the previous year. Corresponding values for Global Generics and PSAI segments for this quarter are at 61.6% and 19% respectively. GG gross margin profit improved primarily on account of higher contribution from new product launches in North America Generics whereas PSAI gross margin declined on the back of lower number of launch molecules to our customers and relatively higher overheads during the quarter. SG&A expenses including amortization for the quarter are at $148 million, an increase of 6% over previous year and representing 31% of the revenues. The overall increase in absolute terms was primarily on account of normal year-on-year salary increment and the effect of rupee depreciation against multiple currencies.

R&D cost for the quarter are at $41 million representing 8.5% of revenues versus 6.2% in the previous year. The increase in R&D expense during the quarter was as planned and is in accordance with our strategy to expand our R&D activities across the focus segment. EBITDA for the quarter is at $96 million, which is 20% of sales and registered a year-on-year growth of 13%. Profit before tax for the quarter at $70 million is 14.5% of revenue. The annual effective rate for FY14 is likely to be in the range of 21% to 22%, which is similar to previous year.

Key balance sheet highlights are as follows. Our working capital decreased marginally by $2 million over 31 March 2013. Capital expenditure for the quarter is at $33 million, out of which the key projects include our injectable facility and biosimilars expansion. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $510 million, largely hedged around INR56 to INR60 to a dollar. In addition, we have balance sheet hedges of $300 million. Net debt at $236 million represents a net debt-to-equity ratio of 0.19.

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

Thank you, Saumen. Good evening and good morning to everyone. The financial year 2014 has started on a very interesting note. What particularly gives me satisfaction is the portfolio mix of our new launches. We have been talking about diversifying to other dosage forms like injectables and the greater share of complex products in our portfolio. The recent launches of generic versions of zoledronic acid, Decitabine, and Donepezil Hydrochloride 23 mg in the US market is growing proof of this shift in our portfolio. Our increased R&D spend at 8.5% for the quarter is a reflection of one particular aspect of our strategy.

The Indian Pharmaceutical market has witnessed the impact of the pricing policy that is aimed at regulating prices of selling drugs though the Drug Prices Control Order of 2013. The implementation of this policy is underway. However, the pharmaceutical companies and the trade continue to grapple with the disruptions in the marketplace in the form of decreased channel inventory and strike by the trade. The impact for Dr. Reddy's is expected to be roughly about 4% of the revenues on this count and we have plans in place to mitigate the impact. In the emerging markets, CIS countries and rest of the world geographies continue their aggressive market penetration despite concerns on currency devaluation, especially in Venezuela. In the API side of the business, changes in the stocking and launch pattern of some of our key customers had a bearing on the demand for launch materials during the quarter. The custom pharmaceutical business witnessed good traction in orders from innovative companies.

Now let me take you through some of the business highlights for each of our key markets. Please note that in this section, all references to numbers are in respective local currencies at average exchange rates. Starting with the North America Generics business. Revenues for the quarter are at $192 million and grew by a healthy 21% on year-on-year basis. This growth is largely attributable to new product launches over the past 12 months and market share gains in select key molecules. This quarter witnessed the launch of two new products, zoledronic acid injection which is the generic version of Reclast and lamotrigine extended release tablets. We hope zoledronic acid will turn out to be a good opportunity in the medium term. While we had the benefit of these new launches, normalization of finasteride 1mg sales and seasonal effect on our anti-allergy OTC product and antibiotics portfolio led to a dip on sequential quarter basis. However, our recent launches of Decitabine and Donepezil in the month of July present a good opportunity in the short to medium term.

On the India business, revenues for the quarter were flat at INR349 crore. We saw some amount of market disruptions in the form of trade strike in Maharashtra for the major part of the month of June. While this hurt results towards the end of the month, the subsequent billings made in the last few days got accounted as sales cut-off as per our accounting practice and got carried forward to Q2. In addition, the implementation of the new pricing policy also caused some amount of destocking in the trade due to which the order flow was weaker. After publication of the revised price notifications in June, we are seeing stability coming back in the market and hope to recover a part of the shortfall in the second quarter. Despite these challenges, our June 2013 [NQT] growth was 14.5% as against the IPM growth of 10.1%, which gives us the confidence on the continuing momentum in our India business. The coming five to six months would be interesting to watch from the perspective of marketplace realignments.

On the emerging markets front, the Russia revenues at $65 million for the quarter grew by 3% in ruble terms primarily because of high base effect of the previous year and changes in the market stocking pattern. Our secondary sales growth data for the quarter indicate a healthy market demand. CIS markets grew by 24% on a year-on-year basis on the back of new product introductions in Ukraine. Rest of the world markets grew by 8% on a year-on-year basis despite the devaluation impact in Venezuela. Performance of our European operations was in line with our expectations. The business model has transitioned to a lean and simplified structure. Our PSAI business grew by 6% on a year-on-year basis. The Active Ingredients business had a challenging quarter because of the decrease in new product introductions by our customers. In addition, we are witnessing volume and price compression on the products launched last year and the general decrease in the stock holding period at our customers' end. We hope this trend will normalize over the coming quarters.

With this, I would now like to open the session for question-and-answers.

Thank you very much, sir. (Operator Instructions) Anant Padmanabhan, Cowen and Company.

Yes. Good evening and thanks for taking my questions. I had a couple. First, on the last call you had mentioned a few high value product launches in the US that were deferred or pending at the FDA. So could you just talk about how many of these products are still remaining?

So again, we mentioned last time that specifics we'll not be able to provide. But as you know, we have launched Decitabine, we're the first in the market, Donepezil 23 mg has also just been launched. But regarding the product, which are likely to come eventually, I don't think we'll be able to comment because the approvals are not exactly in our control. But this is going to be a busy year similar to last year.

Okay. And then of the 64 ANDAs and eight First To Files, could you give us a sense of how many are injectable drugs? Thank you.

On a broader perspective, I think we are gradually moving from just being an oral solids company to a little more diversified in terms of different types of dosages, injectables being primary of them. And in the longer term, I think probably somewhere in the range of 30%, longer in the sense now let's say FY17; the total revenues, about 30% would come from non-oral solids so that's about 30% to 35%.

So could I apply that to the number of ANDAs as well, would you say about 30% of those ANDAs?

Yes, I wouldn't be able to give you on the specific numbers because the value of assets vary from product-to-product.

Okay, great. Thank you.

Arvind Bothra, Religare Capital Markets.

Hi. Just a couple of questions. One, on the US regulatory front we've seen increased action from USFDA in terms of requirement for higher number of batches for test. And also just wanted your sense on how has been the cost of filing ANDA increasing especially after GDUFA and has it impacted approval timelines? That's it.

So two things, you asked about the number of batches increases from calendar year of next year and probably sometime from September onwards, we'll have to get into taking three batches. So far we're still on a one batch, last stability period we are still within that one batch per product. Having said that, the cost of development is not so much dependent on the number of batches. I think the whole effort by most companies are shifting from being plain vanilla players to somewhat differentiated as much as possible in terms of high entry barrier products. In the development of those, it's a little longer journey and some of them need even clinical support. So all in all, I think it's not so much dependent on one batch and three batch type of a shift in terms of the cost, it depends on how smartly or how quickly you can get to the end line and that would sort of decide the cost of development of a product. The second thing, you're asking about the timelines of approval. Certainly, the first phase of GDUFA implementation is seeing a lot of sort of churn in terms of the delays, which all generic companies are witnessing. But we are hopeful that going ahead, I think this will settle down and hopefully next year we'll see somewhat faster turnaround of this.

So just a clarification on your first answer, does this new norm of three batches apply to your pending ANDA filings or that is on an incremental basis?

No, no, the new filings. This would all be on the new filings. But having said that, the current approach of regulatory agency is to have a very detailed development backup so there are a scale of batches to be taken eventually supported in the efficacy management. So that part of it is not the major part of the cost is what I was trying to highlight.

Okay. Fair enough. Just a quick one on the PSAI front, you mentioned that the new product approvals has been fewer plus we see patent cliff kind of approaching. What kind of outlook do we have for PSAI business especially in the wake of your much lower margins in this quarter in PSAI?

Right. So this has been an event just for the first quarter in the sense that two, three reasons that I highlighted. One is clearly that the launches, which were to be done by the customers which are the generic companies; some of them didn't pan out the way it was supposed to do for different reasons for the customers. In some cases it was just delayed approvals, in some cases it was about their formulation not working out, things like that, in some cases they plan to launch the product. These are some of the reasons so that was one aspect of it. The second aspect of it also was erosion in prices of some of the existing products, which were already on the market where we expected higher sales so that also affected. Now we expect these things to normalize, that's what I was saying towards the end of my script saying that hopefully in the next two to three quarters we should see some normalization of that. But whatever we lost in the first quarter, I mean those will be difficult to make up for the next year.

Thank you so much. Thanks for answering my queries.

Sonal Gupta, UBS Securities.

Hi. Good evening, everyone. Thanks for taking my questions. Just to start with, I just wanted to understand in terms of the R&D spending clearly how it has accelerated especially over the last couple of quarters. Could you highlight how much of this is going through or what portion of your R&D spending is going towards clinical trials, et cetera? Is that the major reason for the acceleration?

Right. So again, that the big number that we talked about 8.5% of sales which we said has increased so it covers everything. It covers all the way from the API development to generics development to biologics to proprietary products, it covers everything. Now like Abhijit talked about, the shift in the portfolio itself over a period of time towards more difficult to make products and products with entry barriers so there is some cost attached to that so you'll see some reflection of that. There's also the cost on the biologics front, there's also cost on the PSAI front because OctoPlus is now part of this division, the company that we acquired, so that R&D cost also is captured in the PSAI side. So all put together, I may not be able to give you specifics of how much increased in what, but I'm just giving you a general trend which we anyway indicated last year or in the last quarter in the earnings call saying that this would be the outlook for the year that the R&D cost will increase.

Right. No, I understand that, but I think the thing is for a company of your size and scale, I mean 8.5% is extremely high. So do you expect it to remain in this range over the next two, three years I mean especially once you really start clinical trials on your biosimilars, would it accelerate even further from here?

Yes, that is the indication that we gave that R&D costs will be 8% of sales, 8% to 9% is what we clearly indicated last year and I think it's within that range. And the reasons is exactly this saying that as we move towards more complex products, as we get into more clinical trials based on the biologics and also the increased growth in sales, I mean this is the kind of trend that we indicated and we'll stick to that.

He's asking whether it will go beyond.

No, if you're saying will it go beyond that, it won't. It is going to be in this range, 8% to 9%, we'll stick to that.

Okay. And just in terms of India, what is your outlook for the full year now I mean given all these impacts? Do you still see yourself growing at close to market or how do you see this?

That is broadly yes. The first quarter, as Satish pointed out, was an aberration in terms of some of the events which panned out. Typically second and part of the third quarter is seasonal referring to the India business, some cut-off effect will spill over to second quarter. So broadly, we would be in the range of our own plans and in line with the market.

Okay. Could you just shed some light on how do you see the Russian market growing because the growth has been normalizing and is the trend that we sort of expect to continue given that in constant currency terms also your growth has now slowed down very significantly? So what is the broader outlook and how is the market really growing and relative to that, where do you see yourself?

The Russian market, we don't particularly have a concern. Let me give couple of reasons. One is I think last year Q1 was quite high and there's a reason for it. There was a shorter winter and when the season changes, you'll have larger sales in anti-allergy and other products, which happened in Q1 last year. This year was an extended winter, the seasonal change came later and we are already witnessing much better Q2. That's one. Second thing is there are some changes in Russia in terms of clubbing the holidays so this quarter there was a ten-day type of a holiday, which had a large part of the country getting into the holiday season so which also affected sales in the Q1. But overall Russia, I think we're fairly confident that we would be pretty much where our plans are; strong Q2 seasonally plus the impact what I just mentioned, Q3 should be good. So overall, I think we're not concerned about Russia.

Okay. Great, thanks. I'll join back the queue. Thank you.

Anubhav Aggarwal, Credit Suisse.

Yes, hi. Thank you. One question on the R&D, just a clarification. How do you consolidate OctoPlus? Is it line by line addition of OctoPlus or it's just total expense or the net loss of OctoPlus just goes into entire R&D?

Anubhav, it is line by line consolidation. It is our 100% subsidiary now so it's a complete line by line consolidation.

Okay. So actual it's an R&D increase then entirely on the business. Okay. That's fine.

Probably have had some sales G&A as well as R&D so everything has been clubbed in each of the lines.

Okay. That's helpful. Second is a question on naproxen. In the disclosure which you gave, your naproxen sales in PSAI has more than doubled last year. Just a question, has the market expanded so much and if yes, in which geography or you have gained very large in terms of market share?

We have gained on the market share part.

So much that your sales have doubled?

Okay. Partly of course is the overall market increase, but mostly it is because of the market share.

Okay. One clarification on the PSAI business. The gross margin disclosure which you gave of 19% this quarter versus what you've been averaging about 30% for previous quarters, that's a very, very sharp decline unless you had a very high concentration of the product there where you have grossed very, very significant margin. If that's the case, for next two or three quarters, should we see about thereabout 20% gross margin for this or was there a very high one-off inventory impact this quarter so that margins could ramp up in next two quarters?

Yes. So earlier also we have said, the PSAI business performance, it will be very difficult to judge from a particular quarter thing, there could be fluctuation. Overall margin level last year, we kept around 30% so as we get to the next quarters in all, it will be more clearer what kind of margin level we can expect from PSAI. But definitely, it will inch back towards the normal margin levels we expect from PSAI.

So there was no one-off inventory write-off or something in this quarter, it was just the margin compression or price compression of the existing products?

Also based on the product mix in terms of that there are product mix in various kind of margin brackets. So the things that got sold in this quarter is from the lower margin kind of the products rather than higher margin.

But no, there was no one-off write-off, there's no such thing.

There's no such thing.

Last clarification, ex-betapharm European sales, they have dipped about 30% year-on-year. Is it impact of price correcting in one of the markets or is it expiry of any old contract which is now renewed or not renewed? What is it?

So the contract strategy, we've spoken about it, that we are moving out of the tender-driven business very consciously. Actually with this price compression, what has happened is our gross margins have substantially improved in Europe and we're moving in a direction which is thought out would make this business compact, profitable, and meaningful. But in the process, we're continuing to sort of get out of businesses which do not add to the value recognition and puts pressure on the return on capital.

Which market you're talking about, the UK here?

Well, we are in Germany and UK, both and both have similar traits.

Yes, because my question was pertaining to ex-betapharm basically. So mainly your comment is about UK market there?

No, we're talking about Germany as well. I mean Germany, last year we had several molecules in the tender which were topline without meaningful bottom line. This year those tenders are over and we have not sort of participated at those low levels so that has changed the dynamics of the business in Germany.

But Abhijit, if you were to talk only about UK, would your comment remain the same that you have opted to let's say not participate in some of the low-margin contracts, that's why your sales have declined 30% ex-betapharm?

Yes. The UK business, as you know, is a very, very small part of the whole thing. But you're right, I think consciously we are moving away from sales which have pretty low gross margin and we have done some of those.

Okay. Thank you.

Bino Pathiparampil, IIFL.

Hi. Thanks for taking my question. May I know the actual US revenue in dollars, actually what is it?

$193 million, Bino.

$193 million, okay. And finasteride was practically zero or very minimal in this quarter?

Finasteride was minimal. As we said, it has come off compared to quarter four because quarter four was the first quarter of the launch of finisteride. It was minimal.

Okay. One question on PSAI, you said that there are some changes or some developments like price erosion et cetera that has happened. So now after knowing these things, which are unlikely to change materially as we go forward, would you say that you have enough visibility to have a decent growth over last year's level in constant currency terms?

Yes. What I was trying to indicate was that the first quarter didn't go well so that's what I said and because of this reason that I just indicated. So all I expect is for the rest of the year for things to normalize in the API business. So I won't be able to specifically comment on exactly what the growth is going to be at this point of time except to say that let things renormalize of course so that's the way it stands.

Okay. And your press release mentions about some stocking pattern change in Russia, could you just elaborate on that?

Yes. So you're talking about the seasonal impact, which I just explained on the call.

Is it the same thing that is mentioned in the press release that talks about stocking pattern change?

Yes, broadly it's leading to that, yes.

Okay. And finally on the other revenue, how big was the impact of depreciation in Venezuela or can you give some indication of constant currency growth assuming that?

Bino, we'll take it offline. We'll give you the number offline.

Sure. Okay. I'll jump back the queue. Thank you.

Ladies and gentlemen, may we please request you to limit your questions to two per participant so all participants may get an equal opportunity to ask their question. Girish Bakhru, HSBC.

Yes, hi. Just on the India side, wanted some color on basically Reditux sales. I mean just if you look from the FY13 numbers INR100 odd crores biosimilars portfolio, do you have a number of this, I mean would Reditux be a INR100 crore brand or is it stabilizing at current levels? I'm just trying to assess where do you see that number going in say next two, three years. And just simultaneously on that, any update on the expansion of Reditux launch in other markets? Thanks.

The biosimilar revenue for the quarter in India was INR22 crores.

Right. But my question was if I see from the last year number of INR100 crores, Reditux being say INR30 crores or INR35 odd crores, would Reditux alone have a potential to be INR100 crore brand in India?

You may be aware that Rituximab has more competition now; there is the so-called authorized brand from Roche, there is another competitor who has come in. But having said that, the good thing is we also have the highest market share in Indian market as we see. But of course, the growth would be challenged a little bit by the various competition and there is of course organic growth of the molecule as it gets more access into the country. So not a large change, there will be some growth, but not a very large one.

Right. And what about the possible plans to launch this in Russia and Brazil, where are we there on that?

So again, we have plans progressing. It's not in our control, but certainly progressing as far as Russia is concerned. But as far as the other markets are concerned, the public domain deal with Merck Serono would deal with this and that would come in due course of time. The progress on the molecule is going on as we have both internal and external things progressing so that will be a global phenomenon.

Right. And the second question was on the Japan deal, which was called off, any costs that related to that that were say booked in the quarter and what is the strategy now for that market?

So Girish, in the quarter we did not book any cost for Japan. We didn't incur anything for that specific deal till now.

Okay. But was there any significant investment that went from your side in the joint venture?

No, nothing very significant.

Right. Thanks. I'll join the queue.

Vivek Agrawal, MP Advisors.

Yes. Thanks for taking my question. It seems that Dr. Reddy's the only generic filer for the COPAXONE generic. There's generic opportunities opening in 2014 so I just want to know when we should expect Dr. Reddy to participate in that opportunity?

There are other filers for sure, I think you can look up and do a little bit of research. I will not name them unless they are in public domain, but there was mitigation recently. There was I mean in public domain, actually Mylan and Sandoz, so we're not the only filer but this is a molecule big enough to have several filers. It will have to be seen who all finally get to the market, but those developments started earlier than ours.

Okay. Thank you. So we expect in 2014 or 2015, can you give some color?

Upadhye, can you?

Vivek, we won't be able to comment on the last (inaudible).

Okay. Thank you. Another question is that your SG&A expenses are muted and around 6% growth year-on-year so any color on that?

So I think like what earlier we explained, as we go forward we could expect little bit of operating leverage and some part of the marketing spend may have been muted in this quarter. So as we go forward in the subsequent quarters, a part of this spend might get incurred. But yes, we are seeing some operating leverage benefit on the SG&A side.

Yes. Some of the OTC products are seasonal and we were explaining that some of this cost varies from quarter-to-quarter.

Okay. Thank you.

Saion Mukherjee, Nomura.

Yes. Thanks for taking my questions. My first question is related to the US market. Can you share some color on the Dacogen launch how it went and what's the market situation like and how long you expect to be the only player in the market? And also regarding some of the other launches you had like Toprol XL and isotretinoin, what is the kind of market share ramp up and how far we can go in terms of market share for these products?

So Dacogen went very well. Actually we were expecting approval a little earlier, but good that it came in, we were the first one in the market. How long the other competitors would come in, again that certainly is not in our control, we really don't know, but so far so good. Metoprolol you asked, I think we have some benefit of having the full year this year, there is good ramp up in market share; some of it already has been tracked, some of it will be seen as we move ahead. But I had mentioned that metoprolol has substantial price erosion with we coming in, we have to take market share with some erosion so certainly those things need to be calibrated when it's been factored in. Isotretinoin has not been as big as we were thinking, but these things take a little bit of time. If you're late in market even though molecules are good so it takes a little bit of time. We're moving ahead as far as our own share plans, but certainly not in the same league as metoprolol.

What is the market share expectation for Dacogen being the first player in the market?

We're doing quite well. We're doing very, very well.

Can you share some number based on the initial orders that you might have?

The IMS will publish this actually very soon (inaudible) and I hope you'll hope on behalf of us that we remain a little more longer in the market alone.

And my second question is related to R&D spend, it's going up pretty rapidly. Based on the disclosures that you have made, a large chunk of the spend is towards innovation and Biologics and in fiscal '13 it was like 40% of the total spend, up from something like 15% or so in FY09. Now do you think going forward this ratio is going to up further? And a related question is your Proprietary business, which I believe has the innovation spend included, is running in a bit loss of around INR250 odd crores for last two, three years. So, what's the outlook? I mean basically the spend that we're making here, how do you see and when do you see these losses coming down?

Okay. So Saion, the issue it's like this is how we have planned the trajectory in terms of how the R&D spend is going to be, where it's going to increase. And so broadly we're able to say that again based on the growth in sales over the years and all that so we roughly arrived at a percentage of between 8% to 9%. We still remain committed to that in terms of what it is because obviously biosimilars when they go through the different phases of clinical trials specially since we are addressing the regulated markets so you will see that cost literally in line with that. But it's also in line with the sales growth trajectory, which we also anticipate, so that's how we see it.

You expect as a percentage of your total R&D spend, spend on innovation and Biologics can go higher than 40%.

Sorry to interrupt, Mr. Mukherjee, after this question, may we request you to return to the queue, please.

Yes, sure. So my question is that as a percentage of your total R&D spend, spend on innovation in Biologics is increasing from 15% in '09 to almost to 40%. So do you expect it to move further to something like half of your total R&D spend is going on innovation and biologics and if yes, then the question is what is the visibility of revenues because on the Proprietary business, we saw a loss of around INR250 crores every year now and the revenues from Biologics if it is in the semi-regulated markets like Russia or any visibility that you can give that when do we see these investments in -- ?

I got the question now, Saion. What I'm saying is see the trajectory for both Biologics because there are some which is very near term or there are some which are medium term and even in Proprietary for us, there's a strategy in place to make the business more viable through a series of measures that we think. So it will be in line, that's why I can't tell you exactly when this is going to happen because that's very internal in terms of what we are doing. But all I'm just saying it's a very overall level that the sale growth trajectory is the trajectory which also is percentage of our sales trajectory for R&D in terms of revenue. That's what I'm trying to say.

Okay. Thanks.

Ranjit Kapadia, Centrum Broking.

My question relates to PSAI business in Europe, how you see this business panning up?

You said PSAI business in Europe?

So Ranjit, we'd probably not comment on region by region performance.

In particular, already explained about the overall trajectory for the balance three quarters of the year and we do expect some of the traits to normalize.

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

Prakash Agarwal, CIMB

Good evening. Thanks for taking my question. Hello?

Yes, Prakash. Yes, we can hear you now.

Yes. Question is related to US markets again. If you look sequentially excluding Propecia, we're probably flat despite having good product launches and I also see a comment made that there's been traction in the older products like tacrolimus, fondaparinux, which we had launched some quarters back. So what are we missing here in terms of sequential growth in the US business on dollar terms?

So I didn't mention fondaparinux in particular, I talked of metoprolo. But however to answering your question, there are erosions in products. You mentioned finasteride, there is erosion in Lansoprazole, and there is also erosion -- the Q1 is a quarter in which you have both the OTC anti-allergy product which are down as well as the anti-infectives, they come down in the first quarter. Part of this is being covered by the Reclast launch, some price increases taken very effectively, and some market share increases. So that's where the whole math works out.

Going forward, is it fair to assume much better sequential growth because I mean our product launches have increased quite a bit. Is that fair assumption?

The usual story I think there are product launches, there are erosions coming; but I think we are excited about some of the launches which we have done; both lamotrigine extended release, Decitabine, then Donepezil 23 mg. The rest of the year as I said, there is hope that it will be a busy year as usual depending on approvals as it comes. So overall, I think we are positively [biased].

And secondly, on the recent comments on the EU regulatory some framework on the biosimilars so does that help us in being little faster track or how are we placed on the EU launches for our biosimilars?

As I said, the Merck Serono combined assets development is well within our strategic plan that we have our internal milestones and that's progressing as of plan. And I think so the combined entity, the understanding and progress hopefully would be systematic; difficult to put timelines to it.

No, no I understand that. I was just hinting at the EU regulatory framework that we saw a couple of weeks back, which talks about a little faster approval timelines on the biosimilars front so if you could --?

It doesn't change anything significantly that's what we know.

Okay. And lastly on understanding the basic questions asked on India, Russia, and PSAI where we have probably done weaker than expectations. So I understand Russia was a base effect which is expected to come back. India was because of the DPCO and the Mumbai thing and expected to come back in a quarter or so. And PSAI again we expect on a normalization to happen. Is that correct?

Yes.

But in Russia obviously, we'll come back in the near term, but what is the outlook for a two to three year perspective given the talks on Pharma 2020 and the investments that we might have to require. Any outlook there, please?

So those aspects of Pharma 2020, local manufacturing, more embargo on retailing, et cetera; so we would go by the changes in the law of the land. How and when and what would be implemented. Emerging markets, every country have like we have the challenges on the price control and discipline the channel issues, similarly every country has some challenge or the other; but do we see a massive shift in a short term, mid-term; at the moment, no.

But we are prepared for a local investment there.

Of course, if it demands.

Got it. I'll join back the queue.

Nitin Agarwal, IDFC Securities.

Hi, thanks for taking my question. My question in the past, we're talking about the R&D cost, but how do you calibrate it with the EBITDA margins? I guess in the previous calls if I remember it correctly, you talked that you will calibrate it so that whatever EBITDA margin increases that we have, we probably set it up against the R&D cost increases. Is that broad philosophy stays intact or R&D cost increases are independent of the overall trajectory for the EBITDA margin?

So this quarter our EBITDA margin remained at 20% like last year. So there will be some calibration we will do, but we gave a broad indication that for a future growth driver, we are going to definitely spend more meaningfully on R&D. There have been questions on which part we are going to spend more and all, obviously we will do an overall calibration within the Company which is short term as well as medium-term and long term.

That I probably understand. My point is more in terms of so how do you view the EBITDA margin trajectory for the business? I mean R&D trajectory is pretty much defined.

We said last time that as R&D goes up as a percentage of sales, we would like to see the G&A as a percentage of sales decline. So we'll calibrate those kinds of things.

Okay, thanks. And secondly on the PSAI business just for clarity, when you say normalization in the remaining quarters so what do you exactly -- I mean do we mean growth coming back in those businesses or what exactly is normalization really?

What I was trying to indicate was compare to the previous year's quarters, all I said was the first quarter anyway it's not up to the mark so at least in terms getting to a growth rates of the previous quarters and on an overall year basis that we should normalize.

So on a full year basis, we should be able to grow close to that, closer number than we did last year?

I won't say that yet because all I'm saying is the first quarter, the sales that we have lost, I don't think we'll regain because it is to do with some of the market share declines so we need to discount for that. But overall, if you ask me is there a growth in that segment? Yes, there will be growth in that segment.

Okay, fine. And lastly on the custom synthesis business, you talked about traction with the innovators, I'm talking about products; can you give us some sense on the kind of business which we have in the custom synthesis? How many products do we have in the deal, where are you working with innovators and these late Phase III stage or number of products that is commercialized that you're working with some sense on the nature of that business?

So this is the business where we contract out with innovative companies. So the ones where we said we have gained tractions is to do with existing products of these companies in the market. So these are a mix of off-patent products, certain shift in manufacturing sites which one of the innovative companies want to do so it's a mix all those things. So it is not really about early stage compounds as of today in terms of what I'm talking about. But I can't name the specifics or who the companies are, I can't say that.

So it's not essentially early phase compounds, also includes late phase compounds; products which have already commercialized or in the markets for some time?

Yes.

Sameer Baisiwala, Morgan Stanley.

Hi. Good evening. My question is your ANDA cost versus three to four years back, if it was costing you I don't know a $1 million per ANDA filing; what is the number for your complex filings that you're doing now?

Sameer, it can vary quite widely. That $1 million is more like probably a plain vanilla oral solid where you do let's say one pivotal or a few pilots type of a thing. The game is changing and there are products on one end where the chemical cost of the product itself can be $10 million. There are products where it is a few pilots and a pivotal in an oral solid. On a going for products which are high entry barrier, there are a very wide range of products. Let's talk about tropicals, quite a few; there are biologic products (inaudible) Q2 and can get in and then upsides are equally limited. But when you want to go for somewhat limited competition tropicals, all these products are finished. Now some of them we have not fully gone into, but we will phase those as it comes, but those could be in the range of $4 million or $5 million per asset. So just the development cost per se is not a large factor going ahead. It depends on which asset we are picking up, which asset comes in which quarter. So some of those, but overall size and scale which we have, I don't think that would. As Satish mentioned in overall R&D cost, we see the mix of all businesses, that's not going to shift very drastically.

Okay. And a quick clarification on COPAXONE, my understanding was Dr. Reddy's had filed a DMA for I think late last year and I haven't seen any court case on this. So has the company filed an ANDA on this product?

Yes.

Okay. And have you been litigated or is it [perhaps] for you?

So Sameer, I guess we won't be able to share (inaudible).

Okay, excellent. Do you -- I mean (inaudible) making a big deal out of approvability of these ANDAs and specifically targeting immunogenicity for the product and do you think you would be in time for the first wave of launches?

So the characterization, immunogenicity, all these things I think are like all other companies we're putting in our best efforts and getting (inaudible). But there is lot to this assets actually not just immunogenicity and characterization. There are other facilities, things which have to come into play, but it's high on our priority. Certainly you'll know because other companies filed much earlier, where they are we don't know so the approval timeline's difficult to say in complex products, but it's a high priority product for us.

Kartik Mehta, ICICI Securities.

Yes, hi. If you want to look at your overall gross margin for the Global Generics business, it was actually the highest in the last six quarters or so. With the product pipeline that we have and the overall hedging mechanism in place, is it fair to assume that we'll be able to at least maintain this or maybe improve this in the next three quarters or so?

So Kartik, we've stopped giving guidance on these sales and margins. The reason we had 62% for the particular quarter in quarter one is because of the product mix and price increases that we diluted to. So gross margin is the function of several things we would probably not like to comment on the balance of the quarters.

Okay. But we have almost hedged between 55% to 60% now so assuming that this similar type of quality of products and the launches are maintained, is it a fair assessment that will not go below 60%?

We're not commenting on that. As we said, we wouldn't like to give any kind of a financial guidance so please.

Yes, sir. On the India business, we mentioned in the opening remark that the impact is about 4%, did I hear that right?

Yes, India sales.

So are you factoring this with any assessment of the volume? Is there volume gains that you'll make or is it that it's actually the most pessimistic scenario you will only lose 4%?

So the figure is around INR55 crores on last year's date, it's roughly about 3% of the business. Having said that, the largest hit is on one of our large brands called (inaudible) so we will try certainly to see whether the lowering of price can improve accessibility and we're putting efforts in that direction. Having said that, we'll see how it turns out.

Okay. Thank you.

Mehul Sheth, Asit C. Mehta.

Good evening. Recently Andhra Pradesh government has lifted a ban from OTC manufacturing so what will be the impact on Company?

We didn't get your question, can you please repeat?

Yes. Recently Andhra Pradesh government has lifted a ban from OTC manufacturing from in the state so what will be its impact on Company?

I think you're confusing it. It's a lift on the ban on expansion on capacity for API plants.

Yes. So what is its impact?

No impact.

Then after means you have around 60 ANDAs you have filed, out of which eight FTF status so what market sales are you expecting from it?

So the plan that was the pending ANDAs is something that we'll come back to you offline.

Any further expansion plan that you have in terms of geography as well as in terms of capacity?

Nothing major to talk about right now.

Okay. Thank you.

Monica Joshi, Avendus Securities.

Hi, just two questions. One is if you could give us a broad ballpark about how your PSAI business is segmented in custom synthesis and API, that's one. Secondly, your filing status and your litigation status on Rapamune and do you expect to be in the market early 2014?

So the mix of APIs and CPS is roughly 70/40 within PSAI and it will keep varying depending upon each of the products.

So 70 is API?

Yes.

Okay. And on Rapamune?

What's the second question, Monica?

Just your filing and your litigation status on Rapamune, whether you are a Para 3 filer, have you been litigated if you're a Para 4, and do you expect to be in the market post pediatric exclusivity ends in Jan '14?

Which molecule are you talking about? Can you refer to the generic name, please?

This is Pfizer's Rapamune?

So again, we have tentative approval that's in the FDA website and again the public domain, there is a defined line for this product.

Do you have a settled date for the launch?

We have tentative approval already and subject to the date, which is in public domain.

Okay. I'm sorry, then I'm not aware of the date, is it in 2014?

It's in calendar year 2014, yes.

Yes, okay. Thank you so much.

Thank you. Ladies and gentlemen, due to time constraints that was our last question. I would now like to hand the floor back to Mr. Kedar Upadhye for closing comments. Over to you, sir.

Thank you all for joining Dr. Reddy's senior management for quarter one FY14 earnings call. if you have any additional clarifications, please feel free to get in touch with Investor Relations. Thank you and good day.

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