Dr Reddy's Laboratories Ltd (RDY) 2016 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Limited's Q3 and FY16 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions). Please note that this conference is being recorded. I 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. Thank you for joining us today for Dr. Reddy's earnings call for the third 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 about the Safe Harbor. This discussion will contain certain forward-looking statements which are based on management's current beliefs and expectations and involve a number of known and unknown risks and uncertainties that could cause our future results, performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements. For more detailed information on the risks and uncertainties associated with the Company's business activities, please see the Company's Form 20-A for the fiscal year ended March 31, 2015, and Form 6-K for the quarters ended June 30, 2015, and September 30, 2015, and our other filings with the Securities and Exchange Commission.

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 financing highlights. For this section, all the amounts are translated to US dollars at the convenience translation rate of INR66.19, which is the rate as of December 31, 2015. Consolidated revenues for the quarter are INR3,968 crores or $599 million, grew marginally by 3% year-on-year. Revenues from our Global Generics segment of $507 million and grew by 7% year-on-year, despite currency challenges faced by emerging market geographies and constrained operations in Venezuela.

The growth story is primarily driven by US, Europe and India. The growth in US is aided by sustainable performance of the base portfolio. Europe business grew on the back of launches and India business continues its momentum, which was also benefited by the full-quarter contribution of the brands secured from UCB. Revenues from our PSAI segment of $77 million and declined year-on-year by 17%. This reflects in part, the impact of delay in dispatches on account of the ongoing remediation activities related to US FDA's observation.

Consolidated gross profit margin for the quarter is 59.5% versus 58.2% in the corresponding quarter of the previous year. The increase in margins reflects the continuing high quality of our commercialized portfolio in US. Corresponding values for Global Generics and PSAI were at 65.6% and 17.4% respectively. SG&A spend including amortization for the quarter is $182 million and grew by 8% year-on-year. During the quarter, the Company settled an ongoing patent litigation with Novartis on zoledronic acid. Consequent to this settlement, we have accrued $5.46 million as a charge towards past sales. Normalized for this charge, the balance increase is largely due to remediation costs and certain routine items related to manpower and other spends.

R&D expense for the quarter were at $62 million, representing 10.3% to revenues versus 11.2% in the corresponding quarter of the previous year. The expense have declined year-on-year, largely due to the receipt of our share of development costs and other contractual amounts from Merck Serono for biosimilars development program. In continuation with our practice to translate certain net monetary assets in Venezuela subsidiary at the SIMADI rate, a charge of $9.6 million has been considered during the quarter. Balance continues to be recorded at a preferential rate of VEF6.3 per USD.

As discussed earlier, we continue to evaluate the arrangement entered into with the Government of Venezuela, which may facilitate the repatriation at the above-mentioned preferential rate. If future developments indicate that the CENCOEX rate is no longer appropriate, this could have a significant impact on the consolidated financial statement of the Company.

EBITDA for the quarter stands at $153 million, that is 25.5% to the revenues. Tax rate for the quarter is 23.6%. Effective tax rate for the year is expected to be in the range of 21% to 22%, as we have mentioned earlier.

Key balance sheet highlights are as follows. Our working capital marginally decreased by $7 million over that of the previous quarter and it's largely in line with our expectations. Capital expenditure for the quarter was at $47 million. As on December 31, 2015, we have now a net cash surplus of $68 million. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans for US dollars are approximately $370 million, largely hedged around a range of INR64.4 to INR69.45 to the dollar. In addition, we have balance sheet hedges of $345 million. We have also foreign currency cash flow hedges of RUB470 million at the rate of INR1.06 to the ruble and EUR8 million largely hedged around INR75.31 to INR81.03 to the euro maturing over next 15 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 in this earnings conference call. I believe that our financial performance in this quarter is satisfactory, despite a number of internal and external challenges that we faced, and also considering the fact that compatible quarter of previous year had a high base in terms of both sales and profitability. As you would have seen, the base business in key geographies has been quite resilient, which played a major role in quarter's performance. Considerable amount of time and efforts are being devoted towards the important remediation and risk mitigation activities pursuant to the US FDA's reservations.

Now, let me take you through some of the business highlights for each of the key markets. Please note that this section, all references to numbers are in respective local currencies. Our North America revenues are $298 million and grew by 11% YoY. Key molecules contributed meaningfully to the quarter's performance in absence of any notable new product approval. We experienced sustained pricing and market shares across our key molecules. As you're aware, we relaunched aripiprazole towards the end of December and are actively working towards gaining market share. In view of lower number of launches in the coming quarters, we need to be watchful of competitive pressure on the base portfolio. On the OTC side, Habitrol is well integrated now, and we continue to target new accounts.

During the quarter, macroeconomic factors continued to impact most of our emerging market territories. In this situation, the team continues to focus on broadening the product portfolio in existing countries and entering new geographies by leveraging the current portfolio. Russia revenues are $47 million for the quarter and grew by 5% YoY in constant currency. In Venezuela, we continue to be cautious and have significantly calibrated our supplies. Over the past couple of quarters, there has not been any meaningful repatriation of funds allowed by Local Exchange Control Authority. As explained by Saumen, we remain cautious in our approach towards the geography.

India business revenues are INR581 crores and grew by 34% year-on-year. Portfolio acquired from UCB has fully integrated into our supply chain. Further, you would have noted that in the second quarter, some sales spilled over to October. Normalized for this as well as UCB portfolio contribution, the growth for the quarter is in line with the recent trend of above-market performance. PSAI business posted revenues of $77 million and declined 17% YoY. This decline is primarily attributable to delayed dispatches on account of the ongoing remediation activities. Our efforts are directed towards building a healthy order book.

On R&D front, we stay committed to building a strong pipeline. As you are aware, we received final FDA approval for two NDAs, ZEMBRACE SymTouch, which is a sumatriptan 3 mg auto-injector device and SERNIVO, which is a betamethasone dipropionate spray. We also received tentative approval for our NDA for ZENAVOD, 40 mg capsules for doxycycline. These approvals are critical milestones in our bid to establish a portfolio of differentiated assets in the United States for our proprietary products business.

Before I end, I want to give a brief update on the ongoing remediation activities. Post receipt of the warning letter from US FDA in early November 2015 for three of our sites, we submitted on December 7, 2015, a comprehensive, corrective and preventive action plan, which in short is called CAPA to address all the issues raised. The CAPA plan includes site-specific CAPA, manufacturing network-wide CAPA and CAPA to sustain and enhance our quality and compliance performance on an ongoing basis.

As of January 31, 2016, all the CAPA which were due for completion have been completed. We have submitted a status update to the warning letter response on January 28, 2016, stating our progress on accelerated remediation efforts towards sustainable compliance. As part of this quality journey, we have engaged well-respected third-party consultants, US-based Lachman consultants to provide necessary compliance and remediation support for assuring robust implementation and verification of the CAPA plan.

With this, I open the floor for Q&A.

Thank you very much. We will now begin the question-and-answer session. (Operator Instructions).

[Darryl], are we taking questions?

Yes. Manoj Garg, [Healthco].

Hi, good evening. Thank you for taking the questions and I'll limit mine to two. So one, on the regulatory front, our regulatory consultants here believe that the issues cited in the warning letter would take about 18 to 24 months to clear. Just wanted to get your thoughts on that timeline assessment? And then, two, on Venezuela, can you specifically break out Venezuela's sales? And if I heard you correctly, I think you said you continue to book revenues at VEF6.3. Other pharma companies have devalued or are booking at exchange rates as high as VEF200, so just wanted to better understand the thought process there.

Hi, Manoj, Abhijit here. I'll take the first one, I'll let Saumen deal with the Venezuela part. So on the remediation, we certainly cannot provide you any exploratory guidance on the timelines because on our side, we are doing whatever we can to sort of mitigate, workout on the CAPAs, update FDA. And I think the overall journey we think is progressing satisfactorily. Beyond this is completely the agency's prerogative.

So Venezuela, we have certain arrangement with the Government of Venezuela, so we are still quite hopeful that we get some repatriation during this quarter. Now, if that does not happen, then, we will have to reconsider what will be the right kind of rate for future accounting consideration.

So what's the current exposure there?

$60.7 million which is pending for repatriation.

Okay. Thank you.

Thank you. Saion Mukherjee, Nomura.

Yes, hey, thanks for taking my question. Sir, my first question is on Venezuela. Can you specify the sales booked during the quarter and what's the EBITDA contribution?

So during the quarter, it is $18 million which is sales. We are not giving any specific country-wise EBITDA disclose anywhere.

Okay. Sir, the second question is with respect to your cash flows, which you have shown as improved to -- running at almost INR2,500 crore free cash flow. What are your thoughts on that in terms of increasing dividend payout or looking at the new acquisitions, if you could slice anything you can share that?

Of course, our growth agenda includes both organic and inorganic opportunities, which we have been trying to pursue. So we have enough in our balance sheet today that we can leverage for such acquisition, but having said that, we are treating each of the opportunity on its own merit. Just because we have cash, it doesn't mean that we will dilute the criteria that we have set for ourselves for meaningful acquisition, but if acquisitions are not there, we may think of any other corporate actions, which as and when we find some alternative options, we'll get back to you.

Okay, thanks, sir. Sir, if I can ask just one more question, this is on export incentives, I understand you recognize this as cost of goods sold. Can you quantify that number and is there a substantial increase versus last year?

Yes, there is a substantial increase vis-a-vis last year. So overall, on an annualized basis, it could be roughly INR150 crore plus.

Okay. And how much was it for last year?

So, this is an incremental --

Okay. Incremental. Okay.

Prakash Agarwal, Axis Capital.

Yes, thanks for the opportunity. Sir, if you could highlight any updates on the biosimilar portfolio that we are building for regulated markets?

On the regulated markets, we have a few assets, which we are working with Merck Serono and Saumen just mentioned that there was a milestone recognized and we got during this quarter, which has been adjusted in the R&D investment for the quarter. The more exciting story on this is our efforts to put these into the emerging markets and we had mentioned earlier, we still stand by that we are pursuing approval in Russia. We are filing in quite a few important emerging markets and discussions with regulatory authorities are in fairly advanced stage and we may seek a slightly more expedited sort of review of those. And we would like to sort of build on this, while our journey on regulated markets continue. Specific assets, we will not get into at this stage.

But we have talked about Rituxan and Pegfilgrastim.

Correct.

Yes. So these two assets are what you are talking about for the year in the filing stage?

Yes, the more important is Rituximab and they will be naturally having worked on Rituximab and taken it to the market. There will be a few follow-on mabs, which are in the clinic at the moment.

Okay. And for regulatory markets, to enter the clinics, so what kind of filing dates we are looking at?

So at the moment, these assets, we are not taking ahead ourselves in the regulated markets that we had mentioned earlier, it still continues to a partnership. Emerging markets, we'll take it ahead ourselves. The data is already -- a large part of it is in hand and we're filing depending on the requirement of specific country-wise regulatory agencies. But as far as the regulated market is concerned, the strategy continues to be partnering.

Okay. And there is no timeline as of now for that?

The journey continues at the moment. I mean there is nothing, which we can immediately -- in the short term, there is nothing coming.

Understood. Fair enough. And secondly, on the US FDA again, just trying and understanding after having assessed the warning letter and having consulted your third-party, just trying and understand that if there is any supply disruption in order to have third-party validation of goods or delay in shipments or because US run rate seem to be very much on track. Do you anticipate that happening or any disruption in supply or any delay in shipments?

So as of now, I think either in mine or Saumen's, we mentioned the PSAI business had some impact of batch releases and some impact. We're also closely in touch with the shortage loop if there is anything, but there is nothing major to be reported at this juncture from the existing state of products. Future, of course, we don't want to comment. But currently, there is nothing meaningful and PSAI part also is largely behind us, it's now back on track.

Okay. So just a clarification here on PSAI, the decline is largely due to one-off impact, because warning letter, you're clearly supplying and there is no issue as such for the upcoming quarters?

No, we mentioned that because of the remediation paying, there were some delay in dispatches of API from these facilities.

But you are back on track?

Yes. There is also a product where we have a profit share on a specific product with a customer of ours, which from a dominant market share position, the more generics have come in. So to that extent, that has made an impact as well.

Perfect, great. Thanks, I'll be in the queue.

Thank you. Neha Manpuria, JPMorgan.

Thank you for taking my question, sir. Sir, first, you mentioned that there was some impact on SG&A due to remedial cost. How should we look at that aspect going forward? I know the third-party auditors that we have gotten for that will be recurring, but I'm assuming there would also be some costs related to either site transfers or derisking, et cetera. So how should we look at the margin impact when we look through the next few quarters?

So we are not giving any specific amount for it, but whatever is our SG&A for the quarter, it includes both kind of the payments that we have been making to the consultants for remediation, as well as there is certain site transfer-related activities, which have been happening already, but our SG&A this particular quarter has also some other aspects like what we mentioned about the settlement of zoledronic acid that was a product we launched at risk and now we have settled that, which means there is no risk that we will carry on that, and so that has gone also to the SG&A. So there is some recurring kind of legal and professional expense, which will be incurred by us, but we are not giving any specific amount and it will not have a huge impact, yes.

Got it, sir. And second, FY16 overall has been a tepid year for us when it comes to approval. Now that you're doing site transfers, et cetera, how should we look at our launch pipeline for FY17? Will it be similar to FY16 given it will take time to get these approvals from the US FDA despite site transfer or should we expect it to be better?

So firstly, on the first question, slight addition to what Saumen said, I think although remediation cost has been there in this quarter, but it was not full blown, there will be some more impact as well, as we continue because the number of people has increased in the sites and that will be there, so that's one. The second thing is on approvals. I think this year has been a tepid year, no doubt, but next year, we expect this to be definitely better than this year. Now, two kinds of assets, one, which are date specific launches. One, which are not date specific, needing approval from the agency and contingent to some of the activities, which are ongoing in terms of what we just mentioned, part of tech transfer, et cetera, and some are litigation oriented. But all in all, I know there is a probabilistic aspect to it, but I certainly expect next year to be better than this year.

And if I may just ask one more quickly, our India business even if I adjust for the slippages that you mentioned, it seems like a very strong quarter with the UCB assets. If you look at our business ex-UCB, ex this one-off, what's driving that very sharp improvement [pot out] from let's say in the last three quarters?

If you take out the cut-off impact from Q2 to Q3 and the UCB-related growth, then on a base business, the growth will be around 19%.

Yes. And that's pretty strong and consistently been improving quarter after quarter. So just wanted to understand, what's changed particularly on the ground to drive this strong improvement and can we see more improvement from these levels or the 18% to 19% base business is what we should be assuming going forward?

There is no one specific reason which I can attribute. For last few years, we've been working as a team, a lot on India business. Several efforts on prescriber connectivity, patient connectivity, retail connectivity, portfolio distribution. Overall, we used to be much more acute heavy. We have over the last few years have become pretty well balanced between specialty, chronic and acute. All these and coupled with good execution is yielding result. So going ahead, I think we would certainly be -- we are hopeful of maintaining growth in this range, which should be a few percentage points higher than the market growth.

Sure. Thank you so much, again.

Chirag Dagli, HDFC Mutual Fund.

Yes, sir, thank you for the opportunity. Sir, just in your opening remarks, you mentioned about base business price erosion. If you can help us understand what sort of base business erosion should we sort of pencil in for your business given the larger products. Generally, when we talk to peers, they talk about single-digit, high-single-digit kind of erosion. Is that what is applicable to Reddy's as well or is there anything different in your base business erosion?

Yes, I mean broadly, what others perceive, we perceive the same way except for the fact that we have quite a few big assets. So far, we've been doing well. It could be in that zone, but it may not be even, that's the biggest concern for all of us, it can vary from -- as and when we get the hits. So certain quarters could be better, certain quarters could be a little worse. So far actually, destiny has been kind.

So when you sort of take a three-year view on this base portfolio, sir, this high-single-digit number should hold?

The channel is consolidating, okay, and what everyone else is commenting is normal when the channel gets consolidated, the ability to negotiate and demand, not negotiate, goes up to that extent. So some of that certainly we are all sort of on the receiving side of that. Finally, the oral solids and more sort of areas which are crowded will certainly, unlikely to see anything lesser than that going ahead.

So, we will see more than this or lower than this, sir?

Very difficult to sort of make a very definitive statement on this. Broadly, I gave you the headwind associated with it which is consolidation of the channels, big-time consolidation. So more or less will depend on which assets you are in.

Fair point, sir. And my second question was on the EBIT base for PSAI, it's lower because we said that was obviously delayed and one lower profit in one of the key products. But both these should sort of continue at least over the near term, right, sir?

No, the slowing down of dispatches, Abhijit has already commented, we're back on track on that.

We are already back on track, okay, sir. Okay, sir. Thank you so much.

Thank you. Anubhav Aggarwal, Credit Suisse.

Yes, good evening. Saumen, sir, I've got a question on Venezuela, I was looking through your notes. This quarter, you had ForEx loss from monetary assets about INR63 crores. This is much higher than last two quarters. Was there no sales done from India and that's why this is such a large number this quarter? That's part A. And secondly, would you say the INR63 crores would largely correspond to what's included from Venezuela in EBITDA this quarter?

So first, we are not giving country-wise EBITDA, but yes, net monetary asset we have taken a provision of INR64 crores this quarter and while our dispatch has been not there during this quarter. We have completely calibrated.

This then INR64 crores would have been only generated this quarter, right, that's why it's coming here?

INR64 crores generated, there is an overall impact on the way we compute the net monetary asset, we take as on date, as on December 31. The total scenario and this or that we compute. Yes, but the large part will be attributed to this quarter.

Okay. Just, one more clarity on the way you report gross margin on the segment side. Sharp decline in gross margin for the Global Generics segment sequentially, from September to December quarter, about 170 basis points. Number suggests -- the regional mix suggests that it is largely coming from the US market, was there any large inventory write-off more than normal or any other reason for that sequential decline in gross margins?

There will be always some kind of quarter-to-quarter, some kinds of inventory write-offs which happens, but there is nothing very significant to report.

Anubhav, it's largely currency-related impact on a sequential basis.

Largely currency related impact, okay.

Yes.

And which you mean to say is basically coming from EMs which is impacting it.

[Absolutely], yes.

Okay. Just, Abhijit sir, a question for you, just one clarity on this your response to warning letter to FDA, is there any third-party kind of risk assessment report that you need to submit for the non-impacted plants? Why I'm asking this is that we've got warning data on November 5. It's been three months, we haven't seen any final approval from Dr. Reddy's any plants so far, except the proprietary products, which I'm assuming is not from the Indian plants. I don't know whether there is a correlation or not, but I'm just checking that. When you submitted the warning letter response, the CAPA response, is there anything you promised that you need to do on non-impacted plants as well?

No, I think there was no specific request on that front at all, formally, but certainly we are extending a lot of the CAPA which we have out of these observations to other sites. Now, coming to approvals, I think we did have [considerably] in tentative approvals during this period, and it's a little bit of a lean patch in development, few approvals got slightly delayed as well. And because these were from these sites. So some of them, we mentioned last time, very specifically, esomeprazole now got delayed by about six months, very expensive for us. Xeloda was all set but it still, it's not going to come in because both are from impacted sites and few others which I'm not going to detail is not that impactful as well. However, having said that, there was some period, the audits which happened the earlier period were EIRs were taking some time to come in and in very recent past, we have most of the audits which happened EIRs have come in for the other site. So if that answers your question.

Yes. That's helpful. If I can just ask a related clarification on this. On the PSAI business, is there impact from any of the customers after you got the warning letter, not in this quarter. But anyways -- in future, one or two quarters because I mean anyways, it takes time for anyone to shift capacity or source of supply. Is there any potential impact that you have experienced so far since the time of warning letter?

When the letter came in, there was a lot of questions, both from the retail channels as well as the API customers. I mean we worked overtime in sort of providing the complete transparency and clarity the status. I think most of the concerns are mitigated. Having said that, new filing from the site would naturally be impacted. People would be hesitant to sort of immediately take samples. So those important ones, we have a SEZ site next door where we're filing. All the filings are from API are from the new SEZ site. So those are unimpacted, but whole site whatever product we develop will have to sort of some of those there are some impact, I mean not struggling to sort of put out any figure to that, but there would be certainly some impact, yes.

Thank you.

Abhishek Sharma, IIFL.

Thanks for taking my questions. Sir, out of the total pending ANDAs, how many would you have, which are not dependent on the three sites which have got a warning letter?

So, we have approximately if I could recall correctly 79 pending ANDAs and many of them are of course with certain later dates based on IP, etcetera. The near-term ones, whatever we lost, we lost; a few are pending at the moment with everything complete and impacted which I just covered in my earlier answer to the question. The rest of the ones, we are trying very hard to ensure that the delay is not due to the site. Of course, the remediation of the site is always priority one and all the efforts are going in. But specifically on those approvals, we are trying to see what we can transfer before that becomes a bottleneck for the coming sets.

Understood, but a large number of the 79 today, you're saying are directly or indirectly linked in some way to the sites which have got the warning letter.

I didn't say that. I didn't say that at all. I said on the impact, I mean these -- look, we have 12 sites which are regularly audited by FDA, of the various -- so these are the three. Out of that, two APIs out of that will be one injectible site and there are many products which are partnered outside for manufacturing, quite a bit of (inaudible). So certainly, I didn't say a large part of it. In fact, a small part of it probably.

Understood. Great, thanks, helpful. Sir, on the injectables business, existing business, you've been using vendors, which appear on your label. So does that de-risk some of your existing injectable business as well as future filings? I mean could you use them going forward probably for site transfer or for making future filings?

Yes.

Right. Okay. And sir, one question on Venezuela. So how much unsold inventory is there in the system, and when was the last shipment that you made to Venezuela?

As we say that we have been calibrating the dispatch and sales also accordingly is becoming lower every quarter, but whatever inventory that we have on hand, it can cater to next six months of sales.

This has already been shipped to Venezuela.

No, so let me take it. First of all, we are not manufacturing anything fresh, okay. We have stopped manufacturing probably six months back. Whatever inventories are being tapered out, the sales are pretty much going to drop to very, very low level by the end of this quarter. In fact, as we speak, this quarter itself is very, very low and naturally need to calibrate that in the impact vis-a-vis when you do YoY. So, it's pretty much being tapered down to zero level. No further manufacturing and not a whole lot of inventory in the system.

But having said that, since you are on this topic, I want to clarify a couple of things that what are we exactly doing on this geography. There are two deals we've signed, specifically with two companies owned by the government, that's specific names -- I am not getting into the specific details on the names of those companies. One is on supply of an oncology biologic product and the second is a whole host of very important medications for the geography, which at the moment is very acute shortage of medication. And so one, we have said these are -- which we will take it to government's factory, we will do secondary packaging there and maybe at some point in primary packaging at a certain pre-discussed cost, which will be lower than the current price prevailing in the market substantially. So, the country makes -- gets the benefit. And this is a legal deal which we've signed. Whether and how it is executed, I don't know, but if you can do this well, currently, it's a little bit of chaos in the country you can well imagine. But if this comes through, then we will be able to revise this. But in absence of that, we are not going to sell anything more pretty much next year.

But if conditional too that this was repatriated quite a significant one to us. If they do not, then we are not going to go ahead with it. And that is why I said in the beginning we are hopeful, but we'll have to closely monitor and watch what is happening during this quarter.

Thanks. That's very helpful. And does this deal involve advance payments?

So anything future, Saumen mentioned one. It's actually part of the deal, that significant part of whatever is due to us, we'll have to be paid. And second, any further would be contingent to a complete clarity on payment, there are ways and means you can do it. We are not going to sink in anything more there.

Okay. Perfect, sir. Just one more if I can squeeze in. Sir, directionally, on biosimilars, your deal with Merck Serono, where is it going? When can we see the first program in Phase III in the reg market, yes?

Yes, I think you got me that an exact date I will not be able to specifically [comment]. We will come back to you on that, but we've got the milestone payment and I would guess it shouldn't be very far in terms of --

Maybe later we can check with Kedar.

Sure. Alright. Thanks.

Girish Bakhru, HSBC.

Yes, hi. First question, again on the injectables side, is the site transfer process complete to derisk the API of some critical products from Srikakulam?

Yes, I think we messaged it last time that we have completed that actually. There is one of the two, which is from there and we have completed that, yes.

Right. So in terms of say the business momentum, particularly pertinent to injectables which was doing something like 20% of US sale and that run rate we would be largely maintaining, right, or has that changed because of the initiatives of site transfer and all that?

No. You're saying in the event that suppliers are impact -- at the moment as you are aware that suppliers are not impacted from the site. But your question is, in case that gets impacted, whether we have derisked.

Yes, because that was the assumption that you're anyway preparing for that. Isn't it?

So supply will not be the constraint, but one cannot give any guidance on what is going to happen in the market.

Right. And why would you not say site transfers from pending injectable products which probably would not get approved out of Srikakulam at this stage. I mean particular question being propofol.

Propofol is not from Srikakulam, number one. So, that's a specific question. Second is what's your question that why future approvals will not come from Srikakulam, because it's under a warning letter at the moment. So -- yes.

That part, I understand, but I'm saying would you have initiated site transfer of some injectables or the pending injectable filings from Srikakulam to other injectable sites?

If the API is from there, in case, but a few other site transfers also we've done from or in the process of doing from the sterile site, FTO-7, the Duvvada site. So, that is continuing. As I said, you see the broad message you should take is that we've missed a few approvals, financially pretty big, which has already gone in into whatever we're declaring. A couple of them I mentioned. Going ahead, the effort is depending on the date-specific launches, the effort is trying to see whether we can risk mitigate those. The current lull of approvals is a mixture of two factors, is a combination of two factors. One is of course, these sites and the delays which happened. And the second is in any case, when we embarked on the journey of complex generics, the pipeline slowed -- the development pipeline 2.5 years back slowed down a bit. Part of that patch is now getting over, my message in earlier one of the questions that my expectation is next year launches would be better than this year.

Right. So if I could just stretch this further to answer specific on propofol. I mean what according to you has been delaying that? Is it the particular matter where you think some other player is blocking your launch, or what has been delaying it?

Not really. Broadly as per our understanding, we shouldn't be too far away from approval.

Okay. Okay, that's helpful. And just on transdermals, you have started filing them. Are you doing clinical trials on transdermal products?

Depending on certain products, which mandates, yes. Certain products, which doesn't mandate but quite a few. We have already filed with the clinical trials, got accepted. So the journey of the file being sort of scrutinized where we have started.

And if some of these which would be say very open in terms of the IPR would be in a position to see a launch in next two years, is

that a fair assumption?

I'll have to get into those details. Specifically, firstly, we will not go as simply as that, but as I said, the file has gone in, accepted, the journey is in progress.

Alright. Thank you so much.

Sameer Baisiwala, Morgan Stanley.

Thank you and good evening, everyone. Just, Abhijit, on your commentary on the risk to the base business and you mentioned a few times in the call. Is this just out of caution you are saying or do you see based on your intelligence on what -- or what you're seeing in the market that more competition is coming for some of your bigger assets?

Well, you know the five or six very big ones, to be very honest, I mean do you have specific names of competition? No, we don't, except for we are hearing a lot on valganciclovi that we don't know exactly when could be earlier the latest, but others, it's been a while, so just my guess that we will certainly see at some point in time.

Okay, that's helpful. And can you just share with us how many products for which you have applied for site transfer?

Again, I think what -- where I'll put it is suppose, hypothetically, we have an expected approval in let's say, six, seven months, if you haven't filed already, we would be missing it. Normally, these transfers are exact sort of application of the API in another site. And so if you put it in, put the stability data, there is a reasonable probability in six months. So more or less, keeping that margin of error, we are trying to transfer and submit.

This would be low-single digit, would you say?

The number, which we -- if we take the ones which we have submitted and in the process of -- you see, we will have to take both the batches, sometimes it's T0, sometimes we do it T3 as well. All put together, it will be more than low single digit, it could be 5 to 10.

Okay. And can you update us on your Copaxone 20 mg file?

So better than what I said last time. Last time, I pretty much said that we are struggling with the science part of it. I think we have a much better visibility now, slowly getting into trial batches and getting into the optimized scale-up. Four to five months or so, we hopefully should be in a position to respond to the CR, which we received five, six months.

And do you think this is (inaudible)?

We're trying to do that.

And would you say this is a fiscal 2017 launch?

Beyond that, look, how many more questions FDA would ask, we're trying to do a very deep, decent science job on this. We don't want to rush it, whatever time gets lost, because pretty much similar things would come up in the next asset as well. So, I would certainly not comment on the timing of launch, but we're trying to do a good work on our side on the science part of it, very good work.

Okay, one final question on NDAs. You had set yourself two NDA filing every year. How do we stand for fiscal 2016 and actually fiscal 2017, do you think -- you don't [try] for that?

Roughly, again I'll probably reiterate what we said. We would be trying to get to about couple of filings every year. Now, those things can change a little bit depending on what data we get. But yes, I mean our internal target would be two per year.

Okay. Thank you so much.

Nimesh Mehta, Research Delta Advisors.

Yes, thanks for taking my question. If you can give us some outlook on the Gleevec launch. I know it is probably stuck because of the oncology facility being under warning letter, but have we been able to transfer it to other site or will this be delayed launch?

We have a date-specific launch as per the deal. And the site issue should not be a bottleneck to that in our view. We should be done before that in terms of de-risking it.

But right now, was it filed from the facility, which is under warning letter?

One part of it, but the work is as we speak in progress of shifting which will give us adequate time.

I see. Okay. So do we have, by the way, more than one onco facility, which is US FDA approved?

No, we don't have internally, but many of the assets we don't have to do it internally.

I understand. Okay, understand. Okay. The other thing I just wanted to know about the timeline for evolution, you mentioned you have kind of started implementing the CAPA plan. So according to the plan, what do you think, how long will it take for you to complete the CAPA process if that you can tell us, that will be helpful?

So there are a pretty sizable number of commitments. What we are tracking is, when we're sending the updates, at the date of the update, are we on track? And I think Saumen mentioned in his discussion point that so far, whatever update we send, we are completely on track on that and we continue, we hope to be continue to be on track with the -- when we send the update, we will be on track of doing those. So hopefully in about between three to six months, we will be implementing the CAPA. So in our side, we will do whatever it takes.

And just a clarification, you mentioned that the increase in the export incentive is INR150 crore for the 9 months or for the year, how should I'll calculate?

I said annualized INR154 plus I think, exact we can say during the year-end.

Okay, so INR150 crore plus of annualized (multiple speakers) incentive and a lot of it would be between Q2, Q3, that's a fair assumption?

Lot of it due to?

It would be fairly spread out, Nimesh, actually, over the four quarters.

So while we will take couple of more questions, couple of things, I also wanted to say that this time, we will be filing the 6-K very shortly. Maybe either today or tomorrow, it will be there. So you can all refer to that for a more detailed analysis. And second thing, in the Q4, the currency, particularly in Russia, it has also come down in terms of right now against one ruble, it is only INR0.88 or so. So there would be some pressure from Russia and Venezuela, already we have talked about it. We have not dispatched anything. So there will be pressure which will be there from both Venezuela and Russia front, and so I think it will be appropriate for you to take that into consideration when we're looking at the Q4. So, we will take two more questions.

So a little bit add too, Saumen. So he mentioned about mostly the emerging markets, the oil-related impact eventually into currency and economy, leading to both these large markets getting impacted in Q4. Energy, normally Q4 is a little weak quarter, because injectables, institution-heavy sales normally in Q3, normally gets mitigated with new launches. We don't have new launches, so there will be some impact there as well in North America. Europe, we were doing well in two products, which are slowly getting into tenders as we speak and that will have some impact. And we spoke about API as well. So, essentially, some of these things will certainly have a substantially sobering effect on Q4, so just wanted to sort of make -- since no one asked, wanted to make that amply clear to everyone.

Okay. We can take two more questions, before we close it.

Manoj Garg, Healthco.

Hi. Thanks for taking the follow-up questions. So, some specifically on your North American business. One, can you quantify your Nexium sales for the quarter as I believe you are in the quarter for about half of it, and then after you relaunched, how does that marketplace look like in terms of pricing?

Manoj, specifically I'll not be able to give you a figure. We've not lost share, because of the reception, but the prices have gone down. Initially when we came in, now there are five players in the market. Strangely, I think the stock up in the market is still there. So, full off-take hasn't fully happened. We're still looking at more shares, but what is -- one thing has certainly got calibrated is the price. At the time which you came in to where we are now, the price has got substantially calibrated. So, I had given an indication, very broad indication of our analyzed revenue from this asset. I think it will go southwards from there, but at the moment, I think in this somewhat still unsettled scenario, I would not provide you a specific figure. But having said that, it's still going to be a good asset for us. We still have some share and we are looking for some more share.

Okay. That's helpful. And then, let me just try asking the pricing question a different way, sort of the 18% growth in North American generics that you reported, can you sub-divide that into volume and price?

We're not giving that level of details.

Okay. And then, last question on North America. Of the three ANDAs that you filed in the current quarter, were all three of those as a result of site transfers to other facilities?

We have filed three ANDAs and one more 505(b)(2).

No, none of those are site transfer, these are new ANDAs and two injectables, one fairly attractive, the second was also good, and third is also Soft Gel oral asset we can look at.

Okay. Great. Thank you for taking my questions today and best of luck.

Thank you.

Nitin Agarwal, IDFC Securities.

Thanks for taking my question. Abhijit, on the three, the two final approvals that you've got for our 505(b)(2)s, I mean we did discuss about in the R&D meet, but when you look at the market now, I mean how do you assess the opportunity for these two products and when do you see them going into the market?

Which products are you specifically referring to?

The proprietary products you are referring?

The proprietary products, yes.

Okay. Yes, so one is the doxycycline I said is still under litigation, the rest two in the course of coming few months, we will get into the market and probably we have said the potential for both these, if I recall, rightly is in the range of $50 million to $70 million on an -- but having said that, you'll have to sort of factor in the typically in the proprietary products first year, with feet on ground, it's -- you really have to build the market at this point in time, you don't have enough prescriptions, but eventually sort of you start making money.

But you still believe the opportunity has not changed much in terms of --?

No. I think each of them have their story, which is also the 3 mg injection is basically trying to see 4 mg oral tablet users of migraine who are -- there is a part of the patient pool who are not fully satisfied with that and for quicker onset of action. So there is a pool of patients for this, for the betamethasone spray, it combines all the benefits of the lotion, cream, ointment, et cetera. I think it shows that it pretty much has in one form, all the benefits of all the other skills and similarly the doxycycline asset has -- it's clear on the -- there is a specific meal-related advantage. So, each one has some science behind it, yes.

Thanks. And lastly, on the R&D costs, I mean how should we look at R&D costs going forward, I mean -- and what would have been the impact of this whole -- the payment, the milestone that we got from Merck would have been more than 10%, 15% of the R&D costs for the quarter?

No, no, it was basically out of the biologics R&D, which is (inaudible) will be to that extent only. So it will not be that. But at the same time, our R&D as a percentage of sales will be between 11% to 12% as we alluded earlier.

Okay. Fine. Thanks very much.

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 Q3 FY16 Earnings Call. In case of any additional clarifications, please feel free to connect with the Investor Relations team. 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.