Dr Reddy's Laboratories Ltd (RDY) 2017 Q1 法說會逐字稿

Ladies and gentlemen. Good day and welcome to Dr. Reddy's Q1 FY17 Earnings Conference Call. As a reminder, all participants' 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.

A very good morning and good evening to all of you. Thank you for joining us today for Dr. Reddy's earnings call for the first quarter of fiscal 2017. 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; and Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media 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 Annual Report filed in Form 20-F with the US SEC for the year ended March 31, 2016, and the quarterly financial statements filed in Form 6-K with US SEC for the quarters ended June 30, 2015; September 30, 2015 and December 31, 2015 and our other filings with the 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 financial highlights. For this section, all the amounts are translated to US dollar at the convenient translation rate of INR67.51, which is the rate as of June 30, 2016.

Consolidated revenues for the quarter at INR3,235 crores or $479 million and declined by 14% year-on-year. Revenues from our Global Generics segment $395 million and PSAI segment at $70 million. Overall, the decline in revenue is largely impacted by the lower revenues from North America generics and API businesses as well as loss of sales for Venezuela.

North America generic business witnessed increased competitive intensity in some of the key molecules, primarily Valganciclovir and Azacitidine. Further, we also witnessed pricing pressure and moderation in the volumes off-take. As discussed earlier, the PSAI performance continues to be impacted by delay in dispatches on account of the ongoing quality improvement initiatives.

Consolidated gross profit margin for the quarter is 56.2%, recording a year-on-year decline of around 490 bps. As discussed earlier, increased competitive intensity for our key assets in Generic business impacted the decline. Gross margins for Global Generics and PSAI were at 61.3% and 24.1%, respectively.

SG&A spent, including amortization for the quarter, is $182 million, an increase by 12% year-on-year. As guided in our previous call, we continue to incur expense towards the ongoing quality improvement initiatives and also sizeable outlay towards launch related activities by our proprietary product business with respect to Zembrace and Sernivo. Normalized for these changes and also the decreased [spend base] from Venezuela operations, the balance net increase in SG&A is largely attributable to normal salary increments and headcount increase.

R&D expense for the quarter at $71 million representing 14.8% of revenues. This spend is in line with the ongoing set of developmental activities as planned. During the coming quarters, we will initiate further development of the recently in-licensed IP R&D assets from XenoPort and Eisai. On Venezuela, we have not received any repatriations during the quarter to-date and hence we can't measure the financial statements of the Venezuelan operations at the current DICOM rate.

EBITDA for the quarter stands at $59 million which is 12.3% of the revenues. Effective tax rate for the quarter is at 26%. However, we expect the annual effective tax rate to be in the range of 21% to 22%.

Key balance sheet highlights are as follows; our operating working capital further decreased by $58 million during the quarter. Capital expenditures for the quarter was at $48 million. During the quarter, we concluded our share buyback program and thereafter ended the quarter with a net debt to equity ratio of 0.11.

Foreign currency cash flow hedges for the next nine months in the form of derivatives and loans for US dollar are approximately $228 million, largely hedged around the range of INR66 to INR71.1 to the dollar. In addition, we have balance sheet hedges of $191 million. We also have foreign currency cash flow hedges of RUB825 million at the rate of INR0.99 to the ruble and EUR4.5 million, largely hedged around INR75 to INR82.05 to the euro, maturing over the next nine months.

Effective this quarter, we are presenting the consolidated financial information under IFRS and Ind AS and standalone financial information under Ind AS. You have noticed that the PBT under IFRS is marginally lower by INR35 crore relative to that presented under Ind AS. This is primarily arising from higher depreciation and amortization expense under IFRS resulting from a differential fair value base and also the treatment of the gain arising on fair valuation of the mutual fund investments.

Before I conclude, as some of you are already aware, Kedar Upadhye, after his 12 years stint with us, has decided to pursue his carrier outside Dr. Reddy's. So following this, Saunak Savla, member of the Investor Relations team will now lead the IR function.

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

Thank you, Saumen. Greetings to everybody and welcome all on this earnings conference call. Overall, the performance of the quarter has been quite muted. It reflects the adverse impact of competitive dynamics on the US business, impact of ongoing remediation activities on the API business and no contribution from Venezuela in the current quarter.

Overall, this has been a challenging quarter and every steps are being taken to get back the growth momentum. I will dwell upon each of these business in detail going ahead. We continue to focus on key priority areas of quality improvement initiatives, execution of launches and strengthening of the pipeline.

Now, let me take you through some of the business highlights for each of our key markets. Please note that in the section all references to numbers are in respective local currencies. Our North America revenues are $237 million and declined 20% year-on-year. The decline captures the full quarter impact of competitive challenges in some of our key assets. Further pricing pressure as well as moderation in volume off-take was noticed across Rx and OTC products.

Against this tide, we consolidated our market share position in Esomeprazole. Recently, you would have noticed, our approval and launch of Omeprazole and sodium bicarbonate capsules. We hope to see further improvement in approval rates and launches in this year.

On the emerging markets front, there has been a fair bit of stabilization in the macro situation. Crude is more stable and so is the impact on major EM currencies. Russia business in ruble terms grew by 23% year-on-year and was stable sequentially. Teams continued their efforts in terms of optimizing the productivity and meaningful additions to the portfolio.

As per IMS YTD [2016], our volumes have grown by 6.5% versus the market growth of 0.5%. Consequent to the latest approval in Russia, we are working towards pricing approvals and preparation for tender participation. As explained earlier, we did not have any revenues in Venezuela. We'll continue to actively engage with Venezuela government to provide affordable medicines to fulfill the needs of the people of Venezuela, but with an assurance on payments.

India business revenues are INR522 crore and grew 10% year-on-year. This was primarily due to the prevalent confusion in the market consequent to frequent NPA pricing notifications that were experienced in this quarter. As per IMS MQ June 2016, we grew by 11.6% versus market growth of 8.8%. Team continues to focus on increasing the productivity and augmenting the portfolio.

PSAI business posted revenues of $71 million and declined 21% year-on-year. This decline is primarily attributable to the delayed dispatches on account of ongoing remediation activities coupled with some amount of moderation in the off-take of key customers.

On the proprietary side, we've launched Zembrace and Sernivo. These brands are gradually getting the traction. On the ongoing remediation activities, we believe most of the commitments made by us to the agency have been duly addressed and in this quarter, we wish to meet the agency to discuss the progress and request for a reinspection.

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

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Neha Manpuria, JPMorgan.

The first, is it correct that all of the remediation cost is pretty much done in this quarter as you're close to completion of the remediation and what was that amount?

It is pretty much done. So far, we would have spent altogether around $36 million and I think it could be couple of million more in future.

And secondly, we also mentioned launch related activity for the proprietary portfolio, the two products that you've launched. Is this -- will this be lumpy and therefore a lot of it was in the first quarter as we go or is this recurring in nature? I understand that some of it would be recurring but if you could give us a break up, that would be helpful.

So we have Anil Namboodiripad from Proprietary Products business in the call. So we'll ask him to respond to this question.

Yes, so as with any new launches with Proprietary Products in the US, there are some upfront costs that are associated with the launch. Most of the costs are associated with market conditioning as well as building awareness trial and usage of the product. So we have an upfront cost associated with the launch but going forward, once we'd establish the awareness trial and inculcated usage, then the costs are going to be significantly lower in coming years.

So, it is fair to believe that this amount will therefore continue for a couple of -- for few more years then, the one related to our Proprietary Products?

Part of it will continue for some more years, yes.

Okay, got it. Thank you so much. I have more questions but I'll get back in the queue. Thanks.

Anubhav Agarwal, Credit Suisse.

One question on the US sales. Can you explain your comment on lower volume off-take in the US this quarter? Is this particularly referring to the Oral Solids or injectable portfolio?

So when assets see competitive challenge, there are two ways one deals with it. Either you match the competitive price and keep the account or you give up the account. So either way, you have either a price erosion or a volume erosion and so, the total financial difference what you see is an outcome of both, but primarily it is due to the competitive challenges.

Okay, that's clear and just a clarity on the US sales this quarter, is there any impact of share stock adjustment for sales booked in previous quarter and impact of higher price erosion on those sales, which is flowing through full in this quarter or is this --

There is no one-time impact.

So you mean that like $237 million sales, let's say, if there is no more approval, largely the subsequent quarter sales are going to be around, this is more like becomes a base number for us.

Yes, of course, with the new product, it is going to go up from here. That's what we can hope.

Yes, there is some supply related adverse adjustment, but not a very big one to be (inaudible).

Yes, only thing you would like to talk about (inaudible).

And the other issue, which I would, since you asked the question, there is also, we had been working with McNeil when they had their problem for last few years, and they have been some contract work, which we had been doing for the last few years. So that contract is getting to an end, is tapering off, first quarter was still there and it's going to -- virtually it's tapering off from this quarter. The bottom line impact, give or take, will be in the range of about $25 million per year annualized. So just to sort of put that on record, and base business broadly, you can take this, give or take a little bit here or there.

Sorry, sir. I was not -- when you mentioned about this contract, you were mentioning about the Shreveport work that you do is included as part of US sales?

Yes.

But Shreveport sales for us were almost like $50 million, so are you saying that we will have no sales from this facility.

We have a lot of our own products from Shreveport, several and those will be pretty much intact, but there was the contract with McNeil for the last few years, so that is getting to an end.

And just a sub question on this one is that, now if you had a higher market share in Nexium, would this quarter would have capture the almost good part of the Nexium or this was only partly captured and we are going to see still some benefit in Nexium in subsequent quarters?

The current market share is 15%. There is at least I think still an effort for a fair market share a little bit more. The discussions are on, whether it will succeed or not, we don't know but, active discussion are on but otherwise based on 15%, we are pretty much close to it.

No, he is asking the whole quarter was reflective of that or it was part.

More or less.

Nimish Mehta, Research Delta Advisors.

First question is related to the foreign exchange loss that we have booked because of Venezuela translation losses. So if we adjust for the back losses in the other expenses line item, we seen that the other expenses was reduced drastically. If that's a proper observation or I'm missing something here, and if yes, then what is the reason?

You are talking about this quarter, what we have taken in Venezuela?

This quarter, yes, I guess it is about (multiple speakers).

(multiple speakers) the DICOM rate which was 272 in the last quarter end, has become 630 during this quarter. So the corresponding impact of that is around INR7.5 crore. So we had after the provision that has been taken in Q4, we had roughly around INR15 crore in our Venezuela subsidiary, so our of which INR7.5 crore is now gone. So balance INR7.5 crore will be there.

No, I'm referring to one of your launch which mentioned about INR300 crores plus of impact because of translation losses due to Venezuela which maybe one-time?

Basically, if you're looking sequentially, then last quarter, Q4 FY16, we had this Venezuela related adjustment also in the forex line. So that was a quantum amount of around INR400 crores plus. On similar lines, right now, it is around INR7.5 crores, INR8 crores.

It is not INR300 crore plus because that is what I read in the notes to account that you mentioned. [INR348 crores or INR384 crores] for this quarter is what I saw.

So that would be on a standalone basis, but when we look at the consolidated financial statements, the Q4 FY16 included around INR430 crores of loss which on similar lines is around INR7.5 crores, INR8 crores right now.

The other question is related to our Shreveport facility, if you can let us know what is the status of the facility, was it in OAI status or what is it, if you can confirm or validate development.

No, so there was lot of questions in between. We reached out to the inspector, she has confirmed in writing that it is the VAI as she had exactly communicated at the end of the audit. So I don't think there is a concern at least based on the way we have received the mail from the inspector.

So there is a VAI as of now, right?

Yes, VAI.

Manoj Garg, HealthCo.

First of all, let met also express my congrats to Kedar as he transitions to his new role out of the Company and thank him for all of your help over the years.

I have a couple of questions. I'd like to start on North American pricing. You said pricing pressure is the key source of weakness. Some of your competitors that have already announced in the US namely Teva and Sandoz have pointed to about mid-single digit pricing erosion during the last quarter, which is actually a moderation from previous quarters. So, can you quantify your pricing pressure within your portfolio and I would imagine that this is largely being exacerbated by the inability to launch new price offsetting products, but maybe if you could quantify the pricing erosion?

The erosion in pricing will be different from company to company quarter to quarter depending on what gets what fees competitive sort of interest into the market. So in this specific quarter, the full impact of Valcyte going generic was the major impact and also VIDAZA saw some impact. Dacogen was a little earlier, but since there is some share consideration as well. So, quite a few of our important assets have seen the erosion in this quarter. Specifically, in this quarter, on the base business, it is in double digit for us, but having said that, this will vary from company to company quarter to quarter.

Okay. So within this 16% decline in the US, can you break that down in price versus volume?

All right, so let me again, I just was explaining that when you see competitive intelligence -- you see competitive pressure, you see in most of your accounts. So you retain some, you give up some. The ones you give up is the volume reduction, ones you retain is a price erosion. So you should see overall the impact and a very large part of the quarter-on-quarter price decline is due to the North American reduction and the rest is emerging markets and India and LEM (inaudible) so on and so forth, but probably about 70%, 75% of the difference is from North American price volume erosion.

Okay, that's helpful and then on remediation, you said it's -- so your remediation efforts or the costs associated with the remediation efforts should start to decline from here on, but I think you just alluded to that you received some sort of notice about VAI, can you just expand on that in terms of the timing of that notice and what you expect in terms of FDA interactions or FDA inspections in the near term here?

So let me clarify. The question asked previously was regarding a specific site and has nothing to do with the three impacted sites. So that was the independent question on the VAI which I answered. So let me clarify that, that was about three-fourth.

Regarding remediation, Saumen mentioned between $35 million to $40 million is the total expense. It has more or less tapered off this quarter and because we have completed most of the commitments, some of the long-term commitments will be continuing, that'll be internal. So for all practical purposes, that amount which I said between the last three quarters have played out.

Okay, and then I'll get back in the queue, but lastly on Teva Allergan generics portfolio that you acquired, I think seven are pending ANDAs and one isn't approved. Can you provide any color here as to when we can start expecting some revenue contribution from the seven pending ANDAs? Are they -- how far along are they in the review process?

Okay, so even the one approved is a settled, it's approved but settled so it's not going into launch immediately, but an overall basis from next financial year onwards, we are hopeful of seeing fewer approvals. Of those eight assets, two are very meaningful and the rest are okay, about five Oral Solids, one topical, one drug device and one other (inaudible) type of a product.

Chirag Talati, Kotak Securities.

First question, when do you expect the Teva deal to complete and post completion, should we expect an increase in amortization charge?

So it may as yet close in next couple of weeks, subject to the FDA approval, all probability, it may get closed in next couple of weeks. Now this will be in process. So it will be a -- amortization will only happen once the revenue starts coming in.

Okay, fair enough. And secondly, on the $25 million McNeil contract that you have talk about, where any revenues from McNeil contract booked in this quarter and when does it exactly expire?

Yes, we booked something in this quarter, but it more or less starts tapering off from now in the next two quarters. A small part of it will continue, but most of it is -- first quarter was almost, let's say, 70% of full run rate, which was booked and then here onwards it starts depleting.

Sameer Baisiwala, Morgan Stanley.

Abhijit, your comments are little confusing to me, when you say that the quarter captures the full impact of the erosion in the key assets and I say that because to the best of my knowledge, I think Vidaza competitive thing happen only by the middle of May. So it should be maybe just six weeks impact. Second Sumatriptan auto-injector would actually happened in July, so that should be the new hit that you would see in the current quarter.

So maybe you have not seen the worst of the hits and at the same time when you talk of the benefits of generic Nexium and you said that the quarter captures the full quarter impact of 15% market share. Again, the IMS data says that you practically had negligible market share until the middle of May and it's only then that you ramped it up to double digits. So, your comments seems to be quite incongruous from a timing perspective.

Okay. So let me sort of deal with each one of those. So, yes, about -- when we're saying full quarter, full quarter for couple of assets which earlier played out, some of it is part of it. Yes, so some of it, especially Imitrex, would still to come and we've seen some of it. So to that extent, you're right. Some of it has played out. Some more will happen, although this month's sale seem to be a little higher than our expectations. So, yes, my comment was more general. This some overflow into the subsequent quarter will happen. To that extent, I agree to what you're saying.

The second point, which you mentioned on -- what is the point, Sameer? Esomeprazole, yes. Esomeprazole market share and revenues are not completely limited. When you get in, you tend to lowered a little bit, that's how the customer's stake. So yes, it could be a little higher, but I wouldn't be able to exactly give you absolute breakup of every million dollar, but there wouldn't be too much of upside on that actually.

Abhijit, the second question here is that you have loaded up the entire erosion in the US to these two products, saying competitive risks. But if I see the sequentially your US revenues are down roughly $50 million if I annualize it's about $200 million and if I'm not wrong then both these assets Valcyte and Vidaza. Full year's sales for you I think is roughly about give or take $100 million each. So what your effect implying is that both these products have gone zero or the story is actually a lot beyond these two?

No, story is not lost beyond these two. Valcyte is a big hit. It used to be more like $120 million, down to say $40 million. But if you exactly add asset per asset, you will probably get some part of it. There would be in general, always some competitive pressure coming in the phase businesses. We keep also gaining a few which sort of keep on nullifying some of these. It's possible that there are a few additional hits this quarter which may or may not play out to the fullest extent in the subsequent quarter.

So beyond this, I wouldn't be able to give you. This is a little dynamic, you know this market. So it's still dynamic. So you take the big assets, those are irreversible and I agree with you, Imitrex will probably come in to a certain extent. Injectables, it happens a little slowly because the GPOs are contracted out for a longer period, especially for Vidaza and things of that sort and hence it will happen, but not happen the way it happens in Oral Solids. So between these, you will have to work your figures out.

For the two R&D Phase III trials that you plan to start for XenoPort and Eisai, what do you think is going to be or on a 12 month basis, cash burn to do this two trials?

Very early to make a complete estimate, but it could be anywhere between $20 million to $25 million for this year.

For each asset?

No, combined.

Okay. Abhijit, with your permission, one more question. It looks like your quarter, your EBITDA has almost halved and net profit has almost got decimated and really speaking, has the negative operating leverage, which is in play, which is that you have lost sales, but your costs remains at the same level.

So just a comment that, do you see your INR32 billion sales going up back to INR38 billion and you restore the net profits or B, do you think you have the flexibility in a short order of time to take your costs down, so that you get back to INR400 crore, INR500 crore profit levels?

Efforts would be on both sides, but in a company where it's largely innovation-based business model, to drastically cut anything would not be the right thing to do and we don't intend to do that. While having said that, there is, to look at hygiene reduction of costs and as we know, a program is on at the moment as we speak, with a consultant as well in and we're looking very seriously into it.

Coming back to the increase in sales, broadly, the emerging markets whatever had to play out, has played out. So (inaudible) by quarter on quarter, those to, including India will keep increasing. The launches in both North America and US will define how we sort of plough back to the full level and if we get, it all depends on if you are able to crack a couple of the big assets, then the whole story turns very quickly to the other side, but we will see how it unfolds. But Yes, focus on essentially launching getting sales back that will be the key thing.

And which are the big assets that you have in mind?

You never fail to ask these questions.

Let's not discuss (multiple speakers).

You know that I'm not going to answer those, but yes, the same thing, some launches this quarter, mid-sized assets. The big ones in public domain, you know, there is litigation amongst one or two assets. The ones not in litigation, I wouldn't be commenting on.

Prakash Agarwal, Axis Capital.

Just more color on the US FDA remediation measures and the cost that you just spoke about, total cost being $36 million. Last quarter, you commented about $20 million in the 4Q. So incrementally about $16 million has been spent and what's the outlook for the cost and on the FDA remediation, sir?

Approximately, you are right. And your other question was, in terms of status of remediation?

No, sir. How do we look forward? So this, you said around this quarter, we will be having the meeting.

Going forward, it will be much lower, as I said, just a few million dollar more, that's all.

Yes, and on the US FDA, so are we expecting the meeting this quarter?

Yes.

And then any broad expectations in terms of resolving and getting back our US approvals and API sales back?

We can't speculate on that. So let's have the meeting, then we will thereafter tell you what is the outcome of the meeting.

But from a percentage perspective, remediation measures done till what extent, sir?

Very high, closer to 97%, 98%.

We're almost done, and percentage will not give the right -- so essentially, everything whatever is committed has been done. The institutionalization of activities, which are ongoing which will always continue. Right. So we are about to send out the letter with a request for re-inspection very soon.

And second question, on India and ROW markets. So India, if I'm not wrong, UCB assets closed out at the end of this last year around June. So would not have captured. So despite we have done about 10%. So X of UCB would be, what, flat growth and how do we look going forward? Has the Alnylam hit us bad or if you could quantify, that would be helpful.

There was one month of UCB if I recall last year. So it's not that it was not there and initially when you launch in branded markets, you launch channels a little bit. So there is some impact of that and so if you net of that, maybe you can take about five or so as the net growth, large part impacted by NLEM. As you know, the current IMS has dropped very substantially. And on the MQT basis, we are still leading the market as I just mentioned. So overall, I think attractiveness for the market is down, but we'll have to be selective on launches and we'll continue our journey.

Do we remain confident of a double-digit growth for this year?

Depends on, see the NLEM, three, four months back did we know that series of notifications will come in the market, more than just price impact, which is one aspect that the whole Channel got destabilized. Frequent changes, asking for immediate stamping, whole army of people continuously stamping new prices et cetera. You know, some litigations in place, so all that has disturbed this quarter, beyond that I think it settle down, so we are still hopeful. Let's see, we are still hopeful. Low double-digits that was the (inaudible).

Okay, thanks. I'll be in the queue.

Thank you. Kumar Saurabh, Motilal Oswal Securities.

Just wanted to understand on normalized level as in ex of remediation cost as well as any one-time hit, how should we look at the base business margins? And by when do we except to reach back to the normal levels of 20% plus kind of margins?

Is it something that only after the Teva approvals, we should go back or do we think that we have products in our pipeline which could take us back to the margin levels where we were?

So normally we would be expecting north of 55% to be the margin of our base business. And in terms of the recovery, we were excepting the recovery to be second half. As we alluded earlier, we were reconciled to a decline in performance in both Q1 and Q2.

So I was mainly talking about the EBITDA margins because is it below the gross margin levels?

EBITDA margin mainly got impacted by the lower sales, if the sales are INR500 crores more, that has a very significant impact on EBITDA margin going up.

Yes, and also, our SG&A cost as an absolute number also have gone up.

Yes, so that will -- remediation cost adjusted, it will be a little less and as what Anil has talked from Property Products that initial cost of new launch it will also get normalized.

By when do we expect these NDA products to deliver the margins which our base business used to deliver?

Again I will have to redirect this question to Anil. Would you like to take this?

Yes, so again, I refer back to my earlier statement that with new launches the initial period involves a lot of investment to build the market confidence and usage of the product. We actually expect to see a big ramp-up to a lot of these investments that we're making I think later this year and into the following year. So we expect to have -- to see the benefit of all of this by late next fiscal.

How should we look at our US sales for this year? As you said that our India business should -- we're hoping that low double-digit kind of growth we are expected in India business, what kind of growth we should expect for the US business or decline rather we should expect for the US business?

Yes, so the earlier, one of the questions I was answering those expectation on the products will decide everything like for everyone expectation of products will decide everything, approval of the product. So we can't really answer. I don't know. I can't give you the budget because on principle we don't guidance on all that. But we'll have to wait and watch.

Saion Mukherjee, Nomura.

Just on the numbers are actually a bit confusing the US decline. Now if you look at Valcyte, you said like it's going from $120 million to $140 million. So that's a quarterly drop of $20 million which is much lower than $50 million that we've seen. I don't know but Vidaza we don't see, Mylan or Actavis in the market yet as per IMS and you would have taken some Valcyte correction last quarter itself. So that's one thing. And you know the second thing is, if you look at the material cost to sales under the NDAs, in fact it has been improved Q-on-Q and remained flat year-over-year. So if the impact is because of pricing, we should have seen a significant correction in the gross margins, which hasn't happened. So it's very confusing as to what --

So, Saion, I think repeatedly this question is coming up, let me give you little more details on this.

So on the OTC business, one was some seasonal correction. This was not the (inaudible) season, number one. Number two, there was some drop in the store brand Omeprazole as well. Whether this is very permanent or not, we'll have to see. But there is some bit of these things which are adding up.

Divalproex ER, we saw some significant reduction, but this is also positive news. That's why I was hesitant to give you a little bit. Divalproex ER, I think looks like we've won back some of it and it will come back. So it's a mix of some of these things, these things continue to happen in US market and there are a whole host of other things, I will not go into the detail.

So broadly what is more worrying is the big assets have got impacted. The Oral Solids will see immediate impact, the injectables take a little bit of a time although it will happen and so that's the story in nutshell.

Okay and then in terms of new launches, particularly in the US market, how should we think about it because that's quite critical in terms of gaining back margins etcetera?

So you have said that it will be stronger in the second half. Can you just indicate how many products we should think of and also next fiscal year. So how is the pipeline looking in terms of approval?

So I said first half, which is another few months to go, we will see a few, one mid-sized and a few small hopefully depending on how we're ready for launch, few are partnered, some of these products have partnered, and so that's the first half story. Second half story is we have got a few bigger assets but whether it shows up in Q3, Q4, it's not about the number of launches, number of launches will happen, there are quite a few settlements in Q4 but they may or may not be very big, but the bigger ones, if one or two click, then the story changes very rapidly, but we'll have to wait and so it's not that the story is not just in numbers, numbers we will see, it's not like last year that we will not have launches, we will have launches and we will keep announcing those as we go along, but what is the -- which are the assets which we final go through is going to decide the destiny.

So, I'm just referring to the big assets, so you expect something this year, next year and what's the certainty there? Is it all dependent on litigation or is something which can, which you have enough visibility to say that it can happen this year?

One is in the public domain, which is in litigation. You know Aloxi is in litigation. Barring that, the rest couple are not in litigation. These are difficult assets, depends on how much time, how FDA looks at it, et cetera, and so we'll see.

Any updates on Copaxone 20 milligram, how far we have reached and what's the outlook there?

Trying to fast pace as much as possible, at least the DMF sort of with the new process trial bag is over, the validation is starting. So DMF efficiency in about two months, 2.5 months, 2.5 months or so, we'll try to sort of respond. The ANDA is much easier because it's just taking the batches and providing the stability, but the main thing is DMF, at least the DMF will try and respond in that timeframe, more or less in line with what I said earlier.

So once you respond, given that there is new guidance, when do we expect an approval then?

This is again, your guess is as good as mine. This is, guidance is there, we've done a lot of work, we can more or less assume that to the best of our capability, we have done a thorough job. Beyond that is the agency to sort of look into.

Prashant Nair, Citigroup.

I just needed some clarifications, when you mentioned the McNeil contract going away, you said you gave a $25 million number. Is that the impact on revenues or the likely impact on revenues or on bottom line?

It's the bottom line.

Okay. Can you give some sense on what the revenue would be from that contract which could go away?

No, we'll not go into those details at the moment.

Okay, all right. And secondly, on the R&D spend now, on a full year basis, where do you see it settling as a percentage of sales?

It all will depend on sales. So it will be higher than the previous year because of additional R&D for XenoPort and Eisai. That absolute amount will be more or less in the same line outside these two.

And finally on the remediation costs, so I understand a lot of this will go away, but is there any part of this that would be recurring or would all of it ease off once (multiple speakers)?

Whatever remediation cost I have been telling, it is more in terms of the legal and professional but if there are some manpower increase which happened as a part of remediation, those are there, and that has been already part of our --

Okay, but the number you mentioned earlier in the call, that's for legal and professional charges?

That's right.

Thank you. Ladies and gentlemen, due to time constraints, we'll take our last two questions. Nitin Agarwal, IDFC Securities.

Can you help us understand a little bit more on how the Reditux launched commercialization in Russia is going to go forward? And in general, how do you look at the biosimilar programs for us given that there is a lot of activity seems to be happening now both on the US and the European front?

The big tenders in Russia is in November, and we're more or less getting set to participate there. Overall, we are much more cost effective. The discussion with the health ministry and the government has gone very well. They are very appreciate of the fact that we've brought in savings to the healthcare. It's a large, it's a big saving. So we are optimistic about the November -- participation in the November tender.

In the other markets also, very actively we are moving ahead. We have mentioned we've launched in quite a few markets, small markets and there it's growing, but there are other emerging markets where very actively with agency discussions are going on. I think we're seeing much more traction in the willingness to sort of let the file get in.

So that's the emerging market story and on the regulated markets, the journey with (inaudible) continues. As I mentioned last time, this is little faraway. So as far as the revenues impact is concerned, there is immediately, there is nothing which needs to be factored in, but we would try to scale up as quickly as possible in emerging markets over the next, let's say, eight to ten quarters we'll try to slowly start ramping up more.

And what would be the size of our Biologics business right now?

You know the figure exactly?

Around $50 million.

Yes.

And bulk of that right now would be coming from India?

No, in India, and also there are quite a few emerging markets where we're [spending].

Kartik Mehta, Deutsche Bank.

Is there any update on the site transfer status of Gleevec? And if you could just maybe refresh us on some of the date or the quarter in which we should build in the numbers as per the settlement?

Gleevec is site transferred and data submitted, so it's in the process of review as we speak. There is date given for what's called TAD, and we're hopeful that we'll get through. But probably you must have heard Novartis' con call which they mentioned that there will be probably few people after the six months are over. So I don't know what that -- your guess would be as good as mine what's that means.

Yes, but in terms of, I just want to understand from you, Abhijit, in terms of the date of the launch which would have been settled, we should expect that we should be in the market on that date in terms of the site transfer being successful, right?

Yes, hope so. So far so good, and we expect to launch in this financial year is what I said, probably last time.

Thank you. Ladies and gentlemen, due to paucity of time, that was the last question. I would now like to hand the floor over to Mr. Saunak Savla for closing comments. Thank you and over to you.

Thank you all for joining the call and in case if you have any additional clarifications, please feel free to reach out to the Investor Relations team. Thank you.

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