Dr Reddy's Laboratories Ltd (RDY) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and a very warm welcome to the Dr. Reddy's Q3 FY17 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'm now glad to hand the conference over to Mr. Saunak Savla. Thank you and over to you, sir.

A very good morning and good evening to all of you and thank you for joining us today for the Dr. Reddy's earnings call for the third 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 the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising Mr. Saumen Chakraborty, our CFO; Abhijit Mukherjee, our COO; and Mr. Anil Namboodiripad, who is the Head of our Proprietary Products business; and the Investor Relations team.

Please note that today's call is the 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 on the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to the conference call and the webcast. After the end of the call, in case if any additional clarifications are required, please feel free to get in touch with the Investor Relations team. Now I would like to turn the call over to Mr. Saumen Chakraborty, our CFO.

Thank you, Saunak. Greetings to everyone. Let me begin with key financial highlights. For this section, all the amounts are translated into US dollar at the convenience translation rate of INR67.92, which is the rate as of December 30, 2016. Consolidated revenues for the quarter are INR3,706 crores or $546 million and grew 3% sequentially. The performance has been mixed across the markets. While revenue contribution from Europe and emerging markets have registered sequential growth, some of our North America generic business and Proprietary Products have largely remained flat. On a year-on-year basis, overall revenues declined by 7%. Revenues from our Global Generics segment are $451m and PSAI segment are $80 million. Consolidated gross profit margin for the quarter is 59.1%.

Gross margin for Global Generics and PSAI were at 64.1% and 28.3% respectively. Sequentially there has been a vast improvement in the gross margin profile of the business. SG&A spend including amortization for the quarter is $167 million, a decrease by 6% year-on-year. After normalization of the Venezuela base effect and the settlement charge paid to Novartis with respect to Zoledronic Acid, there is a marginal increase which is largely attributable to normal salary increments, headcount, and other costs. Sequentially also after adjusting for the NPPA charge that we took last quarter, there is no major variance. We continue to explore avenues to optimize this spending. R&D expenses for the quarter were at $73 million representing 13.4% to revenues and is in line with management estimates.

As discussed earlier, we have initiated further development activities on the recently in-licensed in-process R&D efforts from Xenoport and Eisai as well as the acquired ANDA filings from Teva, which has incrementally added to the R&D expense. EBITDA for the quarter stands at $129 million, which is 23.7% of the revenue. So, better gross margin profile and controlled SG&A and R&D spending aided the improvement in the EBITDA margin. During the quarter, we generated $77 million of cash flows from operations. Our net debt-to-equity ratio is 0.31 as on December 31, 2016. The effective tax rate for the quarter is 20.6%. Key balance sheet highlights are as follows. Our operating working capital increased by $69 million during this quarter due to the new product inventory build-up and increase in receivables in few geographies.

We would continually focus on optimizing the working capital cycle. Capital expenditure for the quarter was at $44 million. The foreign currency cash flow hedges for the next six months in the form of derivatives and loans for US dollars are approximately $135 million largely hedged around the range of INR67.6 to INR70.4 to the dollar. In addition, we have balance sheet hedges of $251 million. We also have foreign currency cash flow hedge of RUB300 million at the rate of INR1.08 to the ruble and EUR1.5 million largely hedged around INR75 to INR82.05 to the euro maturing over the next three months. With this, I now request Abhijit to take through the key business highlights.

Thank you, Saumen. Greetings to everybody and welcome on the earnings conference call. Overall, there has been a marginal growth in topline on a sequential basis. We continue to face headwinds in the US business. Delay in approvals of our major launches coupled with erosion of the base business has been a cause of concern. On a positive note, currencies across emerging market geographies have stabilized with crude. The business continues to grow on the back of stable macroeconomy and institution business launches. Let me take you through each business to discuss the performance and some key themes. Reference to financial numbers will be in respective local currencies. Our North America revenues are at $246 million. While we continue to face incremental competitive pressure, we have managed to hold on to our market shares across critical products at an overall level.

During the quarter, we have launched five relatively small products, most of them being partnered assets. The fourth quarter, however, is unlikely to benefit from any sizable launch. This coupled with sequential buying pattern and continued competitive pressure would likely result in a softer Q4. Additionally, we are facing a temporary supply disruption of one of our mid-size assets due to technical reasons, which is manufactured at a partner site. We have already initiated corrective measures to get the product back into the market soon. This will have some financial impact for the quarter also. Some major launches anticipated in this fiscal year are likely to get deferred to next fiscal. The review of the complex products and subsequent approvals by the agency are moving slower than our expectation. We continue to work with the agency to expedite our approvals.

Based on the current visibility, the launch momentum is expected to pick up in the coming year. Overall we are likely to see 15 plus launches coming through next year. With this traction, we hope to be back to our historical trend of business. We have substantially ramped up our R&D productivity. We have filed nine ANDAs in the quarter and expect to close the year with a cumulative scheduled 25 filings. Continuing on the pure generics business, our Europe business saw some good launches. Overall, the business looks well poised for profitable growth on the back of key launches and traction in institution business in EU five countries. On the emerging markets front, we are fairly comfortable with the gradual recovery in the marketplace pursuant to the stable macro environment. Specific to this quarter, our business grew 23% sequentially.

Russia business grew 11% sequentially in constant currency. The team continues to focus on productivity enhancement and portfolio augmentation. Ex-Russia the other markets performance was in line with our expectations. We are on track to expand our geographic presence through leverage of our institution business portfolio and biosimilars. Commercialization of biosimilars across emerging markets has now started gaining meaningful traction. We remain optimistic of building on this momentum further. Domestic formulation business revenues are INR595 crores and grew 2% year-on-year. Normalized for base alignment, demonetization impact, and NLEM notifications; the performance is broadly in line with expectations. In this quarter, we commercialized two of the in-licensed products under strategic collaboration with Amgen.

As a business, we continue to focus on productivity enhancement and portfolio augmentation. PSAI business posted revenues of $80 million. The business is gaining traction in emerging markets with healthy margins. CPS business has done well this quarter. On the quality front as communicated earlier, our warning with the impacted sites are scheduled to get reaudited during the month of February and March. A substantial remediation work has been put in place from our side. Our application of corrective and preventive actions or CAPAs were not just site specific, but they were also network wide and incorporated third-party review and assessments. We believe we have prepared ourselves well for the audit. In the process of implementing the CAPAs, we have made significant progress in enhancing our quality systems and infilling the consumer quality and [continuous] improvement.

That concludes my part. Thank you all. And I would now like to open the floor for Q&A.

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Neha Manpuria, JPMorgan.

Sir, my first question is on the gross margins. What drove the sequential improvement particularly given a flat quarter from US and the issues in India?

Of course there will be some degree of operating leverage with the level of sales and we have been focusing on cost control measures. So, in terms of the section of that in both G&A and core items will be there and this we are trying to do systematically across the organization. In the currency front, there has been definitely some benefit that we are getting. And so for example in the constant currency there is a growth, in actual we will see a better realization in INR our functional currency. And last but not the least, our gross margin which is a weighted average, completely depend on both the business mix as well as specific products, which products if you had gross margin sales higher, that gives us overall weighted [average].

Is it then fair to assume that since all of the items that you mentioned were pretty much sustainable that this margin can continue despite your commentary on fourth quarter being very lean?

It cannot be taken for granted. There could be some fluctuations which can happen, but our endeavor will be there to protect. But anything above 55% is normally our expectation to keep in the gross margin.

Sir, on the US business, your commentary on approvals being delayed and additional pricing pressure. First on the pricing pressure, are we seeing incremental pricing pressure because of the McKesson-Walmart deal or is this related to some of our products seeing competition? And second on the approvals, have you seen an increasing incidence of probably CRLs from the US FDA that has led to delay in approvals, which was not initially factored in?

So the first question on price erosion, I think broadly as expected and as being experienced by the industry, we are also facing the same thing. I wouldn't be specific to any merger, but overall channel has consolidated. We had some high value assets. There was competition coming in and also some of the launches like Omeprazole bicarbonate, you've seen more people have come in; some of those have seen some erosion. So, expected and has happened and the channel consolation will continue to have margin erosion. On the relative delay in approval process, yes, I think the complete response letters overall if you have followed, the industry is getting a lot. We are having our share. We have been always targeting some of the products, which are slightly on the higher end of complexity and hence more clarifications required. So yes, CR letters are coming in and we are addressing those.

One follow-up on the approval point. By how much would you say your entire approval period has gotten delayed because of the CRL? Would you say six to nine months or do you see a longer delay in our approvals?

Asset-to-asset, case-to-case, difficult to put one figure. As you know, the minor CRs from the agency is a three month turnaround from the agency, major CRs are much longer. So, wouldn't be able to place one average figure; but a quarter, quarter-and-a-half delay is a fair assumption.

(Operator Instructions) Prakash Agarwal, Axis Capital.

Sir, just trying to understand your opening comments where you said your working capital has increased in anticipation of new launches and you continued saying that there has been delay in some of the sizable launches, which we are expecting. So, could you elaborate more on this please?

Some markets I can and some I can't. So broadly sizeable wise, I think we have messaged that we had the Imatinib launch scheduled for this quarter. So this was originally from our oncology site, but since we had FDA in sort of WL, we had shifted in time and we had in a partner site which we have scheduled for approval more or less as per in our view. But in one of the recent audits in one of the partner sites, there are questions raised which throws in a lot of doubt whether this would get approval on the specific day. So, we are again trying to see what we can do to mitigate that and maybe bring back to our own site. So, that's one. And there is one more injectable, which is basically a couple of months delay beyond what we were expecting. So, these two are the ones I can mention. The smaller ones are there, but it doesn't really matter in those cases.

The receivables have also gone up in some geographies, which will bring it under control by next quarter.

So the inventory build-up was not for US, but for the other markets is what I understand?

No, it includes US. That's what Abhijit just clarified. We will always prepare for a launch in anticipation. See if the approval gets delayed, to that extent inventory build-up doesn't get reduced.

And secondly, if you could just help us understand the competitive landscape of NuvaRing and Sublingual Suboxone, which would be large opportunities expected in fiscal 2018. Just little bit if you could help us broad level like the kind of competition one can expect and the likely timelines?

These are complex assets and the competition is likely to be lean, which means the value is well secured. But the timelines, yes, both these have some questions from the agency being addressed and as we speak, we are in the process of addressing some of those questions. So, there may be some delay in this. These launches could be towards the end of Q4, could be a little later; but we have to remind also that both are in litigation. In case of NuvaRing, the generics prevailed in the circuit and hence much clearer on that front and also being appealed, but it's at least much clearer. Suboxone has a good position, but beyond that we can't comment because it's in litigation. So, these are the challenges. But if your question was mainly on competition, it's not likely to be sort of crowded in the near future.

And timeline you said Q4 or 2018 or 2017?

We are talking of fiscal 2018 Q4, maybe a little delayed beyond that as well.

Prakash, I'm sorry to interrupt, but I would request you to come back in the queue for any follow-up question. Thank you. Anubhav Agarwal, Credit Suisse.

Saumen sir, just one question on gross margin. Typically we have seen in the past the injectable products stocking in the US is higher in the December quarter. Would you say that that would have contributed to higher margins in this quarter, big part of contribution of the delta in global generics?

I will not say that that could be a primary reason.

In my thing, I had mentioned that we are seeing some traction in emerging market biologics supplies. So to an extent, those things also have helped.

Okay. And actually two sub questions on SG&A. Tremendous amount of saving has been made by the Company over past few quarters in SG&A, I just want to understand that typically in December quarter we have seen more promotion happening in some of the let's say in Russian market just as an example. So, would you clarify that some amount of saving was lower promotion because in Russia for example we have seen minus 5% constant currency decline? So, would you say that all of the saving in SG&A what you're showing today is not hurting revenue at all and therefore large part of this is sustainable?

Whenever we focus on cost [acceleration], the primary consideration that it must not impact our business. So while keeping in view the business consideration to see how we can possibly eliminate any kind of waste and also focus is both on indirect cost as well as on direct costs. In the direct cost area of course we also focus beyond requirement, also on yield improvement and other aspects. So, this is something which have been trying to drive very systematically across the organization with required level of incentive valuation so that there is much more focus.

So would you say that the seasonal promotion which used to happen in some of the emerging markets, that is continuing at the same level what it was and large part of savings we are seeing is ex of that?

See, there are cases where there are more marketing expense than the previous year, which were called for. For example like Habitrol kind of thing which we have in USA or this year brand acquisitions that we have done or what we do in proprietary products so that way. Marketing and sales is an item for overall SG&A. There have been newer requirements, which have been there. So, I will not try to overemphasize shifting from one quarter to another quarter and all. Whatever is required to be spent on marketing for our business, we continue to spend.

Manoj Garg, Bank of America Merrill Lynch.

Abhijit, in the opening remark you made comment that you're expecting around 15 plus kind of launches in fiscal year 2018. Are you considering some of those Teva assets like NuvaRing and Suboxone in that 15 plus or they are over and above that?

Yes, a few; to be specific about three. Two I mentioned towards the end of Q4 and there is one earlier and there's a whole host of other things. The important thing is not 15 plus or whatever number is, whether it's 20 or 15. Important is how many are meaningful actually. It's becoming very clear in the US market and since we're tracking, all important assets would be few which we'll internally track as well to the best extent we can. So, those are the important ones.

So out of those 15 as you rightly said, how many could be the meaningful launches which we are building for the next year?

The ratio is similar for most companies. I guess would be about four or five maybe.

Okay. And the second question is on biosimilars. On the R&D Day, we have outlined that we are looking around $150 million to $200 million kind of revenue from biosimilar portfolio from the emerging markets. Where are we and how do we see that visibility going forward?

So, good traction. Our filings are going on and there's also a pull for a few markets because this apart from the revenue is bringing in healthcare cost reduction in those markets, to a large extent also the affordability issue is getting resolved, and I guess in many of these markets the markets would expand as it has happened in India. So, we feel very excited about this both from our mission as well as revenue angle. We are putting all efforts. This quarter saw good traction, Q4 also would see reasonable traction on that, going ahead also will. But the only thing, it's going to be a little lumpy based on these are not basically when some tenders go, sort of depending on how we do. So it's not going to be absolutely smooth, but yes, Q3, Q4 will continue to be in the similar zone.

May I ask you one more question if you permit? So just on Aloxi, any update on the litigation and any timeline on that.

We are just expecting, nothing happened so far.

Sameer Baisiwala, Morgan Stanley.

Now that you have moved the Eisai and Xenoport assets into the clinicals, what do you think would be your ongoing R&D spend on these quarterly or full-year basis?

What we earlier alluded to is for the financial year that is FY17, we'll be spending around $25 million on both these assets combined. So, we are sticking to that kind of a guidance on the spend for this year. Overall how much will be, I cannot give you that specifics as of now. But as and when do we have further discussions with the agency and get more, maybe we can come back later. But as on date, $25 million remains very much is the FY17 R&D expense on these two molecules.

Fiscal 2018?

I cannot tell you right away.

Okay. And just on Copaxone, is it possible to update on where your 20 milligram file is?

As we communicated, we have filed the detailed response in the second week of December and it's gone into review. ANDA response also will have to go in, but the main thing is the DMF response and the response will go in by the end March or so and 40 mgs response will follow soon thereafter as well on the ANDA side. But the main thing, the DMF thing was in the second week of December.

Okay. So what's your expectation of approval both for 20 milligrams and 40 milligrams?

That's a difficult question to answer, Sameer. As I said, we think we have done a good job. We have good analytical capability. We think we have done a good job. Beyond that, hopefully things progress in the right direction.

Is it part of your 15 launches?

Look, these are complex assets depending on what questions agency would be asking us. But there's been huge amount of scientific maneuvers, which have been put in into this.

Surya Patra, Phillip Capital.

Sir, just wanted to take about the gross margin trend that we have seen for the PSAI business, which really surprised positively this quarter. Despite the growth of the segment is muted only, the gross margin of that PSAI business improved significantly. So, any specific reason and how sustainable is that?

So I mentioned that CPS business did well this quarter, likely to be generally okay in Q4 as well. Some assets we have done some price adjustments et cetera. And overall I think PSAI business in general we are trying to make it value accretive and there are specific strategic focus on this not on the size that much, but more on getting more value out of it.

Okay. But this can be a kind of a lumpy nature of business as usual, right?

Yes and no. Not usually lumpy, but yes, CPS will have some bit of this thing. Q4 is okay. But yes, it's possible Q1 will be a little lean, but little bit clearer there. I can't comment exactly about specific quarters.

Sir, just one clarification about your initial comments. You commented about two aspects, one is that institutional business launches something that you said and also about one supply issue for a partner product that you have indicated. So, whether the partner product is an injectable one?

No. And it's not partner, it is our products that are manufactured at our partner site but mid-sized.

And can you comment on the institution business launches that what you have commented in the initial comments?

Which business launches?

Institution.

So, we are trying and putting a lot of effort into emerging markets. We opened up Columbia this year. Brazil quite a few launches will happen in fiscal 2018 in a few months from now hopefully. And we are opening up few other markets; Chile, Algeria, Malaysia, et cetera. And the whole objective is to leverage the institutional portfolio which we have developed and we have good capability on that, we have good manufacturing capability and we think we can make this business fairly global. So, that's a large strategic initiative on the Company. The biosimilars will be add-on to the same front-end and for the next few years we'll try and sort of grow this business. However, this will not be quarter-on-quarter so lumpy, it will be gradual buildup. But we feel excited about it as a sustainable business in the long run.

Kartik Mehta, Deutsche Bank.

On your comments on Imatinib, you mentioned that you're trying to mitigate by shifting it to some other site. Can you elaborate on this because if you do it now, wouldn't that take a fair amount of time or is it on your own site?

We are exploring all options. What I wanted to sort of flag that in the interest of being [competitive]. We had said it's a Q4 launch. It was all scheduled, but this is an audit which is to us an (inaudible) and of an external partner site. So, we are exploring whatever options we can do to make it as quick as possible. Difficult to comment at this juncture.

But from his question probably we didn't understand what you said in the initial time. Actually it was originally from our own site because our site got warning letter so we did the risk mitigation earlier.

Saumen, so are you expecting your plants to be reinspected to get an approval or maintain it from your side because if you have to mitigate to some other partner, wouldn't you assume that would take at least two, three quarters or so? This is pertaining to Imatinib only.

So look, at the moment let's focus. We have three audits till end March, we're focusing a lot on that and we'll answer those questions later.

So, You have thee audits in the end of March?

By end March. All three plants will get audited by end March, yes.

Fatema Pacha, ICICI Prudential.

Sir, I know a lot of questions on the gross margin. I just wanted to know that is it fair to say that 3Q margins in terms of all the competition that you had in Valcyte and with [Alzar] that is practically captured in 3Q numbers. So, when we will move on to have launches of Gleevec or Aloxi? The margins will build on from this level, is that how one should look at it?

As I said, there will be new product launches. If it is from in-house, then definitely it adds more to margin; but if it is partner, it may not. But at the same time there are continuous price erosions and other impacts, which will be there. So, 59% gross margin which we achieved in this quarter is quite a good one. There could be fluctuations. So as I said earlier, in terms of our expectations of gross margin on weighted average across all business combined; as long as it is north of 55%, it meets our expectation.

Chirag Dagli, HDFC Mutual Fund.

Sir, these 15 products that you alluded to for FY18, I'm assuming these are the biggest launches that we are talking about or is this like a total number?

No, I said this is a total number. Someone asked that what is the meaningful part, hesitantly I said like in all companies maybe four, maybe five, I don't know; and we will track those more. But mind you the more complex it gets, the more uncertain it gets. That's why in Q4, I had already messaged that we are expecting a few, now some of the delays have taken place. So overall, I think we look forward to next year, but a little concerned about the delays creeping in into the assets.

Sir, how many of these four to five are litigation or site clearance dependent, which is something which is not in your hands?

Look, I wouldn't go into too much detail like there is no free launch in this world. But at the same time if it is very very sort of uncertain, I wouldn't mention; but at the same time there is reasonable level of uncertainty. North American business has its own challenges. What is more important is is the R&D productivity picking up? Are we still going for the right assets? The answer is yes. Are we putting in those assets and answering their efficiencies properly? The answer is yes. Beyond that with the channel consolidation, there is no free launch. The plain vanilla products are not earning, headwinds of erosion is there, and hence it is important that we get these through. Beyond that, I wish I knew and I had a better answer to your question.

But the four and five are not litigation dependent or site clearance dependent meaningfully?

As I said, I will not fully clarify those. There could be a few which are not litigation, there could be maybe one or two which are litigation oriented, so it's a mix.

And the second one, sir, in your opening comments you mentioned that your CAPA is basically work in progress and still there is an inspection due so how should we think about this? Because your corrective action plan should have already happened before the inspection was scheduled.

Let me fully clarify, I think you got it completely wrong. I said we have put in all CAPAs in place not just site specific, but also network wide and incorporated third-party reviews and assessment. So I'm again clarifying that to the best of our capability, we have done whatever, we believe we are well prepared. So I think --.

Okay. And when is Srikakulam due, sir?

From now through end March, all the three sites will get audited.

Abhishek Sharma, IIFL.

Sir, out of the nine filings that you did this quarter, how many of them are your own filings versus partner filings?

Of these nine, most of it are in-house. Eight are in-house.

And sir, just one more question. Apart from the three facilities which are under warning letter and which are getting inspected, have you got intimation of any of your other major sites which are going to get inspected simultaneously?

No, not at the moment. Our sites keep getting audited as we speak so there is nothing at the moment to report.

Alok Dalal, CLSA.

Sir, just to clarify the 15 launches for FY18 are not linked to the affected sites, right?

Let me check. See I won't be able to give you all the details, this is overall for the year. We're talking about FY18, right? So there is enough de-risking done, there is quite a few of it and a very large portion of it which is outside the site. Maybe actually 15 plus I said so there maybe a few from the affected sites, but maybe there is parallel activity going on. So, overall you can take it as 15 plus launches unless there are very major details again experienced.

Okay. And sir, similarly if say the inspection does not go favorably, are the FY19 launches linked to these sites, you've had a chance to de-risk or it's early to say?

So, any de-risking in a normal cause is an activity which is let's say nine months give or take. So, FY19 is a little far away. So, that's all I can say at the moment.

Okay. And sir, one last question. Proprietary products have been stuck in a narrow range for quite a few quarters despite two launches that you had so why is there no pickup in that particular category?

Anil, you would like to take this question?

So as we had communicated in the past quarter, our focus in this fiscal year is to grow the prescriber base as well as overall prescription volume while we work through listing on various insurance managed care formularies. In the second quarter, we implemented a number of strategies to achieve this objective including refinement of messages, multiple strategic initiatives to improve patient access, et cetera. So as a result of these interventions, Sernivo prescriptions have grown by approximately 30%; so Sernivo is our dermatology product; from 5,500 to 7,000. Also the prescriber base has grown to about 1,800 and more than half are repeat prescribers. These are all leading indicators to the health of the overall proprietary products business and the thesis of the two products that we've launched.

In the case of Zembrace, prescriptions have grown from roughly around 2,000 in the second quarter to about 4,500 in this past quarter that is Q3 and the numbers of prescribers have also doubled. As in the case of Sernivo, about half of these are repeat prescribers. So as I said, the volume growth is what we are right now measuring because the revenue growth will follow as we get increasing coverage with our insurance and multiple negotiations are going on with these plans. Our objective for FY17 is to get at least 70% to 80% coverage on all commercial insurance plans by the end of the fiscal year and so starting FY18, we will start seeing the numbers follow these prescription trends. We are also working on other initiatives like minimizing restrictions on some of the plans including prior authorizations, et cetera.

Okay. And Anil, how is the pricing here and how many launches you expect in fiscal 2018 in this space?

So, we expect to have one approval in fiscal 2018 in dermatology and another approval which is pending tentative for our pediatrics product that we in-licensed called Xeglyze, it's for treatment of head lice. So, those are the two assets that we expect to get approved in FY18. Xeglyze of course is contingent on the FDA audit of one of our sites.

Chirag Talati, Kotak Securities.

Firstly, I'm surprised with your comment on Imatinib because I thought tinibs could be manufactured in non-onco facilities and one of the existing players on the market is also supplying to the non-onco. So, what drove the decision to go to a partnered facility rather than doing the non-onco facility of your own?

In our view rather, this should be produced in an oncology facility so we feel that's the right practice and hence we transferred accordingly.

Okay. I'm looking at your Aloxi litigation and I can see that you've withdrawn one of your invalidation arguments. Does that raise the risk profile in anyway should you still have a favorable decision in the district court in the coming months?

No company would be able to answer this. I think June was the trial and so we are waiting. On the chances and all that, how can we comment.

What I'm trying to ask is that because you've withdrawn one of your invalidation arguments [very] differently in order to get an expedited decision from the court, there is still some pending issue on invalidation of one of the claims that will still be left. So, what's the tradeoff that you're seeing there?

So, we are pursuing the non-infringement case more actively. And in any case the invalidity, all the reasons I can't share. But yes, we are keenly awaiting the judgment on non-infringement case.

Dheeresh Pathak, Goldman Sachs.

On proprietary products, to the earlier question, I think you said you want to have 80% coverage on the recoveries in FY18. How much coverage do you have now?

Right now our coverage is I would say about 50% and there is some additional coverage, but there are restrictions on that coverage. So, we are working on minimizing those restrictions. So, I would say we are at about half and we intend to go to about 70% to 80%. That's our goal based on the trends in negotiations.

Okay. In the base business of proprietary products, have you seen some degrowth because these two products added and you have 50% coverage, still we're not seeing numbers. The existing $40 million I think which we did in FY16, has that degrown?

That has not degrown, but there are some products that we have deprioritized in order to focus on the new launches. So, there was a deliberate measure that we had taken. So one of our products may not, but you can call it a degrowth based on a deliberate removal of promotional activities and transferring them over to these two assets.

Okay. And last question in the Analyst Event in 2015, I think you had guided to about $200 million to $300 million in FY19. Now that you're going through this journey of understanding the market formation and everything, does that guidance still hold?

The guidance given in 2015 was based off of certain assumptions that we made on the everchanging dynamics of the insurance marketplace. We continue to believe in the $200 million, but the specific year is something that we are working on as to when we will get to that $200 million.

Shyam Srinivasan, Goldman Sachs.

Just on the India business, I think in the opening remarks there's the mention of three points, I think one was demonetization. Can you help us actually look through these three points and if possible, can we have some quantification of the impacts of these three?

So these adjustments what I'm alluding to when we do YoY, last year was pretty heavy Q3 so that is the base adjustment. The second is the demonetization. Yes, it was a little slow for two, three weeks and then slowly started picking up and some companies got more benefit which are chronic heavy. We are not so chronic heavy, but the normalcy have been fully restored so again this is not relevant anymore. NLEM, you know about price reduction, I think this year's cumulative impact was INR36 crores or so annual impact has come in. So some of these, it's part of the business. Q4 back to normal, we should have normal growth.

So when you said it's satisfactory growth, where do we guide on say even FY18? Is growth going to come back to where historical rates have been?

Yes. Give or take double-digit somewhere between 10% to 15%.

My second question is on, I know it's speculative at this point of time, on the destination based tax especially the import of goods and services into the US if they don't get tax deduction, this is obviously one of the proposals. But any early thoughts on what you think the industry can or could lobby if such a such a proposal actually materializes? Anything early thoughts that you can share will be great.

We'll refrain from sharing any early thoughts. Let it first happen, then we will react to it.

Look, the generics industry has hugely contributed from 2006 to 2015. The total impact, I'm talking about generics industry as a whole, $1.5 trillion saving in US healthcare costs and I think that's what the industry should focus on and probably the government as well. So, I think let's focus on that what the value generics industry brings into the healthcare costs and the rest is how can we comment on it.

Vishal Manchanda, Nirmal Bang.

One on your proprietary product business, you have been developing an intranasal migrant spray. So could you share some updates on that, how is the progress happening?

The intranasal migrant spray, it's one of our flagship products for the neurology business. It is progressing well. The program is still in development and we expect to have some important milestones in FY18 and right now there is no concern at all about the product or about the regulatory path specifically.

Expanded date on the safety front?

Yes, we have finished a safety study and no observations of concern.

Okay. And so should we expect a filing early 2018 calendar year?

I cannot comment on that. As I said, there are some important milestones that we expect to achieve in FY18. But I cannot just comment on the filing date.

Okay. Would you be sharing the final data you achieve on the product this year?

Actually we have some abstracts that have already been published on some of the data that we have generated. A number of publications are due in FY18. So, you will see a lot of scientific literature coming out of this and also patents have been issued so that's all in public domain. But overall, I must say that the data is looking appealing.

Okay. And just one clarification on Sernivo and Zembrace Sym Touch, I just wanted to understand why is the volume growth not translating into the revenue growth.

As I mentioned in a previous question, the listing on managed care insurance. In the US, as you know, a majority of the business comes from insurance and you have to actually get listed in the formularies of every insurance plan and that process takes time. So, we are right now at about 50% coverage. So while patients may be insured but they are not covered, we are making the product accessible to them so that they get to experience the product and experience the outcome of that product, the positive outcome which we are hearing from the field quite a bit. The feedback has been very good. So while that is happening, we don't want to prevent patients from accessing the drug while we are waiting for their insurance plan to cover our product. So, that's why you see the gap between the actual revenue and the prescription. So as I said, prescription growth is important because once you have patients who experience the drug and want to stay on the drug, we believe that once their insurance plans start covering, they would continue to stay on the drug.

Ranjit Kapadia, Centrum Broking.

My question relates to DMF filing. We have around 782 accumulative filings and out of which, 16 have been filed during the quarter. So, how many are getting affected by Srikakulam and Miryalaguda?

There are total 16, but one out of that is US DMF; remaining are in other places.

So, we have not filed from these plants and overall I think that's not a major issue.

So if there is a delay in getting the approval, what will be the impact on the sales and profitability?

There are multiple things involved and difficult to answer this question. Why don't we do one thing. Let's sort of wait this quarter, let's see how we do in the audit, and let's focus on that. Let's look at the positive aspects and see how it goes actually. So at the moment, I wouldn't be able to give you a figure on what will happen et cetera.

And sir, can you elaborate remedial major cost in the quarter?

Most of the remedial costs we have incurred till the last quarter so it will not be significant.

Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Saunak Savla for closing comments.

Thank you all for joining the call. In case you have any additional clarifications, feel free to reach out to us. Thank you.

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