Dr Reddy's Laboratories Ltd (RDY) 2015 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Limited Q2 FY15 Earning Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you, sir.

Good morning and good evening to all of you, and thank you for joining us today for Dr. Reddy's earnings call for the second quarter of fiscal 2015. 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 Saumen Chakraborty, our Chief Financial Officer and Abhijit Mukherjee, our Chief Operating Officer, along with the Investor Relations team.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlets 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. Let me begin with the key financial highlights. For this section, all the amounts are translated to U.S. dollars at a convenience translation rate of INR61.92, which is the rate as on September 30, 2014.

Consolidated revenues for the quarter were at INR 3,588 crores or $579 million. We registered year-on-year growth of 7%.

Revenues from our Global Generics segment are at $466 million and grew by 9% year-on-year. This growth was led by branded businesses in India and emerging markets.

We experienced a bit of currency volatility for Russian ruble and Ukrainian hryvnia during the quarter, and the adverse impact on revenues because of this movement in these two countries -- for these currencies is approximately 2% of overall revenues.

U.S. generics business experienced changing customer dynamics, coupled with slowdown in the new product approvals. Revenues from our PSAI segment are at $103 million. While flat on a year-on-year basis, sales improved sequentially from Q1 with improved margins.

The consolidated gross profit margin for the quarter is 58.5% and expanded year-on-year by 50 basis points. Corresponding gross margin values for Global Generics and PSAI are 65.6% and 26.8%, respectively.

SG&A expenses, including amortization for the quarter are $172 million, increase by 10% year-on-year. This increase in absolute terms is largely attributable to normal salary increments, manpower hirings and other sales and marketing spends. Sequentially the SG&A expense remained flat.

R&D expenses for the quarter are at $66 million, representing 11.5% revenues versus 9.0% in the corresponding quarter of the previous year. R&D spend is in line with our planned scale-up in activities.

EBITDA for the quarter is at $141 million, which is 24% of revenues. Adjusted for the one-time litigation settlement income of $6.75 million recorded in the last year, and higher R&D spend this year, the EBITDA percentage to sales is similar as that of last year.

The tax rate for this quarter is 17.2%. However, full year effective tax rate is expected to be in the range of 21% to 22% as guided earlier.

Key balance sheet highlights are as follows. Our net operating working capital increased by $36 million during this quarter. This is partly due to the buildup of stocks for forthcoming launches in USA and North America generics and PSAI, an increase in receivables in line with agreed credit period.

Capital expenditure for the quarter was at $32 million. Our net debt-to-equity ratio is at 0.10.

Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $610 million, largely hedged around INR59 to INR61 to $1. In addition, we have balance sheet hedges of $524 million. We also have foreign currency cash flow hedges of 840 million rubles at the rate of INR1.70 to a ruble, maturing over next six months.

With this I now request Abhijit 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. While we are reporting single-digit growth on an overall basis, the performance reflects several sustainable growth trends in our key markets, partly offset by the impact of some [external issues] .

Our India business performance has become relatively more predictable than the past and in this quarter delivered a healthy double-digit growth. Emerging markets business was able to maintain trajectory, as we sustained supplies to Venezuelan market, which helped offset macro issues in Russia and Ukraine. Due to the absence of major approvals during this quarter, US Generics recorded single-digit growth. At the same time, injectable line of business in US is clocking its expected run rate. For PSAI business, while performance is flat for this quarter, we expect a relatively stronger second half.

Now let me take you through the key highlights for each of the key markets. Please note that in the section all references to the numbers are in respective local currencies.

Revenues from North America Generics for the quarter was $235 million and grew by 7% year-on-year. As mentioned earlier, we did not receive any new approval during the quarter. However, going forward, we expect a number of launches for which our supply chain is adequately geared.

As you would have read, we launched Sirolimus in the market yesterday. Parallely, IMS data shows good progress by us on the market shares for several key molecules, such as Metoprolol, Divalproex, and [Atorvastatin] . Decline versus sequential quarter-end sales is attributable to a usual price erosion in base business, full quarter impact of channel consolidation and changes in the buying pattern between Q1 and Q2.

India formulation business has posted its all-time highest revenues of INR480 crores and grew 14% year-on-year on the base of higher pre-NPPP prices of previous year. This growth is largely volume-led and represents improved portfolio mix and healthy share expansion, especially for major products covered under the NLEM list. The team continues to target portfolio expansion by introducing differentiated products and address existing unmet medical needs.

On the emerging markets front, Russia revenues are $68 million for the quarter and remained flat in local currency terms on YoY basis, on a high base of last year. Current geopolitical situation in Russia and Ukraine has started to impact the healthcare sector. In this background, we continue to outperform the market in volume and value terms.

As for IMS, YTD August 2014 of Russia, we grew by 13.3% versus 12% of market growth in constant currency. In volume terms, our growth was 4% versus market decline of 1.4%. OTC continues to be an important lever for Russian business, as IMS YTD August 2014, we grew by 20% versus 12% market growth in constant currency. From the other emerging market geographies, Venezuela continues to deliver superior growth, both on volumes and price realization. It is turning out to be a high potential market for us, providing substantial upside while the possible currency devaluation is always a strong headwind.

PSAI sales performance is flat year-on-year, however the product mix has improved, which is reflected in improved gross margins. A number of initiatives are being taken to achieve the twin objectives of sales growth and healthy margins. The filings have picked up for API business. Orders for the custom services business are also seeing an uptick. With this improving trend, I feel business is poised to deliver a relatively stronger second half performance.

You would have noticed an increase in R&D spend that we are reporting for the last two quarters. It is a conscious decision and signifies our efforts to strengthen the portfolio across complex generics, proprietary products and biosimilar businesses.

We are continuing the journey of building a rich and differentiated generics pipeline through the globalized R&D platform. During the first half, we filed 11 ANDAs in US, most of these are high-quality filings and are characterized by technical complexity, which helps us target limited competition opportunity at the time of launch.

We have also been able to diversify our filings across dosage forms and enhance the estimated potential value [for our] filings. Parallelly, for the proprietary products business, several assets are in the late stage registration trials. The portfolio of assets, both in dermatology and neurology is quite robust. In dermatology, our assets are targeting the indications of steroid responsive dermatoses, acne, rosacea and actinic keratosis. While in neurology, it is primarily migraine. We are targeting our first NDA filing by the end of this fiscal year.

In the biosimilars portfolio, we had spoken about IND filings of rituximab and peg GCSF [of earlier]. The phase I global trials for both these molecules are on track.

With this I now open the call for question and answers.

(Operator Instructions) Balaji Prasad, Barclays.

Firstly on the US Congressional investigation. Have you responded to the question on price hikes and if so, what is the gist of your responses?

Yes, we have responded and basically out of these two products, Pravastatin is what we're not marketing. And the other one on Divalproex, we didn't take any price increase during the period referred to in their query.

Did you drive or initiate the price increase in any of the -- in either of these products?

I've clarified in these two products. Are you asking other than this?

In these two products.

No.

And so what will the next steps be that we need to or we ought to look out for?

We have responded to the query. Now, if there is any further query again, we will look at them.

Secondly on Russia, thanks for the details on the ruble hedges. I think that's helpful. Can you also explain to us the nature of your distribution arrangements and also what percentage of your Russian sale is in local currency?

Russian sales are in local currency only.

100%?

Yes.

Okay.

[Future] arrangement means, you know Russia, the number of distributors mandate is quite consolidated kind of thing, 10 to 20 kind of number of distributors.

I remember, you also used to have portion of sales being booked in US dollars couple of years ago, that's not the case anymore?

That's not the case Balaji. Now we have a subsidiary from which we sell -- entire sales in the Russian rubles only.

Lastly a quick question on the NDA part and then I will jump into the queue. So, you said you expect to file the first NDA in Q1. So, I presume this is the intranasal Sumatriptan that you've spoken about. On what stage of the trials this is in and the response that you're seeing and how confident are you?

So, we are not specifically talking of the asset, but yes, before the end of the financial year, the first filing will go through. So naturally the product is in late-Phase III.

And the expected timeline of approval would be 12 months from your date of filing?

Normally that's the NDA -- the way NDAs are approved.

Saion Mukherjee, Nomura.

One question on the ROW market. Can you share the key markets, including Venezuela, how big that market is for you? And secondly, the dynamics in that market in terms of your market share, how many products you're selling and how should we think about sustainability of this business going forward?

So from the time the social unrest broke out in Venezuela, the market has been volatile and there are lot of players who have not been able to keep up the supplies in the market. Our traction in terms of prescription and our credibility with doctors were already high and then this opportunity came up. We seized it well. We have taken decision to stock up the market in advance and the current run rate is very, very healthy. Large part of the ROW growth which you see, the major difference has come from Venezuelan market. So it's a very significant market right now for us.

The biggest headwind which could come in is devaluation. And given that oil market is weak currently and considering it's an extremely oil-dependent country, so this could happen, but so far so good. We are gaining ranks rapidly and it's an important market.

And the second question regarding the US market, we've seen a sequential decline. The impact of additional competition in Decitabine, due you think is fully in the numbers now, in the second quarter?

I mean the competition, as you know, came in sometime in the second quarter, so it's not fully factored in, but having said that, I think -- overall I think we're doing okay. There was still some amount of innovative shares which was left in the generic market, as you may recall, so not fully factored in, but we are not very far either.

And how do you see the second half in terms of new launches and compared to the first half?

I think we are more optimistic about the second half. Some are in public domain now with the Diovan launch by Ranbaxy. And we have [got tentative] and Rapamune we just launched. Basically we're the first to launch, because the SKU which was launched earlier was [only 5%] of market value, but surely enough the authorized generic has just come in as well and we might see one more, maybe. So the rest, I wouldn't be able to comment on, but we are cautiously optimistic. There is slowness in approval from FDA. I gather it's for other people as well. So as that picks up, then it will be better.

Neha Manpuria, JP Morgan.

First on the PSAI margin that we saw in the quarter, you did mention improvement in product mix. Is this a one quarter sort of improvement, because of probably more development revenue coming into the quarter and should probably taper off or with the improvement in revenue could see these margins improve further?

We are doing some structural changes in terms of improving gross margins, essentially through reducing the very low-margin products, looking at costs and as well as focusing on some -- so there some structural -- to answer the question, there are some structural changes being attempted in the right direction. We are also looking at extending the definition of the business to deals which encompass what we call API Plus, which means -- this is mostly for the emerging markets where we can sort of look at the dosings as well for the complex APIs, which may not be very value accretive as pure API business, so which is still beginning to happen. So all-in-all, I think we are moving in a direction with the design.

So it would be fair to say that margins could improve from these levels, even if some of these one-off revenues which are there in this quarter go off? So this is basically I want to highlight, this is sustainable margin improvement?

So that's the attempt. Any structural change may see a little bit of a movement either way, but that's the attempt, and it's going in a direction with design.

A second question in the US business, you mentioned one channel consolidation as one of the factors which impacted the quarter-on-quarter decline and the change in buying pattern. First, what was -- a rough estimate and impact from channel consolidation in terms of pricing erosion and what was this change in buying pattern that you saw from first quarter to second quarter, if you could throw some light on that please?

So without giving you exact figures, I think this would be one of the [brutal] years of price erosion, as the channel consolidation has been heavy in US. The impact largely has gone through, now there is not much left or almost it's done, but it has been quite heavy. Partly we have been able to sort of counter a part of it through some market share increase in the products which is available in public domain, but it's been quite heavy. Launches have been weak, so that's the other factor which has added to Q2 performance.

Surajit Pal, Prabhudas Lilladher.

If you can throw some more light on the filing you have done, 11 ANDAs, as well as the portfolio you were developing in terms of injectables or therapeutic area other than what you have said already?

So the quality of the pipeline is changing, we messaged it earlier as well. A few years back, we were primarily an oral solids Company. To just to give you a broad feel of it, I think currently what's pending approval is already at 40% non-oral solid. What's being filed this year is 50% non-oral solids, largely injectables, topicals, patches and soft gels and what's in development is going to go up to about -- almost 60% non-oral solid. So that's how it's moving, which has its flip side as well of higher R&D costs, because it's -- certainly the amount of partnering is going up in which we -- of course this partnering is not just off the shelf buy. We do a certain part of it with a partner, some of it we put in ourselves and so on and so forth. But we fund it. So as a result, that's sort of pushing up the R&D cost. And also the products are needing inpatient trials more and more, and some of them are also needing some efficacy clinics as well, as mandated by FDA. So that's pushing up the R&D cost.

So it looks like you were going to be pretty big in derma space, particularly in older dermal products where competition is very less and price raise opportunity has opened a pretty big area for you?

We are looking at -- yes, we're looking at topicals, but it's still -- and we have started filing as well good product, but we are not looking at only price rise products. We are looking at clinic-based product where upfront investment is a little high and the entry barriers are a little high.

Second question is that -- you know the kind of around 40 million deficit in terms of sequential comparison of your US revenue. I mean without taking any particular number, do you believe that the major part has been attributing to Dacogen?

Surajit, we won't be able to go product-by-product. I think, to an earlier question we answered that this is largely because of the erosion in base portfolio and customer consolidation. So we won't go product-by-product.

So in this year, any kind of major product till March or till this FY15 launch in US?

Can you come again?

He is saying the new launches in the next half (multiple speakers).

Yes, public domain is only Valsartan, [with the] FDA, and there is a fixed date. The rest are not in pubic domain.

Sonal Gupta, UBS Securities.

One, I guess, just in terms of -- again coming back to the R&D spend and -- I mean while the step-up is in line with your expectations, but it's still around 11.5%. I mean how do you see this sort of developing going forward? Currently you have two proprietary products in the clinics, you have couple of, I think, Phase I trials for biosimilars, correct me if I'm wrong. So how does that sort of really change? So, next year how many do you intend to have in the clinic and if you could sort of give a sense of, I mean what sort of step-up do you see further in terms of percentage terms in R&D from current levels, say, in the next 12 to 18 months?

This particular quarter it has become 11.5%, because we had a muted growth in the topline. Otherwise, we expect R&D to be between 10% to 11%. And going forward, we don't really anticipate any exchange from this number.

No. Sir, what I'm trying to ask is that currently like you have two in the clinics and proprietary products is something that you are quite bullish on. So next year, do you intend to have like four in the clinics and that pushes this us up much further or how does this work? Or do you think that the run rate on proprietary products in terms of clinical spend will remains at similar levels?

We have factored in all our existing plan and that's why we [increased] our R&D. So, as you have seen, it has gone up from a range of 6% to 7% of sales to 10% to 11% and within a span of one year. So that's why we -- we have factored in all these increase were to happen in proprietary products and biosimilar. But having said that, as we said earlier that our ratio of R&D spend across, say, Global Generics, API to biosimilars and proprietary products remains at 60 to 40. So that means, the increase in R&D spend in Global Generics spend API is also that much higher as the increase in the others.

I know you're quite excited about these proprietary products, but could you give us some visibility in terms of when -- what sort of clinical end points do you need to achieve and what sort of probability do you see to these -- I mean typical probability as a rule of thumb, because -- and given that the peer environment in the US has got much tougher, I mean what sort of realistic targets are you expecting out of this? I mean, what gives you a lot of confidence on some of these sort of 505(b)(2) sort of products that it will sort of work out that way?

We'll have to wait for the R&D Day that we're going to have so that we can put all these questions to our Head of Proprietary Products and we can field these questions.

And my last question is, anything in terms of -- ex of Copaxone for next year, I mean how do you think about your US business growth, because I am leaving out Copaxone, depending on how the regulator sort of looks at it, but I mean do you think you will be able to still grow next year, ex of Copaxone, on the current base?

We think so. Irrespective of the uncertainties of Copaxone, as you rightly mentioned, your guess is as good as mine, whilst I think there is no bad news as yet, but other than that also I think we have a reasonably robust year next year.

So, you do expect some other complex launches to come through next year?

That's what I'm saying.

Anubhav Aggarwal, Credit Suisse.

Some clarity on few products in the US market. You won litigation on Propofol. When do you expect to get approval from FDA on this product? I mean, in the sense, is it within one year or it could even take longer?

Did we expect approval slowdown from FDA, I think most companies are looking at it. So difficult to -- so the short answer is, firstly the litigation is not through fully, and so I wouldn't be able to answer this question.

Just another product, Sirolimus, you mentioned that you expect one more player. So is that activist who had exclusivity on this strength, their exclusivity forfeited or what's the status with them? Or is that second player expected to be activist?

So, as per FDA rules, as you know, unless the FDA says forfeited, the other players cannot come in. So probably that answers your question.

And do you expect this scenario of one or two players to sustain for almost a good amount of time, let's say, about a year or it could be -- low competition could be for much shorter duration?

That's again a difficult question. I wish I knew, but this is -- not [plays in our] product really. So your guess is as good as mine.

Abhijit, just one more clarity on Nexium settlement that you've done with the channel. Actually I'm very confused with that case, because first, only few players, let's say, Dr. Reddy's, Teva and Ranbaxy from several participants were sued in that case. And by settling with the channel, you certainly get benefit that you are absolved of all the potential liabilities, but what's our flip side? What do you lose out by setting with the channel, because this option was always there. You could have settled much earlier as well, if there was no flip side?

No, no, settlement happens only when both sides agree on a settlement, but the point is that I think throughout, we were very confident of our legal position and we are glad that it's validated through this settlement with no financial impact to us. So the flip side you are talking about, there is no flip side. There is no financial impact to us, it's settled. That's because largely our legal positions are strong and we also maintained that actually. So does that answer your question?

So your opportunity from Nexium front, whatever it was before settlement that remains as it is, even post the settlement as well?

These are two different things, completely different things. This is on a completely different legal case to the opportunity. I wouldn't comment on opportunity, but at least I can tell you that they are two completely different things.

And just last one product update is, Fondaparinux in Europe. What's the status? The last update you gave was that you were expecting by end of this fiscal, you would have some update on Fondaparinux in Europe, application?

Our first filing ran into some different views from European agency and we are just sort of in the process of filing again. But it's a very, very competitive -- competitive in the sense that pricing is extremely competitive. So it's a high topline, relatively low -- everyone can calculate that actually. So it's not a very highly impactful as far as the whole Company's bottom line is concerned.

Prakash Agarwal, CIMB.

First question relates to our understanding on the GDUFA transition by USFDA. We've clearly seen by yourself and other industry players where the approvals have slowed down. Now we've stepped into the next quarter, which is October to December. Have we started receiving CRLs and hence we have better visibility of approvals in the second half?

We just got one approval as we told you. But probably your information is better than ours, because you're talking to everyone. Too early, as we just stepped into the next quarter, difficult to say; we stay optimistic.

But any lead through on this GDUFA transition, both in terms of filing and approval guidance?

FDA is not providing a lot of guidances. So normally it's not that there is fixed -- so the answer is that whether there is a distinct improvement which is perceivable, the answer is no. But at the same time, it's very early in the next quarter. Let's see. I mean somewhere this has to move up or step-up in terms of speed.

And the question relates to our portfolio, one in biosimilars and second in propriety. So first on biosimilars, I mean apart from the mAbs and the GCSF, are we targeting other segments in biosimilar space?

No, I think there are only a few assets in the Merck deal, but in the pipeline, yes that continues. The larger cost implications are from the products, which are more or less known and in public domain, there is many of them we have launched in India. So the current expenses are on those products, but the early development and the other mAbs et cetera that's in -- that's in progress actually.

So we would be looking at the other pieces of the portfolio in biosimilars?

In due course of time.

And second on the propriety, sir, what is the portfolio that we are looking at? Earlier you had mentioned that 15 products with peak sales potential of $30 million to $300 million. So, has there been any progress there?

So Prakash, as Saumen mentioned earlier, probably we'll defer this discussion to our R&D Day.

Is it a date certain kind of thing or -- ?

No, no, we're yet to finalize, we'll communicate at appropriate time once final.

And lastly on the Copaxone, what's our current understanding in terms of the first two files getting approval and our monetization?

Not much change from the last communication, which we had. The rest of it, you're reading in public domain, you know a lot of things are happening. The questions raised in court by the innovator, the view et cetera. So those you're seeing in the public domain, but not really -- not much from our side. The file, it's moving.

Girish Bakhru, HSBC

On US again, just trying to get a sense of how the second half would be. So with Sirolimus giving a good traction, would you say combination of certain recent approvals like Xopenex, Sirolimus, second half would be definitely better than what first half has been at $500 million?

So the two caveats I would like to put there, one is we don't know about the large injectable assets, whether there is any further approval coming in. So that's one. The second thing is the base level, if you're talking of comparison, last year Q3, these injectable assets were in full flow versus what it is right now. But having said that, yes, I think some approvals would come in, in the second half, so we expect better than Q2 for sure.

H2 better than H1.

I would defer that. I mean, overall, I think Q1 was pretty good, but let's see. I mean, you see, with 50% of the generics business coming from North America, and that's about 80% of the Company, some of the questions which I know as little as you know, can change things.

But just on the market wise, is this Xopenex, is it a material market, do you think that there are only four approvals and probably less would come in time, how interesting will it pan out?

Which one is the -- Levalbuterol -- no which one?

Levalbuterol, yes.

Levalbuterol is -- there are two AGs, three generic players, we are the sixth one, small launch for us, partnered, nothing of significance.

Just again a clarity on one product in US. How do you see Gleevec? I know the case is pretty fresh for you guys and with Sun settling for [FAS 16], does it give you a window to launch in August or it could be further delayed?

In discussions at the moment, and litigation.

So, you would say that your litigation outcome will essentially decide your launch, right?

Yes, unless we are able to sort of converge.

I mean, unless it is settled, then probably -- yeah, okay.

That's right.

And just lastly on Habitrol. Actually, I did not really get what is the current sale of the product and -- I mean just judging by the overall market, where I see nicotine replacement market actually has been declining steadily and lot of these new e-cigarettes and all things are catching up, how interesting do you see this asset?

So, you can put a factor of 0.45 to IMS, so which brings it in the range of $60 million-odd topline. But there is potential, because e-cigarettes have run into some controversies as well. These products have been moved from behind the counter to in front of the counter. Having said that this is a store -- combination of store brand and to a lesser extent a full fledged brand. So, we'll see. We already have an OTC business. We have connectivity with the OTC players, OTC channels. And we will see where it goes.

Manoj Garg, DSP Merill Lynch.

Just continuing with the previous question, do we expect similar kind of deals more in the pipeline going forward? And just want to understand the overall thought process behind this, this deal with Novartis?

So, this was, as you know, GSK Consumer Care and Novartis Consumer Care merged and FTC mandates divesture of some assets. So this came up, as you know -- that primary asset is NicoDerm. NicoDerm isn't it? NicoDerm. And so this came up and we were one of the bidders and we went through. Having said that it is still to be cleared through the FTC process. So, while we are going ahead and we have closed the deal, but the process with FTC is yet to be completed. To that extent, it is not 100% complete.

And do we expect some more deals, similar kind of deals in the OTC segment going forward?

Yes, like any other company, we are on the lookout opportunistically, but unless it falls in our areas of focus, we would be choosy. But a lot happening in the emerging markets as well in various types of assets et cetera.

And are you sharing the financial details, like how much we are paying for these assets and all?

Not at this stage Manoj.

The last question from my side, Abhijit, like in the past, we kept on saying that incrementally we are filing 10 to 15 products, because our focus is basically more in the quality pipeline. But in the last two, three quarters, we have started seeing the ramping up -- ramp up in the filing itself and even in the first half you have filed around 11 ANDAs. So, do we -- we expect now going forward, probably we will have this filing run rate of around 20, 25 products annually?

Actually what we earlier said, about 10 to 15 were in launch. So, of course, your filings have to be higher than -- then you have to get approval and then launch.

So better than last year. I mean, last year we -- US, we filled 12, which is certainly much better than last year, but not 25 or something, which you are saying, but somewhere in-between, let's say it's 18 or so.

And the last question, if I can ask, just want to understand, like, the long-term aspirations in terms of -- about the margin guidance, like from the current level of 23%, 24%, where do we see the margin over the next two, three years?

So we expect to be 25%, approximately 25%.

Sameer Baisiwala, Morgan Stanley.

Just, Abhijit, checking on the Nexium settlement with the channel, if you had a strong case you would have won the court case. I mean why did you have to settle with the channel and then cooperate with them, which I understand would be against AstraZeneca and, say, Teva.

So basically we have given our depositions. We stand by our depositions and we will repeat our depositions. So basically this is our view, our facts, which we have with us and so on so forth. So your question was, if we have a strong case, why not keep fighting. The US legal costs, Sameer, are pretty high. And if you have an opportunity to sort of come out with no financial impact and we don't ever do a lot. It's the question of -- so we have chosen to come out.

Abhijit, just on this point, would your settlement be any different from that of, say, Teva, both were supposed to be [181 day], if I remember correctly. And would this then in that case be too different from Ranbaxy, it could all be addressing the same patents before and after which [were comments]. So would the three companies more or less not be in the same boat, at least you and Teva?

So, firstly, it wouldn't have the details of what Teva has or anyone else has, and you know better than me that I'm not going to share anything about our settlement.

And the second question, I'm not quite sure to what extent [this is going to address], but it looks like the proprietary pipeline is not too far away, maybe getting approved in 2016 sometime. So how are you thinking about the marketing and sales front end for this?

So we are there in US, as you know, Sameer, already with the front end sales force. So that is --

Especially for neurology and derms (multiple speakers).

Yes. So neurology and derm, and that is not -- see these assets, as we've said in the past, are not NCEs. These are unmet needs designed around properly, and then taking them through a logic and a full-fledged clinic. These are not [505(b)(2s)] as well. So I think the front end is not a very large concern for us, because I think the Company is familiar with creating value. Important thing is how does the filing and approvals go through.

Just to understand this clearly, but you would be required to -- these would be brand and you would be required to market it to the doctors.

Yes, of course. Yes, of course.

And just one final question on Habitrol. Is it a mature product, the way to think about it, and a steady cash flow or are there ways to unlock value in this?

So the first is right, but this is only the patch. And as you know, there are other smoking sufficient products in the market and we don't have that portfolio altogether, and there are ways to sort of in-license some of the other things like (inaudible) and few other things, so the portfolio can be also completed, but the larger part is the patch and it's not going to give a large value, but there is some growth there and there is some growth in the channel, increase in presence in the channel a little bit more.

Surya Patra, PhillipCapital (India) Ltd.

In fact, all my questions has been already answered. Just a clarification. See, for the Russia business, in first quarter, we have seen a constant currency growth of around 18%. In second quarter, we are seeing flattish number. So what kind of a growth visibility one should have for that region?

Surya, we have been over the years demonstrating healthy double-digit growth for Russia.

Yes.

We will not get into specific number guidance for the market.

But qualitatively, can you give some sense why, because we are seeing multiple concerns around that market. So can you give some qualitative sense about it, whether we can maintain the growth momentum there, that's with the geopolitical issues continuing and all that?

So, growth momentum would be there, but we are more concerned about the currency movement actually. And of course the sanctions are -- will have an impact on out-of-pocket purchasing and all that. So that's a little bit unknown, but otherwise, operation wise, we feel very, very confident to sort of move ahead of the rest.

And is it possible to [scale] the size of the OTC business in US and the kind of performance that they are doing, or what is the kind of growth that they have reported in the first half?

So annualized OTC business in US, Surya, is around $120 million, $130 million at the current scale.

And finally, is it again possible for you to say that, what are the kind of a budget that you have earmarked for your clinical trials for this biosimilar assets in US market?

What I already said is ratio which is in the Global Generics, API, kind of R&D, vis-a-vis proprietary products and biosimilars. Between proprietary products, biosimilars you know maybe at the moment, proprietary products is having little bit higher than total biosimilars, but the detailed partner breakup we'll not be able divulge, no.

Chirag Talati, Kotak Securities.

First question relates to the migraine product. We've seen that the FDA has come out with the possibility of the guidance being revised for the triptans product category as a whole. Do you think that can have an impact on your filing timelines or on your end points or will you be required to do additional trials?

So I think, specifically, we are not saying anything about any asset. We're saying one NDA filing is being targeted before end of the fiscal. Specific guidances and questions, Saumen mentioned that there will soon be an opportunity, I think some time earlier part of next year for the R&D Day, to ask these questions directly, but overall I think the journey is progressing at least on track at the moment.

Secondly, my question is -- I mean how did you go about selecting the therapies for proprietary products, I mean why neurology, it's not been one of the core strengths for Dr. Reddy's, it's a market that's highly competitive, you're competing against Zolmitriptan, an established brand with no field force, no additional products. So, I mean, what was the rationale behind going into some of these proprietary products or therapy areas per se?

The basic thing was to look at where there is a need which is currently not met properly or sufficiently, where there's enough opportunity. And based on that we have chosen specific -- and it is very limited number of [categories] that we are focused and within that we specifically picked up the product where we can focus on. But more questions on that, again, I would like you to just wait for some more time and you will get an opportunity on the R&D Day.

I guess my -- the point I'm coming to is -- I want to understand the capital allocation policy that goes behind some of these decisions, because to me it seems that you seem to be diluting your focus by going into many therapy areas with limited number of assets. So what I'm trying to understand is, could you have done better by filing fewer more of these complex generics instead of going into a neurology area?

So capital allocation decision that we are taking that will be across the BU and within the BU definitely -- we are not serving our complex generics [ambitions] at all from the point of view of being able to allocate capital. Now if we were in a trading off, then your question could have been more valid. We are not doing that.

Chirag, just to sort of -- this journey didn't start six months back. This journey is for quite a few years. We have invested into this for several years. So why should one pull the plug of having come so near. And we are quite focused, two therapies, not a very large doctor base in both these therapies. We have unmet needs in these identified. So why not?

Aditya Khemka, Ambit Capital.

So, first is on the PSAI segment. So we saw in the first Q your SEC filing disclosure that maintained that among the top 10 products, you had [Capacitiva] in there as a big product, which was contributing more and there appears to be some rationalization on the lower margin products of (inaudible) naproxen. So, just to understand the second quarter's result for PSAI better, is it still this one large product, which is sort of contributing materially to the sequential growth between 1Q and 2Q 2015?

There is -- as I mentioned, there is conscious structural change also contributing. Any business will have some large products, some smaller products, but overall I think directionally we are moving in a specific direction with a design. More than that, I don't want to sort of go deeper into it, but we will move with an acceptable gross margin when the things were much lower earlier. So it's unlikely we'll see the [low] margins.

Sir, I appreciate that. But my concern is that in first quarter of FY15 almost 20% of your PSAI revenues came from one product, right? And if this is your only product which has grown like sequentially from 1Q to 2Q and it might be currently contributing anywhere between 25% and 30% and this is a product which is under exclusivity in the US market. So once this product goes off exclusivity and faces competition and price erosion, is it that we are coming back to the sort of sluggish margins that we've seen in the past in the PSAI segment?

Maybe we can just give a one-line clarification that you can expect H2 performance to be better than H1 in PSAI. And with that we'll leave it there.

And sir my second question is on the US Generics, the North American Generics business. So we have seen a $35-odd-million sort of a decline sequentially. And as you mentioned, most of this impact seems to be that of channel consolidation, price erosion. If I just take it on a percentage basis, then we're talking about a roughly more than a 6%, 7% sort of a price erosion sequentially, between 1Q and 2Q. Is my assessment correct?

There is also the factor of absence of new product launch, which you'll have to see and we'll have new products where we have also improved market share.

That's right sir.

What is your question. You are (multiple speakers) what is going for us, because Abhijit already clarified the impact of customer consolidation is almost over.

So I understand that. But just to reiterate my question there, so our revenues are down 13% sequentially in the United States or in the North American generic market. And out of the 13% if majority is driven by price erosion in the base business, then I'm assuming at least 7% is price erosion. So my question precisely is that is this 7% totally entire base business price erosion a correct assessment?

Yes, its probably more than 7% actually. So like what else could be where one could lose base business. Yes, there are some launches of product that again basically leads to price erosion, because you'll defend your -- you take between channel consolidation and new launches, probably the impact of channel consolidation would be about 70%.

So, that's helpful. And sir one last question if I can squeeze it in. So I mean I saw the presentation and we saw some market shares being maintained between -- in the United States. again. between May and August of this year. And there's significant price erosion obviously in many of those products as we just discussed. So, it is about hanging on to market share this tight price erosion in the generic segment, but in the PSAI segment, we appear to be going in the opposite direction where they are letting go off market share for better margins. So I mean, is this slightly like -- is there a difference in the dynamics of the two business that leads us to believe that it's better to hold on to the generic business despite high price erosion, and in PSAI it is better to let go off a low margin business and sort of -- and look at higher margin products?

These decisions are dynamic and dependent on what status the business is in. It is not that we continue to sort of lose market share and give up share in PSAI or it is not also true that we continue to hold on and let [it erode]. These are the very dynamics. And these are -- for PSAI especially is a bit of a correction, which is being done. As far as generics business is concerned, again it's very, very case specific, it doesn't have to be that every time one has to hold on to market share, that's certainly not the way to operate in North American market.

And then I will put in that the market share expansion has actually offset some of the price erosion.

Ranjit Kapadia, Centrum Broking.

Well, my question relates to the European market. You've seen a negative growth rate, the Global Generics -- in both PSAI and Global Generic business. And I just wanted to know what is the management thought process for the turnaround of both these businesses in Europe?

So for PSAI, the Europe business is defined as where we sell, but not where it goes eventually. So there, depending on the customers and all that, there could be -- there are some changes, although the large part of it was also, you are right, with the downturn of new generics business, some of the customers are becoming more and more [rigid]. On the pure generic side, probably after a long time, Q-o-Q, we are flat. So we have been -- always been saying that we are trying to sort of look at the product mix and so with this flatness and new products coming in, we hope that at least on the bottom line, it's going to get better certainly in the second half. Having said that, as you know, it's probably, what, 5% of the total business, generics Europe business?

No, 4% business.

4%, yes, because it's a small business. So I don't know how much more details you would like to have on this.

Both the businesses are 4%, that is PSAI as well as the Global Generic business, but that makes 8% in the European market and if it is de-growing by almost 29%, it's a matter of concern.

So, it cannot continue to do so. There are -- that's -- it has happened. So going ahead, we'll have to sort of see where it goes from here.

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

Thank you all for joining Dr. Reddy's Senior Management for the quarter two fiscal 2015 earnings call. In case of any additional clarifications, please get in touch with the Investor Relations team. Thank you and good day.

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