Dr Reddy's Laboratories Ltd (RDY) 2014 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to Dr. Reddy's Laboratories Q3 FY14 Earnings Conference Call. As a remainder, all participant 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.

Good morning and good evening to all of you and thank you for joining us today for Dr. Reddy's earnings call for third quarter of fiscal 2014. Earlier during the day we have released our results and the same are also posted on our website. We're conducting a live webcast of this call and a transcript shall be available on our website soon. Just a remainder, the discussion and analysis in this call will be based on IFRS consolidated financial statements.

To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising 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 Investor Relations team.

Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlet without 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 morning and good evening to everyone. Let me begin with the key financial highlights. For this section, all the amounts are translated to US dollars at a convenient transaction rate of INR61.92 which is the rate as on 31 December, 2013.

I am pleased to report successive quarter of profitable growth despite an unexpected low performance on the pharmaceutical services and active ingredients segment. Revenue for the quarter are at $571 million and grew by 23% year-on-year. Revenues from our global generics segment [is] $475 million and grew by 41% year-on-year, primarily driven by performance of our recently launched product in US market, sustained growth in emerging market territories and benefit of rupee depreciation against multiple currencies.

Revenues from our PSAI segment are $82 million registering a decline of 29% on year-on-year basis, primarily due to lack of new launches and subdued demand. Consolidated gross profit margin for the quarter is at a healthy 60.5% [of] revenues versus 52.7% as registered in the same quarter of the previous year. Corresponding values for the global generics and PSAI segments are at 68.3% and 15.7% respectively. [That] significant improvement in the global generics margin profile is primarily attributable to a greater share of limited competition products in [our year's] portfolio which helped both in pricing and market share. PSAI gross margin declined as a result of subdued demand.

SG&A expenses including amortization for the quarter are at $169 million which grew by 22% year-on-year. As percentage to revenues, there is a decline of approximately 30 bps over the previous year.

The cost increase in absolute terms is largely due to the annual increment, additional manpower deployment in select areas, incremental promotional efforts on the OTC portfolio and sales and marketing spend for events specific to this quarter. Also approximately one-third of the increasing cost is due to currency movement.

R&D expenses for the quarter are at $48 million, representing 8.4% of the revenues versus 7.1% in the corresponding quarter of the previous year. The increase in R&D expense during the year is in line with our planned scale-up in activities.

As part of our usual impairment accounting checks, we were required to assess the carrying value of certain intangible assets on the balance sheet vis-a-vis their recoverable values. This exercise resulted in the reversal of the impairment charge recorded in earlier quarters, pertaining to product intangibles in our genetics portfolio, amounting to [$1.8 million]. This reversal is in accordance with the requirement of IAS 36 impairment of [assets].

EBITDA stands at $162 million which is 28.4% of the revenues and registered a strong year-on-year growth of 67%. Profit before tax for the quarter is at $141 million, is 24.6% of the revenues. While the current quarter's effective tax rate is higher at approximately 30% the annual effective tax rate for FY14 is likely to be around 20% to 22% only.

Key balance sheet highlights are as follows, our working capital balance increased by $47 million over that of September 2013. Capital expenditure for the quarter is at $38 million. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $331 million largely hedged around INR56 to INR61 to a dollar. In addition, we have balance sheet hedges of $497 million. Net debt at $292 million represents a net debt-to-equity ratio of 0.21.

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

Thank you, Saumen. Good morning and good evening to everybody, and I extend a warm welcome to you on this earnings conference call. I am pleased to report continuing strong performance and our highest ever sales and profitability achievement in the quarter. This profitable growth is an early reflection of our progress towards a greater mix of complex generics and limited competition products in the portfolio. While US generics influenced this performance to a great extent, our key emerging market geographies also continued their growth momentum in challenging macroeconomic environment.

Now let me take us through some of the business highlights for each of our four key markets -- for each of our key markets. Please note that in this section all references to numbers are in respective local currencies.

Revenues from North America generics for the quarter are at $265 million with an impressive 49% year-on-year growth and 21% sequential growth. This can be attributed to the full-quarter contribution as well as market share stabilization of our key recent launches namely azacitidine, decitabine, donepezil 23 milligrams, metoprolol and divalproex ER. This was made possible by a seamless coordination between our customer facing teams in the US and a robust and flexible supply chain organization in India.

As you are aware, we have recently received the final approval for Sumatriptan autoinjector and we will launch the product soon in the market. Our anti-allergy, OTC and antibiotics portfolio are on a gradual improvement path on a sequential quarter basis considering the seasonal demand pattern. This quarter also saw the bunching up of customer orders and initial billings for some new accounts which increased the overall level of sales. While in Q4 we do not expect a material increase in competitive activity on the new launches mentioned above, our sales are likely to see some dip sequentially for the reasons that I mentioned above.

Revenues from our India business were at INR391 crore with 5.2% year-on-year growth. This quarter witnessed a full-quarter impact of the lower price regime and an increased competition across a few of the product lines. The business continues in its endeavor to introduce new differentiated products in India to enrich the portfolio mix and address existing unmet medical needs. Of late you would have noticed the launch of the brands (inaudible) and Optidoz both are in the chronic therapy space and we hope to scale up in the coming quarters.

Our end Q3 December growth as per IMS figures is at 12.2% against the IPM growth of 10%, and we continue to be the fourth highest growing company in India. We believe that with better field force execution, enhanced portfolio mix and presence in the growing institutions business, our India business will constraint its growth.

On the emerging markets front, Russia revenues at $70 million for the quarter grew by 6% in the constant currency. After a robust second quarter performance, this quarter has seen some delayed pickup with respect to the onset of winter. This is also evidenced from the low market growth rates in volume terms as per the IMS reports. The OTC portfolio in Russia is consistently growing and is now approximately 37% of our portfolio there.

We have seen significant improvement in rank by six places over the previous year and we are the second fastest-growing company in the OTC space in Russia.

[The US] markets grew by 27% on a year-on-year basis on the back of new product introductions in Ukraine and expanding base in the other regions. Our PSAI business registered a de-growth of [21%] on a year-on-year basis. Challenges on the external market front continued through the quarter. Nevertheless being vertically integrated, this business division continues on its primary objective to support our global generic launches. Though a little bit early to talk, we are witnessing some positive lead indicators in the form of improving status of the order book and lock-ins for some upcoming launches. This provides us with comfort of improved performance in the coming quarters.

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

Thank you very much, sir. (Operator Instructions) Saion Mukherjee, Nomura Securities.

Thanks for taking my questions. Sir, two questions. First on Russia, we have seen good growth in the past. Now we are seeing slowdown and OTC had also scaled up to [30%, 70%]. How should we think about growth in Russia, say, from next two years?

So, Abhijit here Saion, can you hear me?

Yes, I can.

So I think Sathish mentioned the growth in constant currency terms of 6% and rupee terms at 17% growth. Given the market which is flat on value and declining on units, I think it's a significantly good performance. We have gained ranks as he mentioned, two ranks overall and six ranks specifically in OTC. So I think overall we are satisfied with Russia.

Emerging markets, as you know, are going through some challenges, but if we are ahead of the pack, we are ahead of the pack.

Do you think OTC can -- the percentage can further increase for Russia?

Yes, the plan is we have already -- couple of years back we are in the range of 31%, 32%. We have reached 37% of the overall revenues in OTC. There have been switches last year, some pain, fever products Ibuclin, Novigan went to OTC and they are growing in a robust fashion. Very recently we have got the approval first time in Russia of Omez into the OTC sector. So we are very optimistic about OTC growth in Russia.

Okay. Sir my second question is specific to some product opportunities in the US. Firstly on Copaxone if you have heard something from the FDA and do you think -- what is your take on generics have to do clinical trials on that? And second Dr.Reddy's had been sued on imatinib recently. Are you surprised with this because I think this was the first lawsuit that I have come across?

So Copaxone, the file continues in review, picked up and being reviewed. Beyond that we won't be able to give you further detail. Imatinib is part of generics journey, we are not surprised. So it's one of our good filings.

Okay. Because we haven't seen any litigation that's why I was asking this question on (multiple speakers).

We are not surprised, we are not surprised. We were expecting this.

Okay, okay. Thank you, sir.

Anubhav Aggarwal, Credit Suisse.

Thank you. Just one question on the R&D spend first. Now out of the total R&D spend, we've been spending about 40% on innovative products. Just wanted to get some idea about in the proprietary product pipeline how many molecules are we working on and how many of them are in Phase III right now?

[There are] seven programs in this proprietary products [suite] but to be specific two are in clinical trials right now, Phase III.

Sorry, I missed that. Are anyone in Phase III?

I said there are two products in clinical trials right now.

Two in clinical trials and both of them in Phase III?

Yes.

And, sir, continuing the same question, so when do you expect on biosimilars European clinical trials for you to start, I mean first half next year, second half next year, I mean some timing will be very helpful?

For one of the products it's already started.

So the expense of that would already a part of $48 million what number you're reporting this quarter?

Some portion of it, yes.

And how do you see R&D spend? I think you've been talking about this quarter it was 8.5%, of course on a very high sales, but let's say, would you cap the R&D spend at around 9% to 10%?

As far as this year is concerned, I think we indicated that 8% to 9% right by the end of the financial year, that's what we indicated. So it could be around that kind of a number but we are not caping it at anything, right. So one of the things which you will see from quarter on quarter, again depending on this products moving into clinical trials, the increased spend in -- there is three areas when it comes to complex generics, the bioequivalence studies and some clinical trials and also biologics as well as proprietary products, the trend is on the increase, right. So there is no cap in terms of a number at this point of time. [we can] just indicate a range at this point of time.

Okay, just second question on the PSAI, I agree it was weak, but what led to a sequential decline of 20% in PSAI sales, was there a further price erosion of some specific molecules or was it like -- it was more on the contract manufacturing part, which part was weak?

It's on both counts, right. So this is not -- I mean, again we have to see the trend in terms of what's been happening since the first quarter, right. So there's been no major launches. For example there's been in terms of customers rationalizing the inventory, there's has been all kinds of reasons right. So that's why I indicated the thing that order book from now onwards looks better than the previous one. So we hope things will improve, [but on both counts], both inhibitors as well as the generic [components].

And just last question, if I can ask, Abhijit you mentioned in Russia you are growing still above the market, but your market share is very low, right? Just wanted to check that how many products have been launched in Russia, let's say, in last 12 months and both on OTC and RX side, roughly?

Each year, I wouldn't be able to give you the exact number but in the range of four to five every year.

This is what you launched in last 12 months, roughly four to five in each in OTC and RX?

No, not each in OTC and RX. I mean, together it's a branded market, so together may be five products.

Okay. So typically with your market share and you launching about four to five products a year, you should be growing much ahead of the market not at six versus market remaining flat right?

We are growing far ahead of the market. I just mentioned that IMS if you pick up, the current IMS [gives the] Russian market value terms flat, completely flat. In unit terms it is declining. In that context what we are giving you the market I think IMS -- by the IMS, if I recall correctly we are low double-digit versus the flat market and our internal is --

Anubhav, I think there could be quarterly fluctuations. On a nine-month basis in Russia in rubel terms we have grown at 13%.

Okay.

We had a strong quarter two.

Yes, because I had the impression that IMS [acquired from] expert and this was a calibration exercise, so I am not too sure whether the market really [has been] negative right now.

So anyway overall based on what they are showing and that [might be true for] all -- everyone else, overall ranks we have gained by two ranks. Two ranks in a year is pretty good actually. So if you look at the top players in Russian market [we're] doing quite well actually, and especially in OTC six ranks gained.

Thank you very much.

Vivek Agrawal, Research Delta Advisors.

Thanks for taking my questions. This is Nimesh Mehta. Sir, first of all can you throw some light on the generic launch of -- possible launch of Sirolimus that is Rapamune? What I understand is that Watson has the 180-day exclusivity, but they were not been able to launch probably because of the approval not being granted. Are we likely to see a forfeiture of the 180 day and (inaudible)?

I think your guess would be as good as ours on this, so you have all the details. So there is first to file [claim].

Nimesh, there is a little bit of echo. Would you want to keep it on mute?

Yes, just one second. Is it better now?

Yes. So what I was mentioning is that -- so, there is a first to file player, not having launched their product. We have no clue when they would launch, what's the status, FDA doesn't give visibility of that, so we all set to launch unfortunate.

But will you have to wait for Watson's FDA to get triggered or you can launch, let's say, in the worst case after 180 days?

No, our current guess -- current understanding is that we will have to wait but let's see, we will be in touch the agencies.

Okay. And secondly on Avelox, that is moxifloxacin where we have the FTF. So what is the latest on that? I mean, I guess because we don't have the tentative approval, are we likely to launch or what is the status there?

Can't fully comment on this. Can't comment on the FTF status, but we are all set to launch on the specific date.

Okay. And finally if you can just broadly let us know when do you expect the first product to be launched from the OctoPlus subsidiary that we have acquired, general color on what is happening there?

The exhibit batches for the first product should be in a few months from now and there is a clinic to follow. These are products which would need -- these are complex injectables that would need a clinic, so roughly four to five quarters from now.

Okay. Fine. Thank you very much.

Surya Patra, Philip Capital.

Thanks for taking my questions. In fact just wanted to have an idea of what is the progress on the injectable portfolio in US for Dr. Reddy's? In fact what is the kind of markets that we have achieved for at least two products, azacitidine and decitabine?

So azacitidine as you know there is (inaudible) we are there -- [Innovator] is there. We have a fair market share of azacitidine and azacitidine is just Innovator and us. There is an approval which is not exactly equivalent as (inaudible). So we are yet to see that impact in the market. But I think also we have a fair market share of azacitidine considering the play.

Okay. And regards to pipeline visibility, I mean regards to the US pipeline front, can you give some sense what you see. So far we have seen a much better growth than anticipated in the US business because of the steady kind of funds because of limited competition products or the sustained products, but what is the likely growth that you are expecting or what is the kind of product approvals or launches that you are anticipating for the subsequent year, some sense on that front?

We have a pretty healthy number of launches over the next, let's say, four to five quarters. But to the best of our assessment, they are not really blockbuster launches. They are good products, but they are not likely to be [$49 million] plus type of products. But we do have a healthy number of launches.

Whether those -- [the visible] products can maintain or sustain the growth of what you are currently seeing in the US business on a constant currency basis?

The generics market is not predictable to that extent. It all depends on not just what you launch but what you lose as well. How much and what we would lose would be anyone's guess. We don't have visibility. We have good products. There would be erosion as other players come in. So it's a factor of erosion and launches. Even on the launches side, as I said, good products but not one of the blockbusters. Hence, yes, I think growth momentum will be maintained, difficult to put a figure to it.

Sir, when do you really expect your injectable portfolio would be like critical there and [means, actually like a] critical mass there in US and what is the visibility that you are currently having for new product launches [so far with] injectables?

Surya, currently all the injectables put together are approximately 30% of the portfolio and it could be tough to give any number in the future for that.

Okay, 30% of the pending pipeline.

Overall US portfolio.

Okay, just last question. The kind of margins what we have been seeing since last couple of quarters, what is the kind of -- see this is definitely much better than expected, but what is the kind of sustainable margin that one should look at because the swings what we have seen in the gross margin that is quite significant in the last two quarter period?

I think mainly it would depend on the injectables erosion, you mentioned two products, I think how they behave in the next quarters would decide how the gross margin swings. The other products we had our share of erosion. There could be a little bit more but they wouldn't be leading to wild swings in terms of -- but the injectables products how they behave with the entry of other generics will have to be watched.

The core margin if I look at for the nine-month period, it is like more than 25%. So excluding that impact for this -- means excluding this depreciation and amortization from the margin which is much better compared to the last year number and all that. So is it a sustainable number even for the subsequent period or you do see some sort of implication of some other factors?

EBITDA margin you are really talking about and one thing you must have noticed that the margin expansion has helped us when we have focused quite a bit on R&D. So our entire additional R&D [expense is] coming out of the margin expansion. And of course, our focus will remain not only on R&D, even we are creating capacity, we are correcting capacity in other areas like injectables, we were late to start, but we have I think caught up quite well. So there are other areas where we are going to spend even on CapEx. It will be around topicals, peptides and several other things. So we will continue to invest for the future. I mean that is the resolve that we have taken. Having said that the kind of portfolio that we are building up and the strategy that we have adopted on complex generics which of course there are early success indicators of how it has happened in the past. We will hope that our margin stabilizes beyond a certain acceptable level of EBITDA. Will there be a fluctuation, yes there could be a fluctuation, but we hope that we will do it. But longer term, we even expect to win differentiated formulations (inaudible) products, those really start coming in then we will even have healthier ones, but those are longer term.

Okay. Thank you, sir. Thanks a lot. Wish you [all the best].

Thank you.

Neha Manpuria, JP Morgan.

Thanks for taking my question. Sir, in terms of our SG&A, you did mention that there were some amount of so-called [related loop quarter] expense in terms of increments and events specific to the quarter. So what proportion of the -- what is the normal base that we should take for SG&A going forward if not the current quarter level?

If you really look at SG&A as a percentage of sales year-on-year, there is an improvement, I think, marginal but there is an improvement. And we expect a better SG&A leverage, but what happens when we get some benefit on the top line win there is a currency movement in terms of dollar rupees, but there is SG&A increase also happen because of the same currency movement, and quite a substantive part of our SG&A [exceeded], almost it will be in 30% or so and it gets impacted because of this currency movement, but we expect a better SG&A leverage going forward.

Okay, and you talked a little bit about the CapEx, your focus on topical peptides, based on how much you have spent in year-to-date, how should we look at CapEx going forward and what would be the focus areas? I mean what [are your spent] year-to-date CapEx and what would be the focus area going forward?

We have actually invested a lot of money in our facilities and in several -- both on the chemicals side as well as on the finished dosage side, on injectables both cytotoxic and non-cyto and we have actually spent more CapEx than what initially in the beginning of the year we thought we will spend but we always felt that these are some things which help us with much better supply chain situation when we are launching products.

If you have seen earlier years, there would have been some difficulty in supply. We have got penalty for failure to supply those kind of things we have improved tremendously. So I think some kind of additional money which is we are spending on capacity is helping us tremendously in the longer term. So we have spent more than INR230 crores this particular quarter. We will spend another INR200 crore plus in this current Q4. But going forward in next one year, we can even spend higher than what we have spent in this year on CapEx. Maybe in the next result time we would give some figure, but at the moment it definitely looks like we will spend more than INR1000 crore in CapEx in FY15.

Fair enough. And one last question if may, how do you see the channel consolidation in the US impacting our US business? Obviously there is talk about a possible pricing pressure offset by volume. What's your view on that and especially impact on Dr.Reddy's?

The retailer, wholesaler mergers which are happening (inaudible) and then recently you have CVS, Cardinal depending on how much customers a company has in each of these segments and the ratio of that would impact [to some extent]. So we will also have an impact. We have factored that in into our plans going ahead. So there is an impact, I mean, no doubt about it, but it's part of the erosion, I guess, in the generics business.

Okay. Thank you so much, sir.

Prakash Agarwal, CIMB.

Yes. Hi. Thanks and congrats on a good set of numbers. My question is on a couple of products, Cymbalta and Aciphex which we got during the quarter, so what are the launch plans for the same?

Okay, all right. So Cymbalta I think we are somewhat surprised by the way it has panned out in the market, let's say we are caught by surprise. We are backward integrated. We have initiated plans to quickly catch up. So the amount of time it takes in terms of getting the API and validation and going ahead. So, yes, we would be planning to get in at some point.

So it would be fair to say during this quarter?

Not in this quarter.

Not in this quarter, okay. And moving to Divalproex, I mean we fairly got a decent market share during the quarter. Just wanted to understand the market landscape. My understanding is that market itself has gone to two to three times upwards. Could you confirm to this due to price gains?

Yes, one of the earlier players took price increase, we came in thereafter. Some supply situations have changed as well after that. So overall it's a good product from India. There is [Digest], there is us. We have been choosy about the market share more value sensitive than share sensitive.

Okay. But would it be fair that $180 million market size become a $500 million-plus market size?

Don't go by IMS figures, so there is always substantial factor you will have to apply when you convert IMS to actual values. But all I can say that this is an important product for us.

Okay, understood. And moving to Copaxone, I mean there was a Teva conference call held recently, they talk about thrice weekly that has been launched and they expect a 30% to 50% switch, RX switch in the first year itself. What is our thought on that? I mean so it considerably reduces the size of the addressable market when we get approval?

These switches, it's not easy for us to predict. Sometimes it works quite well, sometimes it doesn't. So at the moment, I think we are very focused on the asset we have filed. That's the more important thing. And certainly I mean there would be players who have filed on this asset would also like to follow up with other asset as well. So broadly I think at the moment we are focused on the journey to how we sort of move ahead with our existing filing.

Yes, and would it be fair to assume it's a second half calendar 2015 event for us?

Difficult to put a date. This is a complex product, agency has to do a lot of work. There are, to the best of my knowledge, two filers ahead of us. [So that leave us at one]. I guess depending on how well it has been characterized we will see how -- what is the outcome.

And last question before I get back in the queue, competitive landscape of Dacogen and Vidaza, I mean we have seen one approval coming under 505(b)(2). So do you think that is a competition threat and some outlook for Vidaza as well?

So you are asking about Dacogen I guess, regarding the 505(b)(2)?

Yes.

So, this again I think how the market will play out. I wouldn't like to hazard a guess at this juncture. The approval has just come through. So we will see how it plays out in the next few months. Normally the equivalence to Innovator has advantages in the injectable space, but we will see.

On Vidaza, so currently we don't have any further information. I mentioned there is [AG], there is Innovator, there is us and we will see how this goes through. We are tracking closely.

Perfect. Then last one, book keeping on tax rates, any guidance for the year and the next year?

No, we have earlier said our annual effective tax rate will be between 30% to 32%. We are holding on to that.

Okay, thanks. I will join back the queue.

Sonal Gupta, UBS Securities.

Hi. Good evening, everyone. Just a couple of questions. One is, could you talk about in more detail in terms of your biosimilar timelines, as to what you are looking at and when do you expect more products in the clinic as well as when do you expect the first potential approvals in European market or somewhere, could you just talk about that?

So it's a bit early to talk about it and we don't want to be specific because we are part of an alliance as you know at this point of time. Only to just indicate that, the clinical trial has already commenced and next year also we will see the spend go up for two products and then -- I mean the earliest launch [season] is some years away, at least --

Okay. Just also again on R&D because, I believe Prasad at some, of course, some function mentioned that people should be looking at potentially spending double digits in R&D. So I just wanted to draw -- is that something that should we expect for Dr. Reddy's in the coming years that the R&D continues to go up and you start with more clinicals et cetera?

Yes, in the sense that what we indicated was, even if you see this year right, we started off in the beginning of the years saying it will be 8% to 9% of sales, and then now we are saying that it will be around 9%-plus in terms of the sales.

So if we see the existing trend and the growth plans and all that, I think Prasad indicated in the JP Morgan Conference that you could expect it to touch double digit. Again, this is a reflection of our commitment to increase the R&D spend based on these three factors that we are talking about, right in terms of where this significant increase is coming from.

The complex generics certainly had in terms of a portfolio plus the clinical trials which come out of that [that reflects] one substantial increase. There is the biosimilars spend I just mentioned that we've commenced clinical trials on one of the products, the second one also is on the way, and then you have the full year, right, so that's a substantial increase, and then you also have proprietary products. As and when we see more and more products get into clinical trials besides the existing [two], there won't be a substantial increase. Again this is going to again depend on the sales growth, right. So in terms of our existing estimated spend and the sales that we anticipate, yes, (inaudible).

And just, I mean there is a big increase (inaudible) almost 9% increase in employee cost which I don't think that would have any FX effect. Could you just elaborate on why we are seeing such a sharp sequential increase?

Sonal, I can separately come back to you on that.

Okay. And just finally in terms of -- given a great set of numbers and you're operating at very high margin levels now, but in terms of the overall portfolio, in terms of geographies I mean other than US is there any other geography which is above this Company level margin because my sense is that -- is this all completely being driven by the US in that sense?

Sonal, emerging markets and US will be above Company average EBITDA.

Right. Okay. Thank you. I will join back.

Ranjit Kapadia, Centrum Broking.

Hearty congratulations for a good set of numbers. My question relates to peptide pipeline. If you can throw some light on the potential of this product and the number of products in the pipeline. And my second question relates to the European business of global generics, what are the plans for this since it has de-grown during the quarter?

So we told you about (inaudible) which we spoke about it, but other peptides which are in pipeline, we wouldn't like to comment at this juncture. We will continue to sharpen our skills in this development, which means we will keep targeting some of these products. These products also are in complex injectables area, it's not about the peptides and synthesis. There is larger challenges in these products [in the peptide] injectables area.

On European generics business, I think the strategy to keep away from tenders, especially single tenders with low margin continues. So we will not -- even if we don't grow we are not going to sort of move in into the commoditized area of single tenders of especially the bigger ones.

The strategy then is also to leverage our complex generics pipeline. Once you develop a product, we will extend these to European geography. Having said that that geography has its own challenges. The value out of the asset is quite different from what one get from US versus Europe. As a result, in the short term the important thing is to sort of ensure that we don't deteriorate further and we consolidate and gradually improve. And in the long term we are looking at some specific products which are fairly complex and value accretive over the next few years.

And, sir, can you elaborate on the addressable market size of peptides if you have any number in mind?

I am not sure -- you are talking about generics business, right?

Yes.

So, to club peptides as a separate group is difficult and nor we will be able to sort of exactly carve it out. As I said peptides go into various types of injectables and we are going to target a few, nothing which will drastically change the immediate scenario.

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

Thank you.

Anant Padmanabhan, Cowen and Company.

Yes, thank you and congrats on a great quarter. I had a couple of questions, mostly follow-ups from your comments earlier. First on the supplier consolidation. One of your larger competitors Actavis has hinted that developments such as CVS, Cardinal will make consolidation among generics inevitable in the longer term. So how should we think about the generics industry longer term, especially for mid-tier firms such as yourself?

I don't know about Actavis' comment on this, but yes, there will be some erosion. As I said, it's part of the generics business. But would that change the broad aspects of the way we operate, we look at business, I don't think so.

Okay, great. And then on generic Copaxone, have you had any recent interactions with the FDA since the filing? I guess one of the questions here is what are the FDA approval requirements and where is the FDA with this application. So could you just comment on any interactions you had with the FDA on the filing?

We have filed about two years back. It's a complex product. The agency has to do a lot of work as well on this, on how they would progress. Beyond that, on specificity of our file, I think we will not be able to comment, but -- work in progress. But it's not going to be something which is just around the corner.

So internally are you expecting Mylan or Sandoz or maybe both to receive approval in May of this year?

I think one of the companies have gone in public domain stating that initially, I don't know if they changed that, that they won't. But having said that, we can't comment on behalf of others. So the work we have done is think is a high-quality work [in characterization]. We will see what happens.

Okay, great. Thank you.

Sameer Baisiwala, Morgan Stanley.

Yes, thanks. Just to confirm the previous speaker, you said Copaxone filing was done two years back, right?

Roughly.

Okay, okay, thanks. And the question is on the overall business model, sir, and if I look at your nine months overall sales number, this year $97 billion versus last year $83 billion and if you compare the US nine months this year and last year $40 billion and $26 billion, so you can see the $14 billion change which is happening is almost entirely coming from the US business which is now 45% odd of the overall business. So thinking two, three years out, do you think your dependence on US is going to go down, go up and how do you want to balance the overall business model?

There is a neutralization which has happened with the decline in PSAI, otherwise there is a growth in emerging markets and there is some growth in India markets as well.

That's a very small number, I just want to get into that level of details, it's about $3 billion, plus and minus but [$14 billion] overall is coming from the US business, so it looks like a fairly imbalanced model from a growth perspective and therefore the question.

So, Sameer you're right I mean at least for this year that's true. In terms of the growth that came in from the US plus what Saumen just said has contributed to this kind of [phasing]. I mean I don't think it will drastically change in the very near term, but over a period of time, because I mean in terms of the kind of growth rate that you have seen in Russia even at a high base which it continues to enjoy, plus also some of the emerging markets, plus also the India growth at some point of time, right.

So, currently we are just seeing 5% growth, that's not indicative of what's going to happen in the future, it won't dramatically alter, but I think over a period of time things will balance out to a certain extent.

Okay. And the second question is on the Vidaza and [decitabine] you have already given us a fair bit of color, but in terms of pricing you being almost the only player in the (inaudible) generics, is the pricing more or less similar to what one would get for 180-days exclusivity for example?

Yes, I mean given the competitive landscape, I mentioned in Dacogen we and Innovator, so it's likely to be healthy and similarly in Vidaza we have three -- it's also fairly okay.

So when you say healthy and okay, I mean is it more like single [play] dynamics?

Sameer, you know that pretty well. How can we give you exact details on pricing. I think it's just too much to expect on that. I think the results are good. These molecules have got full momentum. So naturally I think it has a role to play in the US margin increase and the results.

Okay. And, sir, one final question, I think you mentioned that there are two drug candidates right now from proprietary pipeline which are undergoing Phase III clinical trials. Is it possible to share anything more on this in terms of what categories or what kind of products are these?

So, Sameer it's bit too early. I think once we have progressed on that probably we'll disclose more.

Okay, okay. Sure, thank you.

Surajit Pal, Prabhudas Lilladher.

Thanks for taking my questions. The first question which is that given that you have $571 million and the full year you have around $1.5 billion, even if I assume that Q4 is $550 million, so it will be similar to what you have last year or say similar to that number? So FY14 you had a pretty good product like Vidaza and Dacogen and in FY15 if I just remove Copaxone, I mean, there is an uncertainty. So overall it will be mainly a balancing act for the Company in terms of maintaining the same sales, given the kind of few products available and not mainly blockbuster as you said, if I don't have Copaxone overall?

It's a healthy number of launches as I mentioned. It's not always fair to quote figure for each of the launches. To the best of our estimation they are not huge, but they do add up. So it's going to grow, not as good as this year. A lot depends on how the erosion of all these two assets and the other assets hit the effects which are already matured. So North America will continue to grow, but every year can't be as good as this.

Given that you are increasing your capacity in heparines and [peptides], I understood your peptides, but heparines does it include also some natural heparines like Lovenox into that or you're basically a synthetic or semi-synthetic brands?

No, we are also looking at other heparines as well in the pipeline and in the process.

So in case if you have any filing on other non-synthetic heparin when it could be a possibility?

Again details. These details cannot be given, but as I said, there are two other heparins and we are targeting both.

Okay. Just need one update is that is there any development on (inaudible) on from your side to FDA in terms of filing?

Can't comment. We will have to sort of in the complex injectables could be, couldn't be -- we wouldn't be able to comment on that.

That I understood, but reality could be possibly in FY16, FY17 kind of?

So we are not disclosing details of portfolios. I will place a request not to [press] around that.

Not an issue. Thank you.

Inba, can we take last one question please?

Dinesh Pathak, Goldman Sachs.

Hi, thanks for the opportunity. Sir, is it possible to share what percentage of our R&D are we spending on biosimilars and how much are we spending on [proprietary products]?

So, let me put it in overall it is 60%, 40% ratio, 60% we spend on global generics and PSAI and 40% on allergic and proprietary products put together out of the total R&D spend.

Can you split further between the biosimilar and propriety?

You can say a little bit higher on proprietary than biosimilar.

Okay, thank you sir. All the best.

Thank you. That was our last question. I now hand the floor back to Mr. Kedar Upadhye for closing comments.

Good night and thank you everybody for joining Dr. Reddy's senior management for the Q3 fiscal 2014 earnings call. In case of any additional clarifications, please feel free to reach Investor Relations [team members]. Thank you and good night.

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.