Dr Reddy's Laboratories Ltd (RDY) 2016 Q2 法說會逐字稿

Ladies and gentlemen , Good day and welcome to Dr Reddy's Q2 FY 16 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 . Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Upadhye from Investor Relations team of Dr. Reddy's. Thank you, and over to you Mr. Upadhye.

Good morning and good evening to all of you. Thank you for joining us today for Dr. Reddy's earnings call for second quarter of fiscal 2016. 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 rebroadcasted 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.

Saumen Chakraborty - Chief Financial Officer

Thank you Kedar. Greetings everyone. Let me begin with the key financial highlights. For this section, all the amounts are translated to U.S. dollars at a convenient translation rate of INR 65.50, which is the rate as on 30 September, 2015.

I'm happy to announce the highest ever sales at EBITDA achievement by Dr. Reddy's in this quarter. Consolidated revenues for the quarter INR3,989 crores or $609 million and grew by 11% year-on-year and 14% in constant currency. Revenues from our Global Generics segment of $500 million and grew by 15% year-on-year, despite currency challenges faced by emerging markets geographies.

The growth story is primarily led by U.S., Europe and India. The growth in U.S. was aided by new product launches including Habitrol. Europe business grew on the back of recent launches and India business continued its growth journey, which also included full quarter contributions from the brands acquired from UCB.

The revenues from our PSAI segment was $90 million and marginally declined year-on-year by 7%. Consolidated gross profit margin for the quarter is versus 58.5% in the corresponding quarter of the previous year. Corresponding values for Global Generics and PSAI were at 67.3% and 25.8% respectively. Current quarter gross profit margin is indicative of the improved product mix and operating leverage of the manufacturing overhead. SG&A spend including amortization for the quarter is $169 million and marginally grew by 4% year-on-year. Overall, we are able to derive the benefit of operating leverage as the SG&A as a percentage to sales came down to 27.7% on the back of various cost control initiatives that we have referred to in earlier calls.

We continue to invest aggressively in R&D. R&D expenses for the quarter were at $68 million, representing 11.2% to revenue versus 11.5% in the corresponding quarter of the previous year. EBITDA for the quarter stands at $174 million that is 28.6% to the revenues. Tax rate for the quarter is 21%, effective tax rate for the year is expected to be in the similar range.

Key balance sheet highlights are as follows: Our working capital marginally increased by $7 million over that of the previous quarter and is largely in line with our expectations. Capital expenditure for the quarter was at $45 million. Our net debt-to-equity ratio is 0.02.

Foreign currency cash flow hedges for the next 18-months in the form of derivatives and loans for US dollar are approximately $300 million, largely hedged around INR61 to INR65.4 to $1. In addition, we have balance sheet hedges of $135 million. We also have foreign currency cash flow hedges of RUB960 million at the rate of INR1.16 to RUB1 and EUR6 million largely hedged around INR75.47 to INR77.185 to EUR1 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. Overall, we're quite satisfied with the performance of this quarter, considering the multitudes of challenges faced across the businesses. US business continues to face competitive headwinds on base portfolio coupled with lower number of approvals. However, we were able to sustain the momentum in injectables and other key molecules, which supported the performance.

Emerging market geography sustained the performance despite the continuing sluggishness in the respective markets. Second quarter performance in Russia was healthy, compared to the significant year-on-year decline in the first quarter. India business continued its predictable growth journey.

Now, let me take you through some of the business highlights for each of our key market for this quarter. Please note that in the section, all reference to numbers are in respective local currencies. Our North America revenues are $290 million and grew by 26% year-on-year. This can be attributed to low base effects to some extent and sustained pricing and market shares for most of our molecules. As you are aware, we launched esomeprazole in this quarter, although revenues will start reflecting from next quarter onwards.

In view of lower number of launches in the balance part of the year, we need to worry of competitive pressures on the base portfolio. On the OTC side, Habitrol is well integrated now and continue to target new accounts. During the quarter, impact of macroeconomic factors prevailed on most of our emerging market geographies. In this situation, the team is focusing on broadening of product portfolio in existing countries and entering new countries through leverage of our global portfolio.

Russia revenues are RUB45 million for the quarter and declined 29% year-on-year. However, it grew by 11% year-on-year in constant currency, which is a significant change compared to 22% year-on-year decline in the first quarter. On Venezuela, we continue to be cautious and have calibrated our supplies. The focus is on building a business model, which can outlive the current macroeconomic situation.

India business revenues are INR546 crores and grew by 14% year-on-year. Portfolio acquired from UCB has been fully integrated into our supply chain, because of transport strike in the quarter-end and a weekend around the date of cut off sales, some part of the dispatch spilled over to the month of October. Normalizing this impact, the overall growth is very satisfactory and in line with the recent trend.

PSAI business posted revenues of $90 million with a marginal decline year-on-year. You would notice, the sequential gross margin improvement of approximately 200 basis points. We are building our order books, we're calibrating the business in an attempt to derive more value out of it. Before I end, I would like to give an update on our API facilities. We have learned that during the month of October, two of our API customers received ANDA approval rescission letters from USFDA.

The ANDAs of customers were approved in January and February 2015 post USFDA's inspection of our API facilities. Each rescission letter cites that our API facility was classified as potential OAI on the date of approval of ANDA. We continue to cooperate with USFDA in connection with the pending 483 observation and await further advice from the agency on this matter.

We take the matters of E&P compliance very seriously and investing significantly in terms of resources and managerial bandwidth to strengthen our quality processes, operations and culture across the organization. With this, I open the floor for questions and answers.

(Operator instructions).

Balaji Prasad, Barclays Capital

Hi, good evening, everyone. Congratulations on the results. My first question is on Srikakulam, considering that the ANDA approvals have been rescinded for your customers, does this change your thoughts on the progress that you thought you had achieved or potentially where you are thinking of approaching the FDA for reinspection?

The answer is we don't know. This is for the declaration, we have received this in the month of October and we thought it is important to sort of let everyone know. These were approved after the audits in these facilities and out of the two, this is one asset we ourselves did not get approval. So we are pleasantly surprised to see someone else got approval, but I think this is being corrected. And hence the rescission letters have come, but the rescission letters clearly mentioned potential OAI, which is certainly a concern for us, but we continue our journey, we are updating US FDA. We are in terms of resources as I said, putting in significant resources in improving the systems and quality, but when will the audit happen, what is the next course of action, really can't comment on it.

Thank you. Can you also just help me understand Abhijit, if what exactly does FDA mean by potential OAI. They have three levels of, classification of a inspection observation, where does that potential OAI stand in that sense? Is this an internal FDA classification?

So OAI stands for Official Action Indicated, the potential OAI, which basically means that they are considering the observations, see this is a standard term, this is not something which is specifically designed for other things. So in any case, you are aware that we are not getting approval from the facilities and so in that context that classification is expected, how they will move ahead in future is more important, which is still unknown to us. We are engaging with them and at the moment, we can't comment on it.

Actually, you are asking where does it stand actually if it is voluntary, it is better.

Yes, Saumen, so what I was trying to understand was if this a new classification or something that the FDA uses internally and -

They use internally.

Yes. So there is VAI, which is Voluntary Action Indicated and there is OAI, which is Official Action Indicated, these are the normal terminologies, which is not anything specific for us.

Understood. So my second question is on Venezuela, I seem to see a change in your stance before where you were quite willing to grow albeit [calibratedly], now we're seeing that you are more cautious, what kind of drives that change and secondly on Venezuela itself, where are your current receivables now and how was the progress in the last three or four quarters?

So the cautious approach comes from the fact that we have not received anything meaningful after our last discussion, which automatically leads us to be cautious and what we have decided is I had mentioned a figure that we will not exceed a certain level. We are sticking to that and at the moment we will not be producing anything more, but we have some stocks at the moment in a calibrated way, we are selling in the market and if you don't get remittances before that runs out we will have to sort of slowdown or even phase out.

But the important update, which I want to sort of give you in this context is, we have signed a deal with, actually (inaudible) part of government of Venezuela on some critical care products which they want tech transferred into one of the facilities, which in turn will reduce their healthcare cost and also provides us a new line of business, which of course will be government assured business. And we have just signed the deal and we will progress in that direction if that helps us in recovering the money which is not being remitted then the whole thing starts all over to again, but we are still optimistic, but much more cautious from our last update.

Great, Abhijit, that helps. Just on that question itself, I asked have the receivables progressed in last couple of quarters?

Currently, it is standing at around INR61 million.

Nimish Mehta, Research Delta Advisors.

Yes. Thanks for taking my question. First of all, if you can just explain the sharp increase further in gross margin that will help, I mean is it because of the currency where we have seen US dollar appreciating quite a bit quarter-over-quarter or what was it?

No, I think largely, firstly is the strength of the portfolio, the US assets, we've been fortunate to have sustenance of the portfolio and some of - there were launches in second half, few of them built shares, there were some products where they gained market share, of course consolidation of the channels have led to some erosion as well, but broadly the margin consolidation is business oriented, there are few smaller issues which have also helped, but largely it's business oriented.

Business mix also contributed as well as there has been some leverage out of the manufacturing overhead and specifically yield improvement and all has also contributed.

Further real improvement over the last quarter.

Yes.

Yes, understood. Okay, second on the US pipeline two questions again, we've seen that the case against Novartis on Gleevec has been settled. So if you can please help us know the date of the launch of that product, that will be great.

Date we will not be able to give and public domain Sun and us we have settled. Certainly being the company, having settled after Sun the date is a few quarters after Sun's launch, but beyond that we'll not be able to give you an exact date.

Understood, and do you expect this to be a potentially big launch for you as in you expect more competition, I guess some color would be...

It depends on how many other people are - there are other filers, and I'm sure they are negotiating, there would be. We don't know, just not in public domain and there could be other settlements as well and if everyone settles at various dates then as usual like in all generic assets, the value will be lower than what we think, but certainly it's a big product for Sun, but for us I can't comment.

And will this be bottlenecked because of the Srikakulam facility or this is from a different facility?

No, it's not. The API is from another source, Indian source and no, the answer is no.

I see, and the second product I wanted to know was about Fosamax Plus D, that is alendronate and cholecalciferol, where again there are no patents, but any timeline regarding your launch would be helpful.

I'm not sure, are you talking of North American market?

Yes.

So Nimish, we won't be able to comment on the product.

But I mean, is it going to be an important product for you. Some color would be good.

They are also discussed separately which--

Not to the best of our knowledge no.

It won't be an important. Okay, thank you very much. I'll join back again.

Thank you. Our next question is from the line of Prakash Agarwal from Axis Capital, please go ahead.

Yes, thanks for the opportunity and congratulations on good set of numbers. A question first on the US business, you talked about some after share gains, but if I could see your key assets, which is the injectable portfolio, Dacogen and Vidaza, there as per the market share it seems like market shares have dropped. So are we seeing that or the other ANDA approvals have seen market share gains and maybe injectables are coming off, if you can throw some light there.

No Vidaza, the drop is fairly negligible actually. In fact, you can read it as just, error in the sort of quarter-to-quarter but Dacogen yes there is some drop, but having said that we're fortunate that we are where we are actually. So it's still pretty high and sustaining so let's see how competition comes in and there are of course other few products which have done well, Sirolimus is scaling up, few other products as well, yes.

Okay and would it be fair that there has been price hike across the portfolio given that not much of approvals, but still we are sustaining this run rate despite some base business price erosion due to channel consolidation.

Nothing significant.

Okay thanks, and secondly moving to Russia, we saw very positive commentary about 11% constant currency growth and some demand coming back. So I mean exactly what's happening there, our understanding was due to oil crisis, demand has also been weakened. So are you seeing demand coming back or it's more of channel filling again and it's one time or is this sustainable constant currency growth.

So I think the turmoil is over, that's the good news. There was complete chaos when the currency sort of broke the barrier and sort of got devalued. And then that led to a series of confusion in the market, the retail trying to increase price and basically on a wallet, which was getting leaner it was a double whammy. So all that the channel is corrected, we have increased the channel connect and the sanity is back and we always did reasonably well in Russia.

Having said that, Q3 is still Y-o-Y will see the currency devaluation, but coming from quarter four, I think we will see the usual business. Having said that, the base naturally will have to get calibrated within the new dollar rate but certainly the geography is getting back.

Understood. Secondly on the Nexium opportunity, I saw some comment from the management about the expectation, so if you could give us broad ballpark how do you think about this asset because believe that some competition is building up?

So being the fourth player, we have just about fare share, erosion has been there no doubt, I mean certainly we would have liked to get in month back, which probably we would have had the Srikakulam thing not come up, but having said that it's still a sizable asset for us, pretty sizeable, and hope that it sustains with more players coming in, hope it sustains.

Sir, I mean there is a comment about $50 million?

North of that of annualized.

Annualized. Okay and last question on the SG&A side we have seeing substantial improvement, I mean, is there any currency related savings, I mean how should we think about it, I mean because the business is growing across the board. So how should we think about SG&A going forward?

Some of the things is of course a result of all the initiatives we have been taking in terms of cost control. As such if you compare with our peers, our SG&A cost as a percentage of sales always has been on the higher side. So there are still lots of opportunities in terms of improving the SG&A productivity, we are midway, but we are taking actions on all front, in terms of manpower, on sales and marketing expenses, on travel, freight, on multiple aspects we have been trying to improve the things. So far we are happy there is 200 basis points improvement in terms of SG&A as a percentage of sales.

And this is sustainable.

We hope so.

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

Neha Manpuria, JP Morgan.

Thanks for taking my question sir. My first question is on the comment that you made that on the EM front we are probably looking at one broadening the portfolio and also possibly entering new markets. So two part question there; one, what are these new markets that we are looking at? And would that strategy be more organic driven or are we looking at potential M&A to build that presence in your markets?

So two markets, which we have already sort of gone ahead in an organic way to build a little bit of skeletal team and filing product is Brazil and Colombia, which largely will be targeting the institution sector, so banking on the oncology and other institution product which we already have in the global portfolio. So that's one organic approach.

But having said that, we will certainly look at inorganic opportunities. To supplement that, nothing to report as of now. Apart from that on emerging markets, I think we are trying to look at also biosimilars now trying now that we are beginning to have more data on some of the products and some of the regulatory bodies are sort of willing to accept the files. We would scale that up, may not be meaningful in a very short-term other than Russia maybe in few quarters, but that's a key initiative in the emerging markets.

Got it and second on the US, if you could just highlight what has been the base business size erosion that we have seen so far versus last year given the ongoing consolidation, et cetera?

Reasonably steep, in the sense certain products have been - some products wherever there is competition coming in the one being I can mention (inaudible) has sort of substantial erosion of values, some of it will play out in the second half. Apart from that, the channel consolidation is also leading to fair degree of steeper ask from the channel, which is becoming a bit of a challenge for not just us, most generic companies. So all that is playing out, so there are some headwinds for sure for all companies.

So would this be in high single-digit, would that be a fair assumption or probably higher low double-digits?

I wouldn't put a figure, you can put - probably you are talking to most companies, draw an average from what you had between the lines.

Sure and my last question, you highlighted some amount of slippage in the India business into October would you want to give some quantum as to how much this was?

So, roughly what we are reporting as 14% would have been close to 20% and that equivalent amount will flow into Q3.

Surya Patra, PhillipCapital.

Congratulations for the good set of numbers, just a clarification whether we have seen any price correction sequentially in the US portfolio?

Happening product-by-product, depending on whichever product is seeing completion with the GDUFA some of the old files and of course they are not under GDUFA but there are approvals coming up which are pretty old once in a while. Whenever that falls in the category, whichever companies in, it is either sort of a correction and retention of the account or giving up the account. So those things are happening. So the impact is varying from companies and so far we have been by and large except for the products we mentioned and couple of other smaller products, but going ahead this will intensify I'm sure.

Is that the broader base business there? Can you say that what is the kind of the decline or whether you have seen or not seen sequentially price correction for the boarder portfolio, mature portfolio?

Yes, to a certain extent it is happening, again product-by-product. So to a certain extent it is happening. It is happening to a certain extent.

And secondly whether we have apart from the Srikakulam API unit whether we have any other API unit, which is capable of developing or manufacturing this injectable products, sterile products?

No, so there is nothing about Srikakulam where this intjectables still have to be manufactured. APIs are APIs, so they can be made in whichever site. Now if it's an oncology product, we have another factory where there is oncology product, the third oncology factory is being set up in our SEZ which is due for audit hopefully in six months to eight months time. So all these are flexible and fungible to some extent.

Last quarter what was that comment that we had made about the Srikakulam unit, saying that after having a site transfer application for five odd ANDAs..

Mr. Patra your voice is not audible sir.

Am I audible?

You will need to come a little closer.

Yes okay. See in fact I'm just trying to understand one thing, last quarter we have commented one aspect that after having filed A site transfer application for five odd ANDAs or drugs, so we're seeing that the Srikakulam unit had been de-risked. So whether considering this recent development on that particular plant front, so we're remaining or we're maintain the same stance?

I don't exactly recall five, but we are for the future approvals, continuing to site transfer, but we're concerned about - so irrespective of de-risking, irrespective of any issue, we have to be mitigate and move on with life and so there is certainly concern, as a company we want to be ahead in terms of all compliance aspect. So this is an area of concern for us for sure. Mitigation and all that is a separate issue in terms of de-risking, those things are going on I mean that's part of business I guess.

Just last question on the Aloxi. We have recently settled the Aloxi ANDA, the generic Aloxi ANDA with a innovator..

We haven't, you're talking about the 505J. We've two fives, one is 505B2 and 505J yes.

I believe the ANDA opportunity is still there in the second half?

It's not in the second half, that's what originally a couple of quarters back is what we thought the litigation is getting delayed and as much as we are trying to bring it up, but everything is not in our control. So we would like to sort of bring it up as and when possible, but certainly second half is not possible, no.

So that is what - definitely it is much before the settlement date for the generic product?

Well, it depends on the litigation actually. If you can bring it up and we think at least in our view it's a good thing to pursue, very strong thing to pursue but till it comes up we wouldn't be able to comment on it.

Okay, any update on Xeloda or Diprivan, why we're not getting the approval for that?

Xeloda is CTO VI impacted, I probably mentioned last quarter. So it's impacted because of CTO VI.

And Diprivan?

Yes. So the file is in progress. Again, we can't really comment, but maybe two quarters more if everything goes okay.

Girish Bakhru, HSBC.

First of all on the Europe side, given that we've interaction improving on back of few launches, can you share some color on if there are more launches planned for Europe? How is the pipeline looking there?

We're selective, but there was a time when we were trying to launch anything and everything going after [tender] business, so all that has gone, so Fondaparinux could be the next one and couple of other who follow in next couple of quarters.

Where does COPAXONE fit in Europe?

The guidance is not very clear, we are not pursuing COPAXONE for Europe, let's sort of try and sought things out in US first.

But is it true that you have launched that in some of the emerging markets?

Not the product.

So you are saying the Europe you are not at all pursuing at the moment?

Not at the moment.

The second one was on the Fonda again, I mean you recently bought the IPR, what was the rationale behind that?

Because there WAS a profit share with this company and we thought the profit share was in the range of middle to high single-digit. So compared to that we thought the value we paid was reasonable. And more importantly I think we wanted to move on, so rather than we wanted to sort of take the assets to various other markets and it's an interesting asset in all emerging markets. So try and derive value out of this.

Right and if you could also I mean update on the NDAs, filings, I mean given that PDUFAs are approaching closures. So any update on that front?

On the site?

On the proprietary products?

Yes. So the asset is progressing, so far nothing negative to sort of report. One asset has a little bit of litigation, but otherwise assets with the agency is progressing well. I think January, February should be the time we would probably share more about it.

And you're confident again that Srikakulam will not have any bearing on the event?

Not these assets, these are all US CMOs. So none of these three assets.

Anubhav Aggarwal, Credit Suisse.

One question Abhijit sir, can you update on progress of COPAXONE application with FDA? And any potential delay in Srikakulam clearance, will it impact the progress or you have already site transferred that product?

So in the scheme of things, the bottleneck is resolving the characterization expectations. We are still working on it, it will take some more time, site transfer can be faster and easier and being planned, but I think in the scheme of things the bigger the science challenge is the bottleneck at the moment.

Do you expect, I mean, roughly I know it's tough, but can we even get approval of this product in FY17?

That I wouldn't be able to comment, we will take certainly at least couple of quarters to sort of resolve the issues and then we respond and then let's see how that goes thereon. So two, two and a half quarters at least for us to resolve and hopefully respond.

Okay that's helpful. Second question on Aloxi 505B2, let's say if you win the litigation it's approved to be launched, will it be substitutable product?

So it's in litigation right and I wouldn't comment on any of these things at the moment. We are pursuing it actively, rigorously, but again litigation date is not in our control, we are pursuing it.

Let's say it's approved.

Understood your question, understood whether it is equivalent or not, we hope it will be. So that's an agency decision, so we'll see.

And just one more clarity that's for Saumen sir, on SG&A year-on-year increase is 4%, but if you can just roughly indicate what would be the constant currency increase in SG&A?

1% difference would be there.

Ranjit Kapadia, Centrum Broking.

Hearty congratulation for good set of numbers. My question relates to the FTFs of opportunities, if you can throw some light, what is the potential market size for this?

And my second question relates to the Indian business, that we have integrated the UCB business and we said that we have - 6% of revenue have been delayed because of the transportation strike. So what sort of growth is expected in domestic market going further?

So the first question will be a difficult one to answer because depends on which product you are talking about, I mean not that we will be able to immediately give you a percentage or whatever the expectation of the asset, but FTFs can be multiple entry FTFs, or FTFs can be single entry or a dual entry, all depends on which asset, which product we are talking about. But overall this year it's sending your question I think this year we will be filing at least 30% more products than what we did last year. Coming to India, I can tell you about this quarter, this quarter read 14 more, close to 20 based on the spillover, Q3 going again I wouldn't exactly give you the percentage growth, but momentum is strong.

Sameer Baisiwala, Morgan Stanley.

Abhijit is it possible for you to tell us what the outlook for the US business over next few months and few quarters in terms of new approvals?

Not very exciting, and as I have already mentioned, I think there will be hopefully a few approvals, but you know well the US market it's not a number of approvals but what approval actually. So I think if you don't have headwinds in terms of competition it's probably the best tailwinds we can have.

Okay. If I remember correctly, a quarter back you said that you have three to four niche products for which you may get approval and they are not linked to Srikakulam and with niche I imagine they are meaningful product does that stand or that doesn't?

Some of them are litigation, one we just discussed. So the litigation is getting delayed. Initially we thought some of those will come up this year, but litigation is getting delayed. There could be one or two approvals, but as I said, is it extremely exciting, probably not in the second half.

And when do you expect into get better, is it four quarters away or what would you say?

Next quarter is not bad, there are some P3s, which I can't discuss, P3s and P2s which are not in public domain which is not bad but again, Sameer, I'm shy of really predicting anything because there is so much of uncertainty on approvals et cetera, but next year is not really bad.

And there is some couple of products, Abhijit, one is on Gleevec, you said that you have settled to launch few quarters after Sun. I would have said you had said two quarters after Sun, no?

I never said two quarters.

No, no you said few quarters?

I said few quarters. So certainly not close to Sun it's beyond that I wouldn't say, there is a quite a reasonable few quarters gap between Sun's launch and our launch. And there could be others between as well, I don't know, because not everything is in public domain, there could be other negotiations, can't comment on that, but this is great product for Sun as I said and I don't know what it'll be for us, but let's stay optimistic.

Okay and second is on COPAXONE. Are you doing the characterization work and site transfer simultaneously? Or would you do site transfer after two quarters?

The bottleneck is characterization, we're working very hard on it, not just internally but through several partners and [indiscernible]. And we'll get there. Site transfer would hopefully not become the bottleneck.

Okay and just one final from my side if I may. On Srikakulam the existing business that you are doing from there and I imagine there are couple of very important products, have they been derisked?

Existing business?

Yes.

One or two, yes, but that's not something which is not immediately for consideration but certainly one or two, yes.

Abhijit just on that, if you get an import alert over there, what could be the magnitude of loss of existing business that you are running currently in the US?

So wouldn't quantify that, Sameer, certainly not because, this is not probably the right time to think in that direction, I thought you are a well-wisher. So let's do the right things, let's sort of work on it and then let's see what happens.

Manoj Garg , DSP Merrill Lynch.

Good evening to all of you and thanks for taking my question. Abhijit like apart from Srikakulam, do we have any pending 483 on any of our other facility as of now?

Yes. So there are pending 483s on few other facilities as well, and being addressed, we are engaging and being addressed.

Okay. And the second thing like this is for Saumen, if we look at in terms of Venezuela and we see the sequential numbers, I think that hit which you have taken on account of the exchange conversion is almost 40% of what we have taken in Q1. So is it fair to assume that probably the supply, which was done this quarter in Venezuela was 40% to the supply which we have made in Q1?

Yes, supply has been less, I will not say exact proportion, I think supply has been less.

And the last question from my side, ex- UCB in India how would have been the growth for the base business, adjusting to whatever the postponement of supplies or dispatches, like we are seeing the 20% growth including UCB. If we exclude UCB, what could be the growth?

It's quite different and UCB we had, when we acquired we had in mind some kind of annualized sales about INR150 crores. So we are proceeding in the right direction to get that.

Chirag Dagli, HDFC Mutual Fund.

Thank you for the opportunity. Have we taken any price hikes in Russia or in the CIS countries?

Yes, I mean one or two megabrands we have. We have.

So when you say this 11% constant currency, how much would this have been impacted by in terms of pricing?

Mostly it is volume growth.

Yes, I mean there is some pricing, I mean exact percentage I will not break it up, but it's a mix of volume and pricing.

But you have been able to take some price hikes?

Yes, I mean look the rule is, the law is EDL, essential drugs cannot be price hiked, but non-essentials, you are free to take price hikes.

And second question was on Gleevec, post the 180 day or whenever you are expected to come in the market, do you think in your assessment this will be like a multiplayer market, meaning more than three, four, five players in the market or do you think there will be a phased out kind of genetic entry?

Enough data is not there in the public domain, there are filers we know, so what's happening and the negotiations etc we don't know. Some people may be pursuing litigation, we exactly don't know, the scenario has not been clear. Certainly I mean, there will be more players for sure, but I don't have the answer.

In your assessment, how many filers would be there?

Again four to five at least I guess, but when and how they would come in, I can't really say.

Prashant Nair, Citigroup.

I had a question on the PSAI margins, I think you alluded to it briefly in your opening remarks, so how sustainable are the levels achieved in first-half? The reason I am asking you is, I think last year also first-half was 20% plus and then it dipped in the second half. So is this seasonal or do you think this can now sustain at these levels?

No, the direction of the business has changed. We are approaching it from a different angle, different strategy, different construct. So I wouldn't think that the margins would drop. We would continue to make it value accretive. Important thing is to build sales further on the back of high margins so that part we are still working on, but certainly we will not look at the margins dropping.

All right and just one more question on Srikakulam. In view of the recent development, I mean would you want to start looking at site transferring some products, which I would say further out on the timeline, I mean are you at stage where you are beginning to look at that or you think you still want to wait for some more time and see what the FDA response is?

So irrespective of what we want there is - based on bandwidth that is the main bottleneck, so we'll keep doing on priority I guess rather than long-term, mid-term, short-term and such things. So based on our bandwidth we are continuing to address things. Now naturally depending on asset, the priority will change and hence the focus and the amount of effort will also change. So we will first focus on the meaningful ones and then see where it goes.

Nitin Agrawal, IDFC Securities.

Thanks for taking the question. Abhijit, on the channel consolidation bit that you alluded to earlier during the call, I mean in your experience what you have seen, I mean are there any specific products which have been subject to more pressure in the consolidation or is there any particular characteristics of the business is getting more impacted in this process?

Well channel consolidation is not product specific, it is product agnostic. Channel consolidation is the negotiation of the channel with supplier companies on different terms, more steeper terms of discount and so on and so forth. So that would be on the portfolio of the entire business.

But you have not seen instances where certain kind of products, I mean product specific is pretty much across the portfolio for everyone?

Yes. I mean the discussion is between the channel and the supplier so, it'll be on the whole, the business one is doing with that specific channel, whenever that is happening.

Thanks and secondly on our business I guys over the last four to five quarters barring the recent approval for esomeprazole you haven't had too many approvals especially on some of the larger products and we don't seem to be looking forward to too many of them really coming through the next couple of quarters also. So apart from the litigation led delays, which have happened in certain big products or some products just probably got delayed because of Srikakulam. Are there any other reasons why are we looking at the launch schedule being a little softer than it was say in FY 2015?

Yes, it is based on - as I said second half is not going to see very exciting launches, but having said that as I just mentioned I think (technical difficulty).

Mr. Agarwal if you could repeat your question please.

No I just--

Just for the interest of time, I was saying that while second half is lukewarm a little bit but we are still optimistic on the portfolio next year as I said. I think we have a [test], it all depends on how we get approval and depends on which approval. So by next year I wouldn't say is that bad, it's going to be okay. Does that answer your question?

Yes, this is helpful. And I guess the only, something would be resolution of FDA issues which were there in the ongoing facilities.

Yeah, I guess so. I think that's the biggest thing on our mind and we are working hard on it.

Fathima Khan, Khambatta Securities.

So Darryl, now we have last two questions, isn't it?

Yes, sir.

Okay.

You could go ahead with your question.

Could you please elaborate on Dr Reddy's biosimilar opportunity in US considering potential competition from South Korea and U.S. companies?

Biosimilars are few years away still in terms of the Phase III data, the studies are commencing and but it's still a few years away. The more important thing I wanted to share, which we are all excited about is how do we sort of globalize the portfolio in the emerging markets. And I think maybe in hindsight we could have moved a little faster a few years back, but better late than never and we are putting efforts trying to see what we can do in making this reasonably meaningful in next two years to three years.

Okay but Dr. Reddy's was planning to spend quite a amount of R&D expense in the biosimilar segment and how do you expect to monetize this going forward?

I think this is certainly going to be useful and still personally I'm very, very optimistic about the potential of biosimilars even in the emerging market and when correctly monetize and correctly marketed I think the R&D expenses can be recovered even for emerging markets while with the regulated market (inaudible) partnership continues and in due course we will have benefits out of it, but on total percentage in terms of R&D we are not increasing anymore, I think. Saumen you want to comment on the R&D expenditure on biologics?

No, biologics as a proportion, biologics still is around say 15% of total R&D spend that we have and that is continuing at that rate only and as what Abhijit said even in emerging market itself where there is a huge focus going on, we would more than recover that R&D spend that we had in biologics and anything we get [October] in U.S. and Europe that will be really will be a bonanza for us, but that is still a few years away.

So what is the count of our market size which you are looking at in the emerging markets for biosimilars?

Yes, the bigger markets we will look at, we will look at Russia, we will look at out licensing on all the bigger markets. The ASEAN countries have large populations, these are drugs which are needed in all countries and government eventually will make sure all patients get the drugs, there is always cost pressure especially in oncology area and I think all this will add up meaningfully, but how we execute is a more important question, the opportunity is there.

Balaji Prasad, Barclays.

Thanks for taking my question again. Just two things; one would be intangible assets seems to have gone up significantly this quarter. What is the composition of this rise and secondly, you said that you reclassified one product from generics to proprietary segment, I presume that this is not large in size, am I correct in understanding so?

So, of course, we had Hastech (Technical difficulty) and the generics to proprietary products is that brand that we are seeing for isotretinoin in generics, so that is not a very significant amount.

Saumen, I missed the first part of your response on the intangible asset composition?

Hashtech deal that we announced of course IT product, that has gone into intangible.

Okay. Does it fully explain the rights?

So Balaji if you are talking about increase in amortization year-on-year that is on a count UCB and Habitrol coming in now. In the last year, we didn't have UCB amortization and we had -

Speaking about the intangible assets in the balance sheet Kedar?

Which is Hashtech, Balaji which is [Technical Difficulty] for proprietary products.

Thank you. I would now like to hand the floor over to Mr. Kedar Upadhye for closing comments. Over to you sir.

Thank you all for joining Dr. Reddy's senior management for Q2 FY16 earnings call. In case of any additional clarification, please feel free to revert to us. Thank you and good day.

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