Dr Reddy's Laboratories Ltd (RDY) 2016 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to Dr. Reddy's Laboratories Limited Q4 FY16 and Fiscal 2016 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.

A very good morning and good evening to all of you. Thank you for joining us today for Dr. Reddy's earnings call for fourth 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; Abhijit Mukherjee, our Chief Operating Officer; [Dushyanth], who is the Head of Corporate Development and Sales & Marketing of proprietary products business and 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-F for the fiscal year ended March 31, 2015 and Form 6-K for the quarters ended June 30, 2015, September 30, 2015 and December 31, 2015, and our other filings with US SEC.

Now, I would like to turn the call over to Saumen Chakraborty, our CFO.

Thank you, Kedar. Greetings to everyone. Let me begin with the key financial highlights. For this section all the amounts are translated to US dollar at the convenience translation rate of INR66.25, which is the rate as of March 31, 2016.

Consolidated revenues for the year are at INR15,471 crores or $2.34 billion and grew by 4%. Consolidated revenues for the quarter are INR3,756 crores or $567 million and declined by 3% year-on-year. Revenues from our Global Generics segment are $465 million. As we had expected and in line with what we had discussed in our last call, this quarter witnessed a series of headwinds. This includes sequential decline in the ruble, moderation in the injectable offtake post higher third quarter and continued constrained operations in Venezuela.

The North American Generic business continued to be strong and Domestic Formulations business sustained. Revenues from our PSAI segment were $87 million and declined year-on-year by 22%. This reflects in part the impact of delay in dispatches on account of the ongoing quality improvement activities related to the USFDA observation.

Consolidated gross profit margin for the quarter is 56.6%, recording an increase of 180 bps over that of the previous year. This is majorly contributed by relatively favorable business mix. Gross margins for Global Generics and PSAI were at 63.2% and 20.6% respectively. SG&A spend, including amortization for the quarter, is $176 million, an increase by 15% year-on-year. As guided in our previous call, this increase is primarily on account of the ongoing quality improvement activities. Also during the quarter, there was sizable outlay towards launch related activities by our Proprietary Products business. This is for the launch of Zembrace, which has been already launched in April and targeted launch of Sernivo in the coming week. Normalized for these charges, the increase in SG&A relates to manpower and other spends and is marginal.

R&D expenses for the quarter are at $74 million, representing 13% to revenues, versus 13.3% in the corresponding quarter of the previous year. This spend is largely in line with the ongoing state of developmental activities.

As you are all aware, the Venezuelan government recently announced a long pending devaluation of the bolivar. As per the announcement, the erstwhile official rate of VEF6.3 to $1 is now devalued to VEF10 per $1. Over the year, we have not received approval to repatriate amount beyond $4 million. While we continue to engage with the Venezuela government, however, in the interim, it is appropriate to use the DICOM rate, that is VEF272.5 per $1, instead of official preferential rate, that is VEF10 per $1 for the translating the monetary assets and liabilities of the Venezuelan subsidiary as at March 31, 2016. Accordingly, the resultant impact of for Q4 FY16 and fiscal 2016 is INR431 crores and INR509 crore respectively.

After considering the above adjustment, EBITDA for the quarter stands at $73 million, which is 12.8% to the revenues. Normalized for this change, the adjusted EBITDA would have been 24% for the quarter.

Tax expense for the quarter is high, primarily on account of proposed distribution of profit by our subsidiaries and exceptional translational loss provision with respect to Venezuela. Normalized for these two, the annual effective tax rate is within the range as guided earlier.

Key balance sheet highlights are as follows. Our working capital further decreased by $33 million during the quarter. Capital expenditure for the quarter was at $49 million. As of March 31, 2016 we have net cash surplus of $97 million. Our net debt to equity ratio is now at negative [0.05]. During the year, we have generated INR2,668 crore of free cash flows versus INR1,468 crore generated last year.

Foreign currency cash flow hedges for the next 12 months in the form of derivatives and loans for US dollars are approximately $290 million, largely hedged around the range of INR64.4 to INR69.3 to $1. In addition, we have balance sheet hedges of $253 million. We also have foreign currency cash flow hedges of RUB900 million at the rate of INR0.94 to the RUB1 and EUR6 million, largely hedged around INR75 to INR82.05 to EUR1, maturing over next 12 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. As you remember, in the last call, we had alluded to many external challenges and this quarter has been more or less in line with those. We'd also acknowledge the trend of fourth quarter numbers witnessing a sequential dip in the offtake for US injectables portfolio, seasonal dip in Q4 across branded markets of India and Russia. Irrespective of these quarterly movements, I believe that the underlying performance across geographies was quite resilient this quarter. Further, we continue to spend considerable amount of time and effort towards ongoing quality improvement and risk mitigation activities.

Now, let me take you through some of the highlights for each of the key markets. Please note that in the section all references to numbers are in respective local currencies. Our North America revenues are $285 million and grew by 4% year-on-year. FY16 revenues at $1.17 billion and grew 12%. As alluded earlier, the sequential dip is primarily on account of higher offtake of injectable products during the third quarter and margin adjustments with respect to the competition coming in valganciclovir. Overall, we were able to sustain pricing and market shares across our key molecules. We further consolidated our market share position in metoprolol, sumatriptan autoinjector, and esomeprazole.

Recently USFDA approved our ANDA and 505(b)(2) filings of palonosetron.

Overall, approvals have been an issue through the year, partly on account of ongoing FDA matters and partly as an impact of calenderization of our filings. However, we believe that the approval scenario to improve going forward, [mostly] towards second half of the year. On the OTC front, Habitrol is well integrated now and we have started working towards increasing the customer base and also expanding the overall franchise further.

During the quarter, macroeconomic factors continued to impact most of our emerging market territories. Despite these headwinds, in constant currency terms, Russia business grew by 12% year-on-year in Q4 and 1% for full year 2016. Through the year, focus has been to improve the productivity, broadening the product portfolio and entering new geographies by leveraging the current portfolio. Recently, we received the registration for our brand of rituximab, (Rituxan), in Russia. We are now working towards pricing approval and preparation for tenders in Venezuela. As discussed earlier, the graduations are at significantly low levels and hence we chose to apply the official market exchange rate to record the translation loss that Saumen explained. However, we will continue to actively engage with the Venezuelan government to provide affordable medicine to fulfill the need of the people of the country subject to repatriation of funds.

India business revenues are INR527 crores and grew by 11% year-on-year. Portfolio acquired from UCB has been fully integrated into our supply chain. FY16 revenues for Indian market at INR2,129 crore, grew by 19%.

PSAI business posted revenues of [$86 million] and declined 28% year-on-year. This decline is primarily attributed to delayed dispatches on account of ongoing remediation activities. However, sequentially [improved] 11%. Our efforts are directed towards building a healthy order book.

On the Proprietary Products side, post final approval from USFDA, we are happy to announce the launch of Zembrace. Sernivo will be launched in the coming weeks. We all are really excited about this new journey. This is a critical milestone in our bid to establish portfolio of differentiated assets in the [emerging] space.

On the ongoing quality improvement activities, we submitted our first update to FDA on January 28, followed by a second one on March 30 this year, stating our progress towards sustainable compliance. We believe most of our commitments to the agency will be over by the end of this quarter and post which we will request the agency for re-inspection.

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

(Operator Instructions) Manoj Garg, Healthco.

Just a few from me. One, just trying to better understand your commentary around quality improvements. Can you update us on the remediation efforts at Srikakulam and the associated timelines there?

Two, it sounds like you're pointing to an improvement in the pace of approvals in the second half of the year. So in general, is that when you're expecting some resolution there?

And then three, lastly, we saw about 200 basis points of gross margin erosion year-over-year. The US guys are definitely talking a lot about price erosion, so maybe if you can spend some time and just update us as to what you're seeing in the marketplace in the US on the pricing front.

On the quality front, as I mentioned, post the warning letter in the first week of November, our first update went towards the end of January and the second one towards the end of March. We are planning to provide the third update towards the end of May by which time a very large part of the commitments we made to the agency would be completed. And soon after, we intend to seek an audience and thereafter request for re-inspection. Beyond that, of course, as you would expect that we can't comment, and it's up to the agency when they would come and see it. Broadly, as we had mentioned earlier, I think the resources spend, the management bandwidth put in is very, very substantial, both from the manpower side and also financially. And we feel quite good about the progress made, while of course this is a journey. So this is on the quality.

Launches, as usual we'll not get into numbers. But this is likely to be certainly much better than last year. Last year was a very tepid year and we -- it's going to be brisk, a little loaded towards the second half, starting second quarter. So this is not to do entirely on the sites to come back or something of this sort, because there are -- filings are from various locations actually, and also launched through partner sites and so on, so forth. So, these of course, when I am making the comment that it's going to be a brisk year for launches, I mean we're taking into account the uncertainties related to regulatory aspect, litigation aspect, but of course, based on reasonable assumptions we're cautiously optimistic on the launches.

Third, in price erosion and I think rather simplistically I mentioned that we have managed to contain erosion. But to give you a little more flavor on that, I think of course there is the value erosion. But what has happened is, by and large, the same amount has been counterbalanced by increase in volume of the base business, which basically means that we had to adjust prices in a few, we gave up a little bit somewhere -- some places and we won several new bids as well. Broadly, the two nullifying each other.

So, can you give us a number, I mean in terms of what kind of pricing erosion that your base business is seeing in the US? And then just a follow-up on the regulatory, so this past quarter, just to give us some confidence that this is not a -- or that the agencies are not concerned with the system-wide issues, where there any successful investigations this past quarter?

So, back to the erosion, last couple of weeks have seen various companies talking of price erosions and we are pretty much in agreement with those figures. If you just -- standalone price erosion, high single digit, but as I've mentioned, the volume increase nullifying similar amount. So that probably broadly gives you some indication on price erosion.

On quality and remediation, I gave you the brief about those three types, but you are asking about more general things. I think we are getting -- and probably we mentioned the last con call as well that the EIRs of most other types which were audited is coming in one by one and there is nothing adverse to comment at this juncture. Overall, few other types, one or two other types got EIR, closure of audit et cetera. So we are not able to read anything negative to be the case.

Anubhav Aggarwal, Credit Suisse.

So recent deals that we've done on the Phase 3 compounds, I just wanted to understand that is there a target that we are working in terms of next five years from this kind of division or do we have a target on how much we want to spend on this, because when we had R&D Day, we did not even talk about this as a possible segment that we will target. So it appears that this is something new that we guys are pursuing now?

Can you repeat the question? The initial part of the question?

Phase 3 compounds. We've done the deal with XenoPort recently or Eisai recently.

Anubhav, I will request Dushyanth to speak. Dushyanth you are on the line?

I am, Kedar.

So the question was Dushyanth, this is a new segment that is emerging in our portfolio. Do we have some broad targets in terms of the next five years? Not in financial terms, but in terms of our -- the shape of our portfolio.

So broadly, we have been, as you all know, building a significant pipeline organically across dermatology, medical dermatology, across multiple disease areas and also in neurology, across migraine, epilepsy and Parkinson's. Our intent is to continue to prosecute these development stage assets and bring them to market to commercialize, as we have shown success exemplified by Zembrace approval and Sernivo approval.

So over the next five years, our goal is to continue with the success that we've demonstrated over the past several years and continue to address the needs of patients across these multiple disease areas. As far as our investments, they will be in line with the guidance that both Saumen and Abhijit have shared with you in these assets. And as far as business development, those will be in line with our objectives of continuing to address the patient needs in these disease areas.

Just following up on that, just so this segment -- the areas remain the same that we were doing so far in proprietary products. But the profile changes certainly, now we are looking at absolutely increase -- moving away from the incremental innovation we are now looking at absolute innovation here. Is that a change in strategy, what prompted us to take the decision of absolute innovation?

It is still not absolute, if you're still in the line of really taking care of under-met kind of a medical need. And if you are really alluding towards are we putting more capital allocation for proprietary products business segment to fuel growth for the Company in the period beyond 2019, yes, we are doing that. And while bulk of it will happen to the organic R&D route, we have also tried to expedite early commercialization kind of opportunities, as well as investing further on something which is in advanced R&D pipeline in a similar area.

Just one clarity on the results also. The depreciation number that you guys report, that sequentially has moved very sharply by almost INR38 crores. What have you commercialized that such a sharp increase in depreciation, because our annual CapEx is INR1,200 crores. That cannot lead to such a sharp increase in quarterly depreciation of INR38 crores.

Anubhav, I think that's in line with some of the high value capitalization of some of our assets, some of those are in ECZ, some of those are in Hyderabad, it's a combination of both.

But Kedar, so that will be captured in the INR1,200 crore CapEx that's we doing, right?

No, the INR1,200 crores would be the cash flow, Anubhav. The capitalization converting WIP into a gross block, so that accounting charge would have created this kind of thing. I can connect with you separately, Anubhav.

And just lastly on the Venezuela write-off that was taken, is that all in the net interest cost number, is that all below EBITDA number?

It comes in [F line].

A large part of that is in [F line]. There are certain -- so we have chosen to follow this treatment for all the assets. So there is a part in the COGS line as well. Large part in products line, a little bit in COGS and SG&A. That's how it is split.

How much was the number above EBITDA?

So I think when we compute EBITDA, we take the entire thing, Anubhav, as part of EBITDA. So we only take out the interest and income from mutual funds out, but if you want a split between [S line,] more than 85% is booked in a [F line], balance 15% is booked in COGS and SG&A put together.

Girish Bakhru, HSBC.

First on Ritux registration in Russia, congratulations on that. Can you give a color on what size of the market that is and when do we expect the launch of the product?

Post the price registration, approval is there, so that's in the process and the tender has come with a certain calendar frequency, so we wouldn't be able to comment exactly which one we would be able to catch, but the good news is the process has started. That's the good news. And at the moment, certainly this will be a few tens of million dollars for the Company. But beyond that I wouldn't be able to -- how much will be there. The erosion, how much is this thing, very difficult to say. But, low few tens of million dollars, I guess.

Just clarification here. I mean, given the amount of sales [BIOCAD's SLB] are doing, I think it's in the order of over [$100 million]. Your number seems fairly low. Is it because it will take time to ramp up?

No, it's a tender market, fully government. This fall in the Seven Nosologies, as it is called in Russia. So it will be fully covered by the government. But there is naturally, would be -- first of all we'll have to see which tender we're able to catch and what part of the year we are getting in. I mean, as much we'll try, as quickly as possible. Secondly, there have to be a certain correction in pricing, based on the principles followed in Russia on how they would look at the various market pricing and so on, so forth. Naturally, the competitor would have to match similar pricing. And so, no, it's not about share or anything, but pricing correction.

Second on the FDA front, I mean you said that probably your remediation will be over by end of the quarter. So when you are inviting FDA, ideally one would assume you would invite for inspection for all three sites simultaneously, right? And is that something that you think is a very possible scenario that FDA visits all three sites together?

How agency would inspect sites would be difficult for me to comment, but point is that remediation, your question is probably that are the remediation activities going in parallel in all sites? The answer is yes. Are they progressing satisfactorily in all sites? The answer is yes. When we go and sort of meet up and request, we naturally would give overall three sites, as well as in our extension of many of those things in other sites, the whole picture. And then it's up to the agency how they want to sort of audit.

And just lastly on India, I mean given the growth that we saw last quarter, I mean bit surprised by a lower growth this quarter. Any particular element why India did not do that well? Was there a particular impact from recent price correction in the market? Any color on that?

So, one, is of course the oncology business was a little slow, institutional oncology business was a little slow in Q4. And the second is quarter-to-quarter, quarter end cut-offs vary to a certain extent. So that had some more impact. Not that much about all the confusion and turmoil that is there in the market. Not so much. But overall, I don't read too much into the quarter. Overall, the year has been a robust year. And this year also, by and large, mid-teens types of a thing is not unusual, not like -- we would look forward to it.

So how much portfolio is currently under DPCO?

More or less our NLEM impact is in line with most of the peer group companies. Probably the first one we got a big hit when omeprazole came in, but the rest ones, we're probably tracking a little bit lower than some of the peer group companies. And the good news is, on the FDC issue where -- which has been another topic which is much in news these days, the FDCs which are not scientifically justifiable, our impact is almost negligible, which -- it's not so much about the financial impact. But we're feeling good that it vindicates the scientific approach in our product selection.

Prakash Agarwal, Axis Capital.

Sir, question on US business. You did mention that you are expecting approvals picking up from second half of the year, and given the fact that the couple of your key products in the market has started to see some more competition, would you be able to give some color on the US business spanning our for fiscal 2017?

In general terms, I can't give you again a quantified sort of guidance. But in general terms, yes, we've started with a little bit of a negative note, as you'll know valganciclovir in March went generic, fairly steep correction with just one player in. So that certainly has major impact. Generic Vidaza has also seen, I think, Mylan's approval and 505(b)(2) as well. But that is yet to be felt. There would be some impact, but certainly Valcyte was steeper.

Regarding going ahead on the launches, again, I'll say it'll be a brisk year of launches, again subject to all the cautionary note and assumptions et cetera, it's certainly going to be a year where we used to see a couple of years back, series of launches, similar sort of a thing, but a little back-loaded. The break-up would be probably about 40%, 45% injectables, about 40% oral solids and the balance being patch and cream.

So I mean given the fact that you already saw some margin pressure coming up and with the facts that you just stated on your key product seeing competition, so just trying to understand the margin trajectory as well.

Look, I mean as far as the last year was concerned, I told you that the fall in pricing was counterbalanced by volume gains, roughly, very roughly, here I think -- since the year has past behind us, roughly about [$100 million] fall in prices, about [$100 million] volume increase counterbalancing each other. Now going into next year, of course, as I said, [ the Valcyte] has an impact, but all depends on the launches. Some of them are not so bad and depends on how it pans out, the margin will sort of play out. Look, the honest answer is it will be foolish to even put in a conjecture here. Of course, we have a budget, but how another mega generics work, if -- in the phase of launches, there is always that possible upside and possible not so great upside. So margins I wouldn't be able to give you guidance on that.

And lastly, some color on the Nexium pick-up already, are you seeing the market really stabilized now? You do expect still some market share ramp-up? And lastly on the Copaxone update please. Thank you.

So, Nexium, for us at least there is some good news. There is some sort of shakeup in the market, because of market because of similar issue in Bangalore. So there was some part of the market got vacated and I think, we could -- because our entire supply chain was pretty well poised, we could take advantage of it. And now I think it will play out in the next few weeks, we'll see the shares. I think we are -- I think certainly going to have due share in the market.

And what was the last one you wanted?

Copaxone.

Copaxone -- by the way, Nexium, I mean the pricing is of course with entry has got eroded, but still effective enough. On Copaxone, I think we'll try and see whether towards the end of -- by the end of Q2 we are able to comprehensively answer the CR. We are working towards it. So, unless any -- we see more unforeseen things and there is a whole deep characterization, some done here, some done in various parts of the world and various other locations. If we're able to put in together, we'll give it a shot whether by end of Q2, comprehensively answer the CR.

Manoj Garg, Merrill Lynch.

Abhijit, while you've alluded on the generic pricing scenario in the US over the next one year, but just would like to pick your mind from a little long-term perspective that how this whole thing is likely to play out, once you start seeing the acceleration in approval, and even people are talking about maybe potential combination of [strip and cream]. I just would like to see in the next two, three years how do you see the whole scenario panning out.

Life is going to be very eventful, if I can say the least. Firstly, erosion at the bottom end with multiple approvals coming in; impact due to ongoing expectations of the agency for everyone to ramp up the quality levels. So these two would be a continuing factor in the whole game. But to summarize, I think, finally, certainly where things were much better earlier when it was less crowded and one could get more upsides, here unless the assets are good, and I probably repeat what I have said all along that everything would be in the type of products which we file and get approval and in what time frame. I mean with the consolidated back end -- sorry -- the consolidated customer end, if you're very late, you can probably lead erosion of price, but you may not benefit in the process. So, finally, back to R&D and the productivity and success of R&D.

And Abhijit, I think a couple of quarters back you have made a comment on Gleevec, like probably you are seeing the launch maybe couple of quarters after Sun Pharma's exclusivity. Now given the fact that Gleevec is there in the market and even Novartis had made a comment that they do expect four to six players post-exclusivity, where do we stand and you see Gleevec probably launch this fiscal year itself?

Yeah, this fiscal year yes. Number of competition, in between anyone's guess. Four to six in our view is a little high. But I don't know; beyond that we wouldn't know.

And just last question from my side. On your proprietary portfolio, we understand like you have the [dump] field force. But with regard to your CNS, are we going to use a separate field force or like probably you feel that the current field force could be good to even promote the CNS products as well?

Dushyanth, you want to take this question?

For our neurology portfolio, we have deployed a dedicated sales force for Zembrace. This sales force calls on primary migraine treatment providers. So this is a distinct force from the dermatology sales force.

Can you share the number, like how many reps or the people who we have -- who are directly going to call the doctor?

The strength of the team is roughly 50.

50?

Yes.

Neha Manpuria, JP Morgan.

My first question is, you alluded to having some remediation cost in this quarter. One, how much was this cost? And second, is this all in the SG&A, is that the right assumption, or there are some other parts where this cost is reflected?

No, this is part of SG&A. So roughly, mainly it is consultant cost. It will be to the tune of around $20 million.

And since we are talking about completing remediation towards the end of this quarter, I'm assuming we'll see additional cost in this quarter and then probably that will normalize?

It will not become zero, but it will substantially reduce.

Secon6dly, in terms of R&D, we indicated that we [were] increasing investment towards our proprietary product portfolio and I read somewhere that our guidance still remains again 11% to 12% of sales. And we are adding more assets. So how should we look at R&D going forward? I would have assumed that this number would inch up as we're looking at more novel products now?

Yes, if it is going to be successful and we take it forward, it may.

But currently we are sticking to a 11% to 12% guidance, is that correct?

It can go up beyond 12%, but it will all depend on hitting milestones and being successful and taking it forward and accordingly we'll decide it.

And my last question is, we have seen very strong cash flow generation this year of course, even after a buyback, we have a healthy balance sheet. How should we look at inorganic growth opportunities, M&A? Are we evaluating and what would be our areas of interest?

Buyback process has started, it is not yet completed. So, of course, whatever we are going to earmark for buyback, we'll have to take it from the current balance sheet and not (technical difficulty). But we have been focusing a lot on growth, both organic and inorganic. So at any point of time there will be a few targets, which we are looking for. But at the same time, as I have alluded to earlier, there are very strict set of criteria we apply. So if there's a meaningful target, we will definitely consider.

And would US be our primary market of focus or we're open to doing deals in other markets too?

India also we will be very open, if there is a good target available.

Surya Patra, PhillipCapital.

So, again, continuing on the R&D aspect, can you just give us some update on the biosimilar portfolio for the advance market? What is the kind of a developmental progress that we have seen so far?

Nothing different from what we have been saying. The journey with Merck Serono is progressing satisfactorily. And as I said that none of those launches are in near term. But, while on that I think the clinical this thing is progressing satisfactorily on the assets.

So those are like in Phase III?

Yes. If you are talking about finally the launch, it is still few years away.

Second question is that as you've indicated in the initial remarks itself that you're seeing some sort of price correction and all that in US and possibly that is the reason for the sequential decline in the gross margin. So should we consider that this is the kind of a new norm what gross margin that we are seeing for the quarter or even for the full year?

Maybe a quarter or two before the new launches pick up, as told by Abhijit, in the second half of the year.

First two quarters, as you can guess from whatever we spoke so far, couple of assets coming under competitive pressure, our launch is a little more heavy towards the second half. Given this, naturally it's safe to assume a muted first half. And also the remediation costs, which Saumen mentioned, some of it [designed] to this quarter and substantially came down thereafter.

Just one more question on that Venezuela side, see after this kind of a write-back, so is there any kind of negative surprise is still there or what is our stance on that or what -- can you just give some clarity on that front?

No, after this entire translation loss in Indian rupee terms all that we have is very negligible, less than even INR15 crore. So actually, we have taken a complete [revision].

And what is the kind of revenue --

By chance if there is any repatriation comes, it could be on the reverse side. I mean, we'll have to reverse (multiple speakers).

And the likely decline on revenue side that would be how big on Venezuela side?

Venezuela has stopped selling completely actually. Last quarter we didn't sell anything, almost, because now here onwards the game is completely different. As we mentioned, we remain very, very focused to the geography, because we think there is opportunity, we've signed two deals with two government organizations. They are keen to have the biologics in, because it's a win-win for them and for us, because we bring in healthier savings, substantial. So we will stay very, very focused. But only thing the game has changed. It's always established, advanced through (inaudible) before we dispatch. But we stay fully committed. In fact, President Maduro mentioned our company specifically that they are very happy to sort of [lean to]. But the only thing is -- that's all fine, but there is turmoil in the geography, so till we see business rolling in, we can't bank on that.

Saion Mukherjee, Nomura.

On the proprietary product side, on the XenoPort asset which you've licensed in, can you give us some indication on the timeline and cost involved in development for the drug for psoriasis? And also for multiple sclerosis, if there are any thoughts at this stage?

Dushyanth, would you take this question?

Sure, Kedar. Thank you. With regard to the clinical development timeline, our plan is to very quickly, within this fiscal, to initiate the Phase III study. As you know, this asset had completed a large Phase II. So our intent is to continue the momentum and enter the clinic very soon.

As far as MS is concerned, we as you know, were able to incorporate that as part of the deal, where we see it as an upside. And so, at this moment, we are evaluating the potential clinical design and strategy for that indication.

Just on the Phase III trial, how long will that take in your view and what's the cost involved?

With regard to the timeline, we see this in line with those who have conducted psoriasis studies within a moderate to severe patient population, that roughly is in the 18 to 24-month time period. And as far as cost is concerned, we also see that as in line with those studies required to get the label indication we seek.

And since you've launched Zembrace, any initial feedback that you have?

We've only been on the market for a couple of weeks, as you know, and the feedback from our constituents, physicians and patients has been very positive. As far as data and scripts, that, as you know, take some time to go through adjudication and the repo databases have a lag. So we do not have that data as of today.

And one final question on your gross margins. If I see the material cost as a percentage of sales they have in fact come down a little bit QoQ. The other expenditure as part of COGS has gone up substantially. So what is the nature of that expense, if you can just explain that?

One, we alluded to is the remediation cost itself -- sorry, you are talking about the gross margin?

Yes.

So one will be the business mix, which is there. If you see the Global Generics, if the pie is much higher, then the weighted average gross margin for the Company becomes significantly improved, compared to if the PSAI business mix moves up, then it goes in the reverse way.

Just one last question if I can. Abhijit, you mentioned about the kind of launches you are looking for fiscal 2017, and as we move into fiscal 2018, will the mix more or less remain same, like 40%, 45% injectables, or do you think there would be more of injectables and patches as you go into FY18? And also in terms of number of launches, how would FY18 compare to FY17?

FY18 would be as [my earlier comment], because naturally there are always every year some overflows from the early year to next year. But the nature would be somewhat similar, the makeup of the whole thing. And I said about 40%, 45%. It should be in the same range. That itself is very high, given the fact that overall the generic portfolio in worldwide is 80% oral solids, and the rest is all between injectables and topicals and etcetera, etcetera, devices and other things. So there, I think, this itself is substantially skewed with a purpose and a design and I think broadly if we can maintain a similar one, I think we should be good.

Abhishek Sharma, IIFL.

Most of them have been answered. I just had one around your commentary on the prior year's change in the US dynamics. You said that there was a fall in prices and then that was compensated by volumes. Just wanted to understand where exactly did you see this volume uptake? Was it in the same products where you saw the price erosion or was it a different set of products and whether that could be extrapolated to the next year?

The two parts of the volume increase, actually the volume meaning eventually translating to value, of course. The first is some supply failures by the other competitor company. That would account for a significant part of that, which happened to be in the portfolio where our supply chain is geared to take it. As you know, in US, someone may have supply failure, but you need to have the supply chain robustness to swiftly capitalize, because no one's waiting for anyone. So that has been one part. And the second part is, of course, some companies, as you know, going to this -- piecemeal, here and there. Some bids added up the balance -- win in the bids added as well.

So it was basically largely on account of disruption at competitor?

I don't have an exact breakup. But I'm just quickly trying to put things together. Yes, a reasonable part of that is supply failure, yes.

And just one more, which is in the RoW, ex of Venezuela, would it be fair to say that your business has grown at 25% plus kind of a number? I mean my rough calculation gives me a very high number.

So the RoW outside Venezuela is largely Australia, South Africa and a number of small markets, Abhishek. There has been a currency hit there as well. I think the local currency number could be double-digit, but eventually in rupees it's smaller.

Chirag Dagli, HDFC Mutual Fund.

As you look at your US portfolio in FY17, do you think price erosion for the base business will be much larger than in FY16?

So, again, erosion per se, without taking into account new launches et cetera, certainly will be higher, because (inaudible) itself has got a reasonable hit. So, yes, I mean the answer is yes, and hence it's important that we have the launches.

Post our entry in Russia for Rituxan, what will be the price discount versus the innovator's product at the final level, once there is sort of -- we are in the market?

So actually the market is more with BIOCAD actually, as you know. And earlier in the call someone mentioned some figure. So there would have to be a discount and it's a partnership launch. So I gave a rough indication of low tens of million on an annualized basis. So let's see how it pans out.

And what will be our CapEx, next two years?

So, around INR1,200 crores.

This is for FY17, no sir?

Yes.

And then similar number for FY18 as well?

Maybe a couple of years it could be at that level. And after that, it may come down.

My only point is that last three years CapEx has been significant, so have been the R&D investments. If you can give us some color of what broad buckets does this CapEx, say last couple of years and the next couple of years, sort of broadly fit, where do they fall, what is this CapEx for?

When we really launched our injectable business, it was all getting outsourced from others. Then we have developed the whole capacity in-house now. Then, of course, we have also built up [facility for] topical and others that we didn't have. Even on [OSD] side, there is requirement to expand the capacity, because you can't have a capacity constraint when there is an opportunity in the market. Because if you cannot cash on opportunities, then it's a double whammy. And also, going forward, there'll be requirement to expand our biologics capacity a bit, particularly on the emerging market perspective, if there are more and more countries, if you're going to get approvals. And there are CapEx also in other areas. For example, we are considerably stepping up investments even in IT, more from -- ignore overhead where quality is concerned, some automation. And then even on the cyber security perspective. So all these add up to CapEx.

Last question, if I may sir. Do we continue to do business in Venezuela?

As Abhijit already said, we are very actively engaged with the Venezuela government. There are two contracts which have been signed with both government companies. So only condition to the contract is that we will dispatch only when we get either the LC or some advance. And when we get, we will then have that business there.

But then the profits on that business will be converted at this lower rate or at the higher rate, sir?

The thing is we always position ourselves as a company coming from India, where the medicine is more affordable. Secondly, our pricing will be on that. Now, so far as the thing is there it is on a preferential rate kind of a thing --official preferential rate. As and when we get LC and thing, it will be on the preferential rate.

So, these contracts largely will be in US dollars, simply put, yes.

Also we'll continue to record at the higher rate and then we'll wait and see if we get the money?

No, what Abhijit is saying the contract itself, the money that we get, we will straight away get the dollar, so there's no need to have bolivar and then have a particularly rate of translation.

That is the change that we are looking for. Okay sir, fair point. Thank you so much. All the best.

Surajit Pal, Prabhudas Lilladher.

Most of the things are pretty much answered. Could you please give some idea that if remediation cost is not there, how much benefit could be seen in EBITDA margin? And what could be your effective tax rate in FY17 and FY18? And number of site transfer you have done till date or in FY17, where you could expect or that could help your launch in FY17 and FY18 as planned?

So it will be very easy for you to compute what would have been the EBITDA, if you take out that $20 million that I alluded for the remediation cost for the quarter.

Okay $20 million you have mentioned.

Then in terms of the effective tax rate for this year, it was within 21% to 22% as I explained earlier. The adjustment which has happened because of two reasons. One is this whole translation loss of Venezuela. Already we have decided to -- we will look forward to repatriate some money from subsidiaries. And so that changes your tax this thing.

So about four or five have already been executed in the site transfer. One or two approved, one -- few already submitted and as we speak some executed,- and just to be in the process of being submitted, few more. So, we are more or less -- here onwards whatever we have lost, we've lost, as I said last time, but going ahead we are trying to see we mitigate the balance.

Ladies and gentlemen that was the last question. I now handle the conference over to Mr. Upadhye for closing comments. Over to you sir.

Thank you all for joining Dr. Reddy's senior management for Q4 FY16 earnings call. In case of any additional clarification, please feel free to get in touch with the Investor Relations team. Thank you and good day.

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