Dr Reddy's Laboratories Ltd (RDY) 2014 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to Dr. Reddy's Laboratories Q4 and FY14 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and 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'll 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 the fourth quarter and full year ended March 2014. 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.

Just a reminder, 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 Chairman; G. V. Prasad, Chief Executive Officer and Managing Director; Saumen Chakraborty, Chief Financial Officer; Abhijit Mukherjee, Chief Operating Officer and Investor Relations team.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcasted 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. Greetings to everyone. You would have noticed the press release that we've made earlier during the day on the senior management organization changes. These changes are in line with our endeavor to adhere to the best-in-class governance tactics of segregating the roles of Chairman and CEO.

Accordingly, Satish Reddy is the Generics Chairman, with Abhijit Mukherjee taking up the mantle of the Chief Operating Officer. G. V. Prasad continues to lead us in the role of Chief Executive Officer with an additional designation of Managing Director and Co-Chairman.

Let me begin with the key financial highlights. For this section, all the amounts are translated to US dollars at a convenience translation rate of INR60, which is the rate as on March 31, 2014.

Consolidated revenues for the year FY14 were INR13,217 crores or $2.2 billion. We registered year-on-year growth of 14%. Revenues for the fourth quarter were $580 million and grew by 4.2% year-on-year. Revenues from our Global Generics segment were $455 million and grew by 21% year-on-year. This growth was driven largely by the performance of this year's new launches in the US market, sustained scale-up in our emerging market territories, and India formulations.

Revenues from our PSAI segment were $111 million and declined by 35% year-on-year, primarily due to a high base effect and the lack of any notable new launches. However, on a sequential basis, PSAI revenues grew by 31% on the back of revival of orders from some of our key customers.

Consolidated gross profit margin for the year was healthy at 57.4% versus 52.1% of the previous year. Consolidated gross profit margin for the quarter was 57.2% versus 50.4% in the same quarter of the previous year. Corresponding values for Global Generics and PSAI were at 65.8% and 20.5% respectively. As we have highlighted earlier, the significant margin expansion is due to improved product portfolio, business mix and favorable currency situation.

SG&A expenses for the year were at $646 million, an increase by 13% year-on-year. Corresponding value for the quarter stands at $172 million, an increase by 18% year-on-year. The cost increase in absolute term is largely due to depreciation of the rupee against multiple currencies, annual increments, additional manpower deployment in select areas and sales and marketing spend for events specific to this quarter.

R&D expenses for the year were at $207 million, representing 9.4% to revenues versus 6.6% in the previous year. For the quarter, R&D expenses were at $66 million, representing 11.4% to revenues, versus 7% in the corresponding quarter of the previous year. The increase in R&D spend during the quarter and year is in line with our planned scale-up in activity.

EBITDA for the year stands at $553 million, which is 25% to revenues and grew by 19% over previous year. EBITDA for the quarter stands at $132 million, which is 23% to the revenues. The effective tax rate for the year is 19%.

Key balance sheet highlights are as follows. Our working capital balance decreased by $45 million over the previous quarter and is largely in line with expectations. Capital expenditure for the quarter was $32 million. Our net debt to equity ratio now stands at 0.12.

Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $335 million, largely hedged around INR58 to INR62 to $1. In addition, we have balance sheet hedges of $650 million.

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

Thank you, Saumen. Greetings to everybody and I extend a warm welcome to you on this earnings conference call. We ended the fiscal year for 2014 on a good note with strong sales growth in our key markets accompanied by a healthy margin expansion. In several ways we demonstrated steady progress towards our strategic goals. Notable accomplishments during the year include a strong injectable product franchise in the US, first wave of differentiated product launches in India and continued scale-up on our presence in the emerging markets.

Our development engine continues to prioritize on complex generic assets across identified dosage forms and therapies. We are also investing aggressively to build best-in-class manufacturing infrastructure to service future demand across the markets. While the US generics influence the current quarter's performance and the annual performance to a great extent, our key emerging market geographies and India also contributed despite a challenging macroeconomic environment. The PSAI business had a tough year, though the fourth quarter performance improved on the back of better offtake from our key customers.

Now, let me take you through some of the business highlights for each of our key markets for the quarter. Please note that in the section all references to numbers are in local -- in respective local currencies. Revenues from North America Generics for the quarter were $244 million. As you would recollect, we had alluded to a possible sequential decline in Q4 due to bunching up of some customer orders and initial billings for a couple of new accounts. This played out as expected, resulting in the Q4 year-on-year growth of 14% and the second half year-on-year growth of 30%.

Our key launches for the quarter -- our key launches for the year, namely zoledronic acid, azacitidine, decitabine, donepezil 23mg and divalproex ER consolidated the market shares, supported by seamless supplies, coupled with lack of significant competitive activity.

As you are aware, we launched Sumatriptan autoinjector, amlodipine/atorvastatin combination and Moxifloxacin during the quarter for which we are working towards garnering a fair market share in the coming period.

Revenues from India were INR410 crore and recorded 18% year-on-year growth. This was on account of strong volume expansion in our NLEM portfolio, revival in some of the key therapeutic lines and also a lower base effect. We continue to introduce new differentiated products to enrich the portfolio mix and address existing unmet medical needs for the market. We believe that with better field force execution, enhanced portfolio and presence in the growing institution business, India can consistently grow faster than the market.

On the emerging market front, Russia revenues were at $60 million for the quarter and grew by 4% in ruble terms. While January and February saw healthy in-line double-digit growth, the market was quite volatile in March due to the currency headwinds and the resultant liquidity issues.

This financial year, we have been the fastest growing Company among the top 20 Russian pharma companies. OTC sales of 37% of the total sales in Russia and as per IMS, we grew by 10% during the year compared to the market growth of 1.4%. We gained five ranks during the year over the previous year.

In spite of the ongoing geopolitical issues and currency devaluation, our emerging market territories witnessed faster than market growth. Our thrust on these territories continues and we believe that there is enough headroom to grow our market shares.

Our PSAI business declined 42% on a year-on-year basis, mainly due to the higher base, though sequentially it grew by 31%. Past few quarters have been challenging for the business. However, we'll continue to identify improvement opportunities. In addition, PSAI continues to provide strong support to our Global Generic new product launches.

On the biologics front, we continue to commercialize our products in emerging markets, as we progress our pipeline towards approval in the US and Europe. This strategy allows us three distinct advantages. The first, ability to provide improved access to life-saving medications for patients and significantly under-served emerging markets. The second, the real world experience and data on our products. And the third, it allows us to capitalize on early revenue opportunities while we make progress on developing our assets for approval in mature markets.

We filed a US IND for the proposed biosimilar rituximab in July 2013 and permission to proceed with the Phase I trial under this IND was received during the year. We also filed the US IND for the proposed biosimilar of pegylated filgrastim, which is PEG-G-CSF in December 2013 and the permission to proceed with the Phase I trial in normal healthy volunteers under this IND was received in January 2014. At this time, we are in the midst of planning, designing and executing the studies under these INDs.

Against this backdrop of financial year 2014, the year 2015 presents us with its own set of opportunities and challenges. We've made significant progress in our journey towards operational excellence during the last four years. There's also a strong focus on enhancing the portfolio of complex products and targeting a greater share of limited competition opportunities.

As you are aware, it is not our practice to provide any forward-looking quantitative guidance. However, we are quite optimistic on the opportunities across the board in branded and unbranded generic markets, as well as our ability to execute on operational agenda. We expect the growth momentum to continue. We believe the journey in FY15 and beyond will be quite interesting and rewarding to our stakeholders.

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

(Operator Instructions) Balaji Prasad, Barclays.

Hi, thank you. Good evening everyone and congratulations on performance. May I also offer my congratulations to Satish and Abhijit on your new roles and wish you the best. My first question is on your US growth this quarter. So when I analyze your US sales data, it seems that decitabine and azacitidine contributed around 70% of incremental growth this quarter. Is that a fair estimate?

Both assets are doing well. Q3 was -- year-end -- we messaged in the last call that there were some additional sales in Q3, so Q4 was not as good, but as far as competition is concerned, both assets have been doing well.

Sure, thanks. So is this -- while it's good to note that both the products are doing well, is it a concern that incremental growth was largely dependent on these drugs, especially considering that launches in FY15 don't seem to be comparative to FY14?

So launch on FY15 is a different topic, but Q4 we didn't have any large launch, although Caduet and Sumatriptan injector went in. Both are reasonably good products, but not in the league of Dacogen or VIDAZA. FY15 has just started. Certainly, let's see how this plays out. There are a few products. Some of this will be known as we launch how many players get into the market and so on and so forth.

Understood. Thank you. My second question is on Nexium. Just wanted to see if you see there is any possibility of an earlier than [day 181] launch in any of the scenarios which can play out?

So, I don't think FDA is -- the principle of honoring first to file is still valid. We've seen in Diovan it's more than two years. We saw in Rapamune as well, it's now six months almost and we are not able to launch because it's the first to file and launched. It may not be very different than Nexium, unless there is some change in legislation or specific decision making by FDA.

Understood. So you think that the probability is high that their launch would only be a day 181 launch for you?

I guess so, yes.

Thanks very much. All the best.

Prakash Agarwal, CIMB.

Thanks for taking my question. Question is on the R&D side. I mean from a year basis we did 9.4% and fourth quarter particularly was a heavy quarter in terms of -- the number of filings also went up. So, could you give, A, the guidance in terms of what you're looking at for next year and year after, and also which broad buckets are we having a incremental filing [into]?

So this year we ended about 9.4% of sales and we expect that to be double-digits next year. So, it will be anywhere between 10% to 11% of sales. That's what we expect in terms of R&D spend. So if you see the three parts on which the spend is transpiring this point of time, there is Global Generics and PSAI on one count and then there is Biologics and then it's Proprietary Products. I mean, roughly you can take it as 65%, 35% kind of spend on -- say, Global Generics and PSAI on one side and then the balance on Biologics and Proprietary Products.

So, in terms of spend what's going up is because of the movement on the clinical trial for the biosimilar products that I just talked about, two of them, is that increase in spend. There's also the Proprietary Products progress on some of the products, but the biggest increase will also come from the Global Generics pipeline, because there -- it's a mix of complex generics products, as well as some external partnerships. So where there is a significant increase in our likely spend. So, all put together we see quite a substantial increase.

And when you file, say -- the filing has been in the range of 12, 13 products, would you be able to give what portion would be the complex side or which broad buckets; whether it would be oncology injectables or what kind of buckets we should look at?

I don't think we can go into that level of classification at this point in time.

Right. And second question is again on the US side, we saw nine product approvals. So, would you say [ our 2015 and 2016] are similar kind of product approvals and with GDUFA increasing their action, would you expect better approval run rate going forward?

Going forward it's difficult to say. At the moment, I think it's pretty much in the same rate of receiving the efficiency and approvals as such. We don't -- so far, we haven't seen a great deal of increase in the speed of approval or the files going ahead.

Okay. And in terms of your number and quality of products versus launched last year?

So last year was a little skewed with some great products. Beginning of the year, if you had asked the same question, we wouldn't have been able to answer that we have such -- it played out much better than we thought. It may happen in one or two products this year as well. Difficult to say that how it will play out, but we have launches. We have already launched a few. We have few launches in Q1, Q2 as well. So, let's see how these play out.

And last one, if I may add, on the Russia piece, you talked about the last month -- that is the March month seeing some disturbance. I mean, have you seen any structural change, because we saw Teva also talking about warm winter, political disturbances, which has hit the OTC market? So, could you be a little more elaborate to what happened and do you expect past growth to come back?

So, the net of all these effects, the pharmaceutical market has slowed down. The whole year has ended, IMS reports a 2% decline in the market. So, all this is playing out in -- the results of all pharmaceutical companies were in Russia. Having said that, how long is this likely to continue, difficult to say. The year has started in a good note. We are doing very well. We are actually in the top 20 companies in IMS. We are growing the fastest. The improvement in rank in OTC is five ranks increase in OTC. So, we are doing well in this somewhat adverse situation. Let's see how the market sort of plays out.

Right. I have more questions, I'll join back the queue.

Chirag Dagli, HDFC Mutual Fund.

Yes. Thank you. Sir, any thoughts on how gross margins -- how sustainable these 57% kind of gross margins are, especially given that FY14 has been driven by some niche launches. So, any thoughts on how we should think about the future?

The way we always put our business model is to ensure that we are having north of 50% of gross margin, so something that we'll definitely would like to protect. And so, if we do not get a very favorable currency kind of thing, keeping the same gross margin would be challenging, but at the same time if the new product launches and if we are getting better price increase in some of the products that we have seen in US Generics we've got last year, then it could be favorable to us.

Okay. And second question, sir, on the tax rate with higher R&D, how should we think about tax rate?

We can -- for modeling purpose, you can have anywhere between 21% to 23% of tax rate.

Okay sir, thank you so much.

Neha Manpuria, JPMorgan.

Thanks for taking my question, sir. Sir, on the R&D spend, when we talked about proprietary products and biologics, one, could we mention the sort of investment that we're looking in both of these businesses? And my second question on this is, for propriety products specifically, if you could give us an update on sort of pipeline we are looking, what areas we are focusing on and when we should expect any launches from the investment that we are making?

So, Biologics, already Satish mentioned that there two INDs which have been filed during FY14 and both have been accepted by US FDA, where more development will start. We are at the design stage and you know we have an alliance with Merck Serono for that. Proprietary Products, we can expect all that investment that we have been making in Proprietary Products, there are early proof and success and we expect some good progress. Some point of time during this financial year we will disclose all the Proprietary Products portfolio in greater details and you will have complete idea.

And would you like to -- I mean, are we looking at like an upper limit to investment in these areas, specifically in Biologics?

We have an upper limit in terms of total cumulative GAAP that gets consumed by the business in terms of -- because in Biologics also we did some earnings out of the revenue from emerging markets. So Biologics we have set an upper limit of $150 million. So within that we expect that business to break even and start contributing to the profitability of the Company. For Proprietary Products, definitely we have an higher [limit]. It looks like it will be around say $300 million kind of an investment that we will be willing to put forth.

Got it. And, sir, an update on Cymbalta, when are we expected to launch it?

Soon. In six to eight weeks maybe.

Okay, got it. Thanks so much sir.

Girish Bakhru, HSBC.

Follow-up on the previous question. You said $150 million for Biologics, containing how much portfolio, like how many assets are there in that?

We have actually four currently and, of course, there are more in the pipeline in terms of development, which is going on.

So this would be our share, apart from the Merck Serono, right?

Yes.

But just comparing to, say, what bigger guys like Celltrion are spending, $200 million per products, you don't see that kind of investment necessary for these products in the integrated markets, right?

I said about the cumulative GAAP, which is getting consumed, because we have already launched some of the products, some biologics in emerging markets, so we get revenue and profit out of that. So it is a net GAAP consumed that I have said.

The scale of investments will be similar, but we are developing this through our partnership and we will limit our cumulative additional cash flow to $150 million over the horizon of the next three to four years and after that we expect the business to be self sustaining.

Right, that's helpful. And on the US side, again, just wanted to get a sense of OTC business in US and specifically on slowdown, there seems to be a molecule -- I mean generic launch there by Dr. Reddy's itself, what has happened there exactly?

When we are trying to maximizing the penetration of the molecule and being in both generics and the brand gives us an advantage. We have seen this experience in our other product also, which is the Isotretinoin. But we have a brand as well as a generic. So, we have figured out how to maximize penetration through a combined approach.

And how much would be OTC, sorry, in the US?

The store brand OTC is somewhere in the range of $140 million.

Okay. And just lastly on the R&D side, just wanted to get a clarification. There is no spend going on the [set up] inhibitor molecule, right? The NCI spend isn't at all -- is there any NCI spend happening right now?

There is a small spend for the early-stage pipeline, but it is quite small.

Okay. Thank you. I'll join the queue.

Anubhav Aggarwal, Credit Suisse.

Thank you. Just a clarification, does the Merck partnership include PEG-G-CSF asset? Somehow, I don't know -- I had the impression that Merck partnership was only for MAbs.

Yeah, Merck partnership doesn't have PEG-G-CSF.

So, PEG-G-CSF what's the future --

Sorry, I am --

We are not disclosing the full portfolio. There are multiple products there.

So the clarity here is, you've got two INDs, one is Rituximab, second is PEG-G-CSF. So what's a future PEG-G-CSF. Is this what you will spend alone or with Merck?

We are not disclosing that.

Okay. And just going back [two] quarter call, you've been saying that your R&D expense will increase, but earlier you were at least indicating about 9% to 10%, but let's say more expectation of reaching towards 10%. What has changed in one or two quarters that thinking about 10% to 11%? Is it more spend towards the Generics side or more spend -- more towards the Biologics side? Is it getting two INDs approved has changed towards higher R&D?

You see, it's not easy to predict a very accurate number what the spend will be. This depends on the timing of the clinical trials, the ability to accelerate sometimes the pipeline. So, a combination of factors, including expansion on the Generics side, where we are getting into more products, which have a component of clinical trial to their development and changes in how the clinical development happens in our Biologics and Proprietary Products in raising the R&D intensity, but as you can see, our margins are also expanding. So we believe that we can finance this additional R&D spend and we believe it is wise to do so today.

And just one more last clarity on R&D. So sequentially R&D expense increased almost INR100 crores and given the state of your molecules, which are on Biologics side -- Biosimilars right now, I think you will be still recruiting the patients. So this --

We are not going to give you a breakup of where that went. All of it didn't go into Biologics.

Didn't go into Biologics, that's what you're saying?

All of it, but some of it --

Okay. Just shifting gears, just couple of -- let's say one clarity on the US pipeline. On Reclast, do you expect -- when do you expect -- Markman hearing is right now on Reclast status. Do you expect -- there are about four players in the market today. [Five] haven't got the approval. Do you expect that as and when the competition gets approval they will be there in the market?

Yeah. So, no messaging heard so far in the market, but certainly if they get approval they will come in.

And what about the hearing status, where your Markman -- going on? Is there a timeline for the final hearing of the case?

We haven't tracked that so closely.

Okay. The last clarity about VIDAZA and Dacogen, anything have you heard about -- any chatter in the market that at least for this quarter you're safe without any more incremental competition?

That we wouldn't be able to comment on. I said so far so good.

Thank you very much.

Sonal Gupta, UBS.

Hi, good evening. Thanks for taking my questions. Just starting off with India, what's your field force right now? Did you add anything? I mean, how much was the addition during the year or anything?

It's around 4,000, Sonal.

4,000. And just in terms of Russia, what was your local currency growth for the full year?

It's 11%, Sonal.

In primary?

In ruble terms, yes.

Okay. And how many products do you plan to launch in Russian in FY15, FY16, I mean what's the pipeline like in terms of --?

Roughly five or six products.

I mean over two years or every year?

No, probably over a year, four, five or six products in different therapies. We are in various therapies. So one or two products per therapy.

Okay. And just coming to the R&D side, I mean if you -- you saying like $150 million of cumulative investment in Biologics and given that, I mean right now your Biologics portfolio is very small, so I don't think there is a lot of net revenues coming or net profit coming from there to support the rest of it. So, I mean -- so in that sense it doesn't look like you're going to spend more than $50 million a year on the Biologics side. So, if you're looking at R&D spend, which is now touching almost closer to $250 million to $300 million, I mean that's a lot, right? So, where is -- I mean, is it all going to generics? Can you just give some more clarity on, I mean -- because -- and how much of your R&D spend is really being driven by outsourced R&D? Is there a split that you can give?

So, there is no split. But I think we -- as we said, overall generics R&D is also increasing year-on-year. Every year, it's going up. We said that product complexities are increasing. There are products needing clinical trials. We are funding those. So there is increase in generics R&D.

No, but -- I mean -- so if you're saying that you will not spend more than -- I mean, roughly to what it looks like a $50 million and you're saying that you're spending $150 million to $200 million in generic R&D, is that how to look at it?

Yes. But slightly lower than that, but yes.

Okay. And just in terms of the number of filings, I mean, 13 seems a bit low, I mean, in that sense. Is there some -- for the full year. I mean how do you see this going forward really speaking? I mean, do you see this sort of a run rate or do you think that there is some step-up, which is going to be there?

So, I think tracking numbers is not a game we're playing. We have a pipeline in development. Cost of developments vary. Complexity of development varies. So, one is not equal to the other. So, the number 13 doesn't mean much to us. The value really is what we track.

Okay. And would this include any partnered products or partners would be filing on their own and then you will help them commercialize that?

So, there are quite a few partnered products, but the principle which we follow is we will file, sometimes develop, sometimes -- some of that aspects of development done outside, but eventually, we would own and file every product.

Okay, thanks. I'll come back in the queue.

Surya Patra, Phillip Capital.

Thanks for this opportunity. On this IND filing that you have made for the rituximab and filgrastim -- pegylated filgrastim, what is the route that you're following for US market, whether it is 505(b)(2) route or the biosimilar, what is that, can you give us some clarity?

It's not 505(b)(2), it's the biosimilar route most likely, but it's too early for us to comment on that.

Okay. And, in fact, whether you've initiated similar approach -- means what is the progress regards the filing of the products for the European market, whether you've already done that or what is your thought process regards European market?

I think the European markets and the US will go in parallel.

Okay. So that means you have already filed your -- filed for starting the clinical trials there?

Yes.

Okay. And regards that amortization, this full year the amortization number has declined YoY, whether we would be seeing a kind of a reduced kind of amortization amount hereon or whether we have revalued the timeline of the asset?

Yes. We have a schedule of amortization asset-by-asset. So the (inaudible) schedule line.

And lastly, in fact, can you give some idea regards that -- for your US-based business, in terms of what is the kind of momentum in terms of price and volume that you are seeing for your base business?

For PSAI or which --?

Generics business only.

So, there is a lot of consolidation on the customer side and hence -- and having an impact on the price of product, there is erosion. Also, there is -- it's counter-balanced to an extent by new share gain in certain products, which we are aiming to and sometimes by price increases. So, I think on both sides, there is downside on one side and partly compensated by the two things I mentioned.

Sir, just last question, on the margin front, since you are saying that okay, there could be chances that the gross margin cannot be maintained at this level and also on the other end R&D is also increasing gradually. So -- means whether it is a kind of difficult task for us to maintain the kind of margin what we have reported for the last financial year?

No, I think the margins was talked about on the basis of the currency benefit that we got, right. So, it is all -- it's that particular currency effect, because it really depends on how the situation is going to be. So outside of that we see (multiple speakers).

Outside of the currency fluctuation I think we are optimistic, but it also depends -- you asked the questions on how quickly we will see competition in some of the products. So, those things will matter a lot. Overall, I think the businesses can be quite healthy.

Okay. Yes, thank you.

Surjit Pal, Prabhudas Lilladher.

Thanks for the opportunity. My first question is that how long can we see the pain in PSAI scenario to continue? And if you can throw some light to understand that how this business you are planning to evolve, considering 2015 (inaudible)?

So I think the reasons for why the business didn't pick up is something we had discussed earlier. So if you see the order book and the lock-ins that we have with the customers, that's the one we will track very closely and especially the order book is something which is now on the positive side. So even sequentially that's why, if you see from Q3 to Q4, there's been an improvement, but still lot more needs to get done before we see the full effect of the turnaround, which we expect maybe next quarter or two from now.

But do you think this turnaround is sustainable, given the basket of product is dwindling every quarter or every year?

Again, if you look at the overall PSAI business, right, so there is API part of it and there is a CPS part of it. So in terms of the traction that we see one both the fronts, and then if we everything falls into place, we should see the sustainable business ensured from now on. But having said that, I mean some of the things that we slipped up on the last year that correction part of it I'm saying will take us a little bit more time than what we anticipated. But to your question, it's a sustainable business.

I mean I have observed in your PSAI business, typically it is that in Q4 there is a quite a bit of bulk, I mean if you compare the Q1, Q2 and Q3, I mean in both the year you've got the highest average per quarter sales always in Q4. Is there any kind of seasonality in PSAI?

That should not be taken as a trend. It could have just been a bunched up of orders kind of a thing, but it is not a trend that you should track.

Okay. In your presentation, you said about heparin you've put up a plant. I mean could you throw some light on that whether plant is now operational and your ANDA filing, how many products you were targeting and out of them how many of them are patent challenged?

Which product again, I didn't get that, which product?

Heparin-based drugs.

Heparin-based drugs, I don't think we mentioned any such thing. No.

We have not messaged anything on heparin-based drugs, new plant --

I mean heparin-based plant, you said in that presentation this Q4.

Which presentation are you --

There could be some investments, Surjit.

Which presentation you are referring to?

That press meet presentation you have made.

The press meet, I don't think so.

You have given that, you know, the plant, description of all those plants you have made investment recently.

No, I don't think we have made any such thing, because Saumen made the presentation at the press and I don't think any such thing was made. We'll check back again, but -- sorry, you should check back again, because we don't have it in our text.

Yeah, we didn't mention in product, by the way.

So, we'll come back, Surjit , on that. There could be some investment, but not a dedicated plant as such.

Okay. In Biosimilar, currently that regulation is presently ongoing and they are coming out with some of the suggestive papers. Now do you think that when the final outcome will come and then -- as you have already started clinical trials, will they need a further kind of trials post that finalization, which is expected 2015-end? Is it a possibility?

Can you -- what is the question? Can you repeat that? On Biosimilars is it or --?

Yes, biosimilars.

Yes. So, what is the question? Can you repeat --

The question is that, you have already started clinical trials with certain parameters in mind. Now the question is that, when biosimilars, say, by 2015 end, when it is expected in the market that -- the concrete, the total phase of how they're going to develop biosimilar generic. In that case, your total -- the plan of clinical trials for biosimilar drugs in US, does it require or there is a possibility of requirement of other trials to match those requirements in US? Could there be any possibility in that area?

Excuse me, sir, can you hear us? Participants, please continue to stay connected, while we reconnect the management. Participants, we have the line connected back to the management. Mr. Pal, you may go ahead with your question.

Yes. My question is that in biosimilar you have already started clinical trials in US. Now the question is that if in between, say, 2015 end, when the clinical trials on biosimilar might be concrete and finalized, now in that case, if those requirement you need additional investment in terms of matching those parameters, if there is anything different what you have done currently, or you have been briefed?

So, as the Chairman was explaining, we are in close touch with the regulators, taking their guidance at every step and we don't see any deviation from how we are planning the trials and what the requirements will be. And we are in early clinicals now, which means to go to the large Phase III trials it's still some way off. And we are in close touch with the regulator on this.

And how much time does it require, two to three years?

Yes.

I mean, the last question on this biosimilar, is that just to understand your understanding about that, is that, if they don't allow any RLD, unlike generics, do you believe that there will be a similar kind of interest from the generic companies to enter into biosimilar in US?

RLDs are available.

There is a strong debate over there whether they will be allowing them or not, RLD to the branded drugs like the way you do in generics. I mean, do you think, will it be interesting for the generic company to put such a kind of huge investment to get into that market?

I'm a little confused by your question, but if I understand it, you're asking me whether is it first a biosimilar at all. Is that the question you're asking?

Yes.

We obviously believe it's a very high value proposition and that is why we are investing (technical difficulty). It's not going to be a game that everybody can play, because it's a very large investment and it's also a lot of complexity in matching entreprenology. So, we believe that the companies which navigate these challenges will make a lot of money in this portfolio.

Okay. Thank you.

Sameer Baisiwala, Morgan Stanley.

Yes, thanks. Good evening, everyone. Just to understand the US-based business progression, Abhijit, I think on roughly a $900 million sales pace that you had for FY14, now we are assuming that there's no supply disruptions or additional competition, just the base business as it stands. What would be your guess, would there be a price deflation for this business and has the full impact of customer consolidation felt by the company or is more to come?

Large part of it is -- as we speak, large part of it is through. So there are downsides on account of customer consolidation, partly to -- quite some extent being made up through share gains and some price increases. So, there is a last bit, some more to come, I guess, with the last public domain consolidation that is not yet through, but 75% of it's through.

And what would be your expectations for the base business as it stands right now, going into next year -- going into FY15?

Again, Sameer, same figure specifics will be difficult to get into, but as I said, erosion is being handled through share increase and some price increases.

Okay. The second question is, could you just update us how many products from proprietary filing, which I reckon is 505(b)(2) based products are in clinical trials right now and when do you expect the first filing to happen?

When you say NDA, are you talking about [zoledronic]?

Yeah, that's right, the proprietary filings 505(b)(2) based. I think in last call you mentioned there were two in clinical trials?

Yes, there are two. I think we expect the first NDA to be filed within 18 months to 24 months from now.

Okay. And just one final question and I think it's more to do with Satish. Satish, is the understanding correct that with your elevation to being a Chairman, it would be a far less executive, if at all, any executive role that you'll be playing?

That's correct. It'll be much lesser, yes.

Okay. And what's driving this, because it's quite unusual in the context of Indian promoters at such a young age?

No, Sameer, I think the main thing is like we explained in the note that see, clearly in terms of separation of the role of Chairman and CEO was something that we've been studying for quite some time to see when we can do it. So, I think the timing is -- at this point of time, especially when we look at it from the point of governance on one side and also providing internal growth, I thought this is the time to do this. That's how we see this. As for my age, what can I do, I just happen to be young.

Okay. Thank you very much.

But was there any other question, Sameer?

Well, I mean, I was trying not to get in, but isn't it a reflection of lesser commitment by the promoters in the business?

Not at all. In case you are assuming that my involvement in the Company is going to be -- actually it's going to be different, but not less. So, that's the change.

Okay. Thank you very much.

Alok Dalal, Motilal Oswal Securities.

Yes. Good evening everybody. On US, now that you've crossed $900 million in sales, and you have about 62 ANDAs pending approval, do you think this is 62 ANDAs is kind of enough or you are satisfied with this number to drive growth over the next two, three years?

Numbers do not drive growth. It's the quality of the assets that would drive growth. So, what we have in those 62 and how we get those approvals are going to be important. So, overall numbers I don't know whether that would mean anything.

So, I mean, just to add to what Abhijit is saying, you should correlate the various [pending RLD], the acquisitions we are making and the overall focus of the Company. The focus is clearly on complex products with sustainable revenue and you're seeing the first few launches of that in the last fiscal year. So, that's the choice we've made and we're going to continue to deepen our commitment to that choice.

Sure, sure. No, the reason of asking that question was that some of your peers with a similar base have higher number of pending approvals and now everybody is focusing on difficult to manufacture products, complex generics, etcetera. So, I was just trying to understand how you're thinking about it?

Yes. So, we are very committed to it. We are committed, deeply committed to complex generics.

Sure. Okay. If I heard you correctly, on India you mentioned that you've launched first wave of differentiated products. Is that kind of a game changer now when it comes to India?

I think it's too early to say it's a game changer, but it's the direction we're going to take. We will try to add value to the products, to innovations and that's how we will create a little bit sensation, but it's very early to say that it is the new wave of --

But Mr. Prasad, in which areas have you launched these products?

A couple of them there in cardio and the blood pressure management and then we've also launched a range of gastro products for pediatricians, for children, so on and so forth. So there are various products in -- we are increasing the breadth of the portfolio in terms of therapy. We are trying to broaden the therapy. So that's where these products are coming in.

And last question, CapEx for FY15, is the CapEx spend going to be INR1,000 crore to INR1,500 crore?

That is the range we have given. This year we have spent INR1,000 crores and there are quite a few project, which is going on, so likely spend would be higher in FY15 compared to FY14.

Okay. So, Saumen, should we assume that with this size, $2 billion size, Company would require such kind of recurring CapEx going forward?

Not recurring CapEx, but all the capacity that we were required to do for all the areas that we are getting into. So I think in another couple of years we'll more or less will be done with that. So recurring CapEx will be much lower.

So the big project in -- for our [single dosage] as well as API in Vizag, which not only reflects a new site, but also new technologies, also new philosophies in the site, which is requiring a much higher CapEx than what normal plants would be and here we are investing in making those plants better in terms of quality, compliance, robustness and safety.

Okay, thank you for taking my questions.

Manoj Garg, DSP Merrill Lynch.

Good evening to all of you and thanks for taking my question. Hello?

Yes, go ahead, Manoj.

So, just wanted to know, like what are R&D investment which we have started doing for the differentiated products is largely being expected to last one, one and a half years, and where the dividend of the same will be outlined maybe over next two or three years. But do you believe that in between, maybe for the next 18 to 24 months, we only will have more consolidation of the business in the US and then probably again start taking off from there on?

See, it's hard to predict. One or two assets launched can make a huge difference. So, the average value of our assets is going up dramatically. So given all that I think it will be very lumpy and it's hard for me to say that whether the business will go up or down, but we remain confident that the products that we are working on are very interesting and overall our journey is going to be sustainable and valuable.

Okay. Because where I'm coming to, like, if you recall in 2013, when you were expecting some of these launches, which ultimately have happened in FY14, you used to indicate that probably we will have one or two years of consolidations. Now has the outlook changed from there on?

Outlook hasn't changed, but the timeline uncertainties remain in this business.

Okay. And just looking from a long-term aspirations, how do you see the margins going over the next two, three years?

See, if you exclude our investment, say, of the products, the margins are expanding in all of our businesses.

Sorry, you're voice is breaking, so probably I haven't heard you properly, sir.

If you exclude the investment that we are making for the future, and increased R&D and things like that the gross margins are expanding.

Right. And do you expect that trend to be continued?

Yes.

Okay. Wish you all the best.

Saion Mukherjee, Nomura.

Thanks for taking my question. A fewer of them sir. Actually, first on the Biologics front. Prasad, I mean a few years back you used to mention about one Biologic every year in India. We haven't seen that. So, I mean, can you just throw some light on the development programs that you have for the emerging markets like India and how should we think about launches in India and other emerging markets going ahead?

I think, we were a little too optimistic when we said one product a year, but we do have a number of products in the pipeline and at least in the near term there are two products getting into the clinic and these two are both MAbs and they should be launched in the next two years in the emerging markets. And as we are also debating how we focus on developing a global program of developing products, both for the emerging markets and telescope the same trials for the regulated markets. And are in the middle of developing the strategy for our portfolio and we will clarify to you as and when we [roll them].

Okay. So, in the test case of [Rituximab], which was launched in India a few years back, I mean, when you're now going for the US market and also for the European market, is there a big difference, I mean the product that you had for India and what you will --

No. Incrementally we're developing the product. We'll have one product for the world. And we have had some learnings from rituximab in terms of how to do the trials, how to sequence the trials, how to do the bio-similarity characterization in a way that we don't have to redevelop. So, we're putting all those learnings into our R&D programs and that is why our R&D programs are taking a little longer. That learning will help us in the next wave of launches in the MAbs.

And for rituximab in Russia, you are on track you think for a FY15 launch there?

We hope so, but it's all in the hands of the regulator.

Okay. My second question, Prasad, again, you mentioned that the average value of assets is significantly higher. So, I mean, when you look at those 60-odd products which are there in the pipeline in the US, do you think per product revenue on an average would be materially higher than what you have in the market currently?

I need to verify that before I comment, but the average value of the assets that we are developing has been (inaudible).

So, compared -- I think what Prasad meant was more -- when we compare with value per asset which you launched few years back to what it is now, it's virtually doubled. So, that's what he was trying to mention, not so much measured from the outside-in perspective.

Okay. And sir, any update on Copaxone, have you heard from FDA any complete response letter, any update you can share on that?

No, we can't share details, but we reiterate the quality of filing is very good. And it's in the hands of FDA at the moment and it's progressing step by step.

Is there possibility of an approval this fiscal, FY15, do you see a possibility?

Can't comment on that. Can't comment on that.

Okay sir, one last question on the Indian domestic market. You mentioned that for the NLEM products there is a significant volume expansion that you saw in Q4. The question is how sustainable is that and is that something which was seen across all -- I mean in the industry as such for those products where the prices have come down, the volume has expanded, or it is limited to some very specific product opportunities?

No. I think overall it will play out for some other companies as well, but there also I think it's not uniform across all products. I mean, depending on some products, it's seeing larger volume growth, some products not to that extent.

Okay. Thanks a lot sir and all the best.

Krishna Prasad, Franklin Templeton.

Hi, thanks for taking my questions. First question is relating to the global consolidation in the specialty pharma generic world. Could just share your thoughts around how does Reddy's viewing the situation and if we choose to act at this point in time? And a related question would be, is your decision to sort of hike R&D spend, invest more related to what you see as relevant assets to actually buy at this point. So, is the risk reward changing on [bios' build]? Thanks.

Broadly, our approach has been to focus on organic development in the last few years. We are not as an aggressive consolidator. We are building the capabilities through partnerships, acquisitions and own R&D investments and we expect this trend to continue. We remain open to acquisitions, but we are not an active acquirer as of now.

Right. And you don't think this has really changed given the external circumstances?

No, I don't see any reason for it to change today.

Sure. If you could just give an update on our Rituximab approval in Russia, where are we at this point?

We are awaiting approval. We don't have any update now. We hope to launch it in FY15, but that depends on the regulator's permission.

Thanks and good luck.

Thank you. I now hand the floor back to Mr. Kedar Upadhye for closing comments. Thank you, and over to you, sir.

Thank you all for joining Dr. Reddy's senior management for our Q4 FY14 earnings call. In case of any additional clarification, please feel free to get in touch with the Investor Relations team. Good day to all of you and thank you.

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