Dr Reddy's Laboratories Ltd (RDY) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and a very warm welcome to the Dr. Reddy's Laboratories Limited First Quarter Earnings Conference Call. (Operator Instructions)

Please note that this conference is being recorded.

I now hand the conference over to Mr. Saunak Savla. Thank you, and over to you, sir.

Yes. A very good morning and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings conference call for the first quarter ended 30th June 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 made available on our website soon.

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. G.V. Prasad, our CEO; Mr. Abhijit Mukherjee, our COO; Mr. Saumen Chakraborty, our CFO; Mr. Anil Namboodiripad, who's the head of our Proprietary Products business; and the Investor Relations team.

Please note that today's call is a 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.

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 U.S. dollar at the convenience translation rate INR 64.62, which is the rate as of 30th June 2017.

Consolidated revenues for the quarter are INR 3,316 crores or $513 million, rose 3% year-on-year but declined 7% sequentially. Sequential decline is primarily attributable to the lower sales in our Domestic Formulations business due to channel destocking during GST transition and quarterly fluctuations in our PSAI business.

Revenues from Global Generics segment are $425 million and PSAI segment of $72 million.

Consolidated gross profit margin for the quarter is at 51.6%. This quarter, we had some very good launches in North America Generics business. However, considering that most are follow-on launches, their contribution in this quarter is low.

There were few key external market dynamics responsible for pulling down the margins against our more recent (inaudible). These are: one, incremental price erosion in the base business in U.S. in addition to increased competitive intensity in some of the key molecules, enhanced customer consolidation, [late] erosion laid out beyond our earlier estimate.

Two, GST transition impact. This transition was characterized by significant reduction in the channel optic and also higher returns. In order to ensure adequate product availability in the marketplace, we had to make certain onetime interventions in the form of selective incentivization, public compensation for any loss incurred by them with respect to the channel inventory. These channel interventions had vastly impacted the margins.

Three, adverse impact from manufacturing overhead deliveries. During the quarter, we had lower reported sales partly as a consequence of GST implementation and partly on account of quota getting in other businesses. These factors should get normalized going forward.

And four, adverse movement in currency rates. During the quarter, the U.S. dollar net delivered rate depreciated against the rupee. The USD rate is now stabilized around INR 64 to INR 64.5 range.

SG&A spend, including amortization for the quarter, is INR 1,176 crores or $182 million, a decrease of 4% year-on-year due to reduction in spend on remediation-related expenses. We continue to explore revenues to optimize our spending.

R&D expense for the quarter at -- are at INR 507 crores or $79 million, representing 15.3% of revenues. This spend is in line with the ongoing set of development activities as planned.

EBITDA for the quarter stands at INR 336 crores, which is $52 million and is around 10% of the revenue.

Our net debt-to-equity ratio stands at 0.29 as on 30th June 2017.

The effective tax rate is around 23.5% for the quarter, and we anticipate it to be in the range of 23% to 25% for the full year.

Key balance sheet highlights are as follows. Our operating working capital increased by INR 283 crores or $44 million during this quarter, primarily due to increase in receivables in North America Generics business. We didn't focus on optimizing the working capital cycle.

Capital expenditure for the quarter was INR 272 crores or $42 million.

Foreign currency cash flow hedges for the next 9 months in the form of derivatives for U.S. dollars are approximately $240 million, largely hinged around the range of INR 66.3 to INR 68.7 to the dollar. In addition, we have balance sheet hedges of $374 million.

We also have foreign currency cash flow hedges of RUB 900 million at the rate of INR 1.135 to the ruble maturing over next 9 months.

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

Thank you, Saumen. Good evening to everybody, and I extend a warm welcome to you on this earnings conference call. Let me take you through some of the business highlights for each of our key markets. Please note that in this section, all references to numbers are in respective local currencies.

Our North America revenues for the quarter are at $230 million. On Q-o-Q basis, we have managed to sustain the overall business and, in fact, grew marginally despite multiple challenges. Our base business witnessed pricing pressures driven by enhanced channel consolidation and increased competitive intensity on a couple of key assets, azacitidine and valganciclovir. With further consolidation among buyers' consortium, we expect the adverse pricing environment to persist going forward.

We had a fairly reasonable quarter in terms of new products with 4 launches. Decitabine has been a successful launch with strong contracted market share. We also had doxorubicin liposome injection (sic) [doxorubicin hydrochloride liposome injection], our first complex injectable.

We are ramping up market share. And since most of these are follow-on launches, we expect to peak in terms of value contribution over next couple of quarters.

With respect to the pipeline, we continue to work with agency on the approval of our assets and remain optimistic on 2 to 3 launches per quarter. However, quality overhang at our injectable facility may impact approval timeline for a few of our key assets.

Continuing on pure generics. Our Europe business is fairly stable now and well poised to deliver a profitable growth on the back of new product launches and traction in new markets. Our emerging market business is on track of a gradual recovery. Russia business grew 31% Y-o-Y in local currency. During the quarter, we had our first shipment of rituximab as a part of our secured share under their national tender. Ex rituximab, the growth is in line with expectations. We continue to focus on improving productivity and of maintaining the pipeline. Ex our share, the performance of the other markets were also in line with our expectations.

We are well on track to expand geographic presence, leveraging our institutional business portfolio and biosimilars. Commercialization of biosimilars across emerging markets have started to gain meaningful traction. We remain optimistic of building on this momentum further.

India business revenues are at INR 469 crores and declined 10% Y-o-Y, 18% Q-o-Q. The nation implemented one of the largest and significant transitions to a progressive taxation regime in this quarter. We are witnessing a lot of transition challenges, and we are working towards those.

There was an evident disruption in the normal flow of activities, and we had our share of impacts. As discussed earlier, the decline in domestic business is resulting from channel destocking due to transition to the [GST regime]. This obviously had a sizable impact on our quarterly performance. There are some teething issues still being resolved, and it will take some time for all the industry participants to return to normalcy.

Subject to this, we continue to focus on productivity improvement and portfolio augmentation.

PSAI business posted revenues of $72 million. Our efforts are directed towards building a healthy order book.

Our Proprietary Products business, we continue to execute our strategy of expanding Zembrace and Sernivo. Over the past quarters, we had several successful initiatives to accelerate volume growth. Effective this quarter, we have started focusing more on improving the net realization to optimal PR coverage. On R&D term, the pipeline is continuing to grow. Overall progress on R&D program milestones are on track.

This concludes my part. Now I'll hand over to Prasad for his comments.

Thank you, Abhijit. Thank you, Saumen. From the discussions -- from the preceding discussions, you have an idea of the challenges that we face today. Delays in approvals, additional competition, regulatory actions have all combined to put significant pressure on our performance.

During these circumstances, we have -- we are -- the management of Dr. Reddy's have done a strategic review of the various businesses and initiatives and have developed 3 high priorities for the team.

The first one is, of course, strengthening our manufacturing and quality system. Our first priority is to ensure that our management -- that our manufacturing systems meet the highest level of quality and compliance. We will need to modernize some of our infrastructure, systematically implement our new quality management system and automate some of the critical manufacturing and quality-related processes. To accomplish this, a number of initiatives have been taken up across all locations, and this will take us a few more quarters to complete.

The second priority is to revitalize growth. Our efforts to deliver a healthy pipeline of products, enabling sustainable high performance are on, and we are focused on accelerating the development of our complex generics portfolio and also making -- first, to ensure that the approvals come on time through appropriate risk management and proactive measures to deal with possible deficiencies. We are also registering our assets in several countries beyond the U.S. in emerging markets to drive growth. This is our second priority.

The third priority is really to look at our cost structure and optimize it. Over the years, our fixed cost structures are based on growth in revenue, and we feel this must be corrected now to enable us to compete effectively in the marketplace. We've embarked on a systemic -- systematic exercise to transition to a leaner and flexible cost structure focused on areas such as network rationalization, improving plant operating efficiency, R&D site optimization and productivity, as well as portfolio rationalization will have the potential to deliver significant savings. And we've already made a strong start, and we expect to see some results starting this year onwards.

With this, I conclude my commentary and hand it back to you, Saunak.

Hello? And so we can have the Q&A session now.

(Operator Instructions) We'll take the first question from the line of Prakash Agarwal from Axis Capital.

Yes. Just trying to understand the gross margin. You did mention about the India GST impact. Just trying to understand, without that impact, what would have been the gross margin given that fact that we have started to see limited competition products in the U.S.?

Yes, I basically talked about 4 points. We had overall contributed on a year-on-year basis about 450 to 500 basis point reduction in gross margin. So if you see -- relatively, a maximum impact comes from the North America Generics price erosion. And then second comes from the GST. This is the specific quarter impact that we feel. And of course, the third one is the manufacturing overhead deleverage, which is directly attributable to our level of sales, and helping the -- definitely, that is normalized. And the fourth, which is much lesser impact, is due to the currency rates. These all (inaudible)...

Yes, so -- yes, if we exclude the GST impact, sir, what would -- could have been the normalized -- because that's something which is really one-off.

That as well as the manufacturing overhead deleverage both would be really a quarter-specific kind of thing. So we will not -- we will do exactly the -- what will be the -- what would have been the same, but it will be broadly in the range of around 53% to 54%, in that percentage.

Okay. And we would assume -- or is it fair to assume that this is the base case now given the fact that the approvals and launches have begun during the quarter, so you'll have fully -- a full quarter impact going forward? So this should highly improve going forward?

Yes, assuming no further erosions take place.

And the erosion is in line with what you have guided in the past? I mean, what you have seen in the past?

It is more than what we would have expected. And in annual report, we mentioned that we feel -- we said, based on last year, there was a huge erosion which has happened, we did not have in the previous year. So we feelthat this year will be more calibrated. But we will -- it is more than our expectation or our estimate. It cannot be more both because of the -- I think the intensity of competition as well as the customer consolidation between the key players having 82%, 85% of the market. And this is the quarter when most of the RFPs happen from different -- some customers. So that impacted sales. We could not have cited, saying that M&A mostly happens in June. So then we understand that our initial estimates were lesser than what had actually happened in actual.

Any broad range? I mean, 12%, plus minus, or...

Yes, it is in double digits. Two major assets I mentioned are itself account for about INR 11 million Q-o-Q impact (inaudible) and (inaudible).

We'll take the next question from the line of Kumar Saurabh from Motilal Oswal Securities.

So sir, have you mentioned -- just a follow-up, particularly only the month of June, we could realize the impact of renegotiation of RFPs? So does that mean that the full quarter impact, we will be seeing in second quarter?

Well, some of them have a retrospective effect as well as from (inaudible).

Okay. So going forward, if no further pressure comes from here onwards, ideally the margin should improve ex of GST. I'm talking about U.S. business, okay.

You cannot take it for granted. Normally, it is [effective of] annual RFP, but one cannot take it for granted (inaudible)...

Yes, I'm going -- I'm assuming that because we have good product approvals which have come and which are expected to come in coming quarters. So take that into account, we should see some kind of respite?

Hopefully.

Yes. And sir, India business in the current quarter, are we seeing -- are we -- how confident are we that we will be able to recoup the impact which we witnessed in 1Q?

We are seeing some recovery. Confidence level is there that whatever is the impact one has seen, it is -- should be limited to Q1.

Should be limited. And we should see that full recovery coming in quarter 2?

I can't comment on full recovery. There will be recovery.

Overall, I think couple of quarters. I think it's -- the current run rate is very good. It is a temporary hit unlike the headwinds of pricing in North America. So I think it shouldn't be that big a concern.

Sure, sure. So sir, and you mentioned that there were a couple of one-offs and this U.S. business price erosion was there. So how should we look at what is the normalized margins going forward we should look at from second half FY '18 onwards?

I wouldn't comment on that. These are difficult to sort of predict. I think the key issue is, I think, getting the approvals and launches. That would be the -- probably the most impacting factor. The headwinds which are beyond our control, we can't do much, and there isn't too much of a point trying to predict that. Overall, what we are saying is it has been a little more intense than what we thought. And yes, I -- we agree that the sounds that you hear have already wear out. But hopefully, let's see whether it stabilizes a little or not.

And in terms of growth strategy, the high priority which you talked about, revitalizing growth and cost control, is there any change in strategy in terms of focused area, in terms of geographic focus? The U.S. has been a key focus area. And now, given the challenges which we are seeing, is it fair to assume that the focus should be more in other geographies as well? Or is -- in terms of geographic focus, we still continue to focus on U.S. and India as the core markets?

Look, I mean, our core markets are beyond U.S. and India. U.S., Russia, some select emerging markets, large emerging markets and India. We focus on U.S. continuous. The -- most of the assets that we have been looking are targeted towards the U.S., but we will leverage them in Europe as well as in all other parts of the world. We have increased our globalization of select high-value assets, including [biosimilars]. So to that extent, we are seeing more activity in the emerging markets in the medium term. So -- but that's not going to be a hedge against the U.S. The U.S. is such a large market that any other market or even a collection of markets cannot replace the growth that we will -- we hope to see in the U.S.

And sir, do we...

Kumar, I'm sorry to interrupt, but I would request you to come back in queue for any follow-up questions. (Operator Instructions) You have the next question from the line of Neha Manpuria from JPMorgan.

My first question is on the other expense, SG&A expense, excluding depreciation and amortization. The base seems pretty high for the quarter. Is there some pay -- incentive payments, et cetera, in the quarter? Or is this the new base, new normal for SG&A?

If you see year-on-year, there has been a decline in SG&A. Quarter-on-quarter, in the last quarter, if you remember, we have talked about certain specific long-term incentives and others, which were earlier accounted for but was reversed because we didn't pay it due to nonperformance so that with the previous quarter, manpower costs would have been lower than normal. Now what you'll see this quarter is a fair indication after all the increment costs that have been built in to manpower costs. But our India, more internally, is to continue to improve on these and reduce further.

So for all purposes, this is the new base for our cost going forward for the time being?

We'll say this will be something for which we need to improve further quarter-on-quarter.

And sir, even you mentioned our efforts to sort of improve our cost structure to make it more lean and that we are expecting certain synergies. Is there a number for the synergy or -- sorry, for these savings that can be expected from cost control over the medium term, probably not for FY '18, but how much do you think we can improve our costs by?

So we are working on this project right now. It's going to be quite substantial. I don't have an exact number, but it's hundreds of crores kind of possibility to take costs away, multiple hundreds of crores.

Okay. And my second question is on the proprietary

business. The licensing agreement that we announced yesterday for DFA-02, I mean, is there a change in the way we are looking at the propriety business in terms of commercializing these assets ourselves?

Well, I -- is Anil on the call?

Yes.

Can Anil answer this?

Yes. I'm on the call, yes. You want to comment first? Or you want me to take over?

Well, broadly I'm saying that we are looking at more differentiated assets, and our assets more aligned with our sales force. And the headline message, well, I'll leave it to you to give it more color. Anil. Anil, go ahead.

Yes. Yes. So specifically, this particular asset that we licensed is a high-value asset, but it was within a therapeutic area that we are not focusing on at this point in time. It's for the acute care hospital markets. So we felt that it is best developed at the hands of somebody else, and we believe that CHD Bioscience is a capable partner to develop this particular asset. The value of this asset is tremendously high, but we made a conscious decision to focus on 2 areas, neurology and dermatology. Hence, this divestiture.

Okay. And are there any other such assets that we're looking at in the near term on the proprietary side? Or now most of the launches would be commercialized by Dr. Reddy's?

There are a couple of other assets that we believe are high value and do not fall within the purview of our strategic focus. And there are discussions ongoing about partnering those as well, but we cannot disclose at this time.

We'll take the next question from the line of Anubhav Aggarwal from Crédit Suisse.

One question is on Srikakulam plant. I just want to understand that once this plant comes back, the -- once it gets EIR, one, how much of PSAI sales is impacted because this plant has a warning letter right now, which can get -- or which can -- which gets recovered? Second, how much is the unabsorbed fixed cost which is impacting our costs right now? And so just trying to understand how much benefit we get once the plant comes back.

So the -- one, that they never prevented us from marketing the product, which were there already. And so what it'll have is some of the assets for the future approval. Some we have transferred and not relevant anymore. But for the future approvals, it will have an impact. As far as unused or overheads, which are now unutilized, I -- it wouldn't make a very material impact. I think for sure, the injectable plant, which you have -- you mentioned, is more important in terms of the launches, and it's necessary for us to work towards getting it back.

Yes, which is -- I was thinking more in terms of whether it had any impact on the PSAI business not just this quarter but in general because...

Well, yes. So it will be -- some impact will be there. It's -- the flow will improve our products. And we've been heavily focused on remediation. We are trying to now focus on efficiencies. And so there will be some impact, but it won't be very huge.

Okay, that's helpful. Second question on the PSAI business itself. In the composition of the business, this quarter was very different from the trend that we have seen so far. The sales in Europe has significantly declined and sales in India has significant picked up. On both counts, if you can explain that. And secondly, if this trend were to, let's say, remain, if -- when you sell it -- PSAI sales in India, ones in Europe, are the margins very different in the 2 categories or similar?

So this is a B2B business, and I wouldn't recommend and suggest that we read too much into regional sales from PSAI. These are depending on customers who pick what when. What is more important is the last point which -- that I mentioned, that we were very focused on a lot of remediation activities which sort of certainly had some disrupting effect on manufacturing and supplies. I think we would -- we can focus much more now on supply chain by managing the supply chain better. So to that extent, I think it will be certainly beneficial and move upwards from here, I guess.

Okay. Just last question on the U.S. business. You quantified the price erosion year-on-year, Abhijit. Can you just give an idea sequentially as well the impact of price erosion in the U.S. business?

Sequentially is not a right way to look at. But if you -- I'll give you a broad study which we did in terms of top 8 or 9 generic companies. If you add their erosion, and you can get it from the IMS, and add it up and then take an average, that will give you the industry. Because a certain quarter, we could be very high, other companies may be low and could be vice versa in subsequent quarters. So overall, the trend for the last 8 quarters we studied, and it that has been fairly steady upward moving percentage. 2 years back, it was probably 5, 6. It is trending between 10 to 20 right now. Now having said that, look, whether this whole consolidation also has broadly, I think we've more or less seen the end of it come -- go any further between 3 players, 85% of the market share. So whether it will plateau out a bit, time will tell.

We'll take the next question from the line of Nimish Mehta from ResearchDelta Advisors.

On the India business and specifically on the impact of GST, I just wanted a clarification. One, just regarding back end because of the lower-stage development you target. But you also mentioned about really, given some [compensation] (inaudible). So is there -- and also, obviously, you (inaudible) this [generous credit]. And if not, what is that amount or pain point? Is that a...

Specifically none, I don't think. But there was -- certainly -- in the confusion in the transition certainly some amount. I mean, is it very significant? No. But yes, there were some efforts to sort of keep the stocks moving. We didn't want also the retail sales to run dry, and that could have been apart from anything else, which would have meant secondary sales loss, which is not character sort of in this confusion. So I wouldn't read very much, but yes, there were some.

Okay, understood. But that's on [Novigan], right, that it commenced?

Not really significant, no.

Okay, okay. And second, on the U.S. business. You mentioned about 2 to 3 launches per quarter here. Any guidance at all, how many high-value launches, specifically launches like Copaxone will be efficient?

Difficult to say. 2 to 3 numbers would happen. And I think you'll realize, I mean, what is the quality of 2 to 3 would decide everything. There are a few assets. There are also a few concerns because of the injectable sites and delay. But the numbers are there, and there are a few assets, without getting into specifics. Things go okay, then we may see a few good launches.

Quantify that number, as in how many? Are we going to see around 2,3 (inaudible)?

(inaudible). Yes, on that, yes, we just can't because the uncertainty is because of intellectual property aspects of it and the -- as these approval time lines are not in our control. So we can't.

Okay, great. If I can squeeze in one. Just wanted to know (inaudible) strategy now that [Morfil] is opting out of the JV, so outside of the...

Well, we've been -- there are a number of good news and] is very motivated to continue. And we've had our meetings and it is going quite well. So -- but they've acquired this groundwork. They paid a lot of money, so we believe that they're very committed building this business going forward.

We'll take the next question from the line of Sameer Baisiwala from Morgan Stanley.

Abhijit, can you update us on the progress with Duvvada with 13 observations? What's our way forward? And would it require a second reinspection?

This would require a secondary inspection, Sameer. So -- and then our position to that significance, we responded, but it will require another inspection. We are working towards it. And normally, in running the site, if revisions are found, there is a secondary inspection. And we would -- I can't say exactly when we would sort of invite FDA back again, but we are working towards it, yes.

Okay. And is it fair to say that Copaxone's filing is being done from here? And so -- and that's what you have said a few times on the call, that -- because some of the injectables will get delayed. And second, are you looking to site-switch it?

Copaxone is not from Duvvada. There are other good assets which are in the process of site switching, but site switching has some timeline delays. So let's see which comes through earlier and we'll see.

But optimistically, we expect to have a peer come in by the year-end December also.

Okay. And just one last question. In the context of complex generics, can you update us the progress with the batches? How many are you working on? And what's the sort of our filing targets?

Not very significant. I mean, there are -- there was one which we are a little delayed. There is one still alive, which we have settled and -- maybe Q2 next year. But these wouldn't really move revenues much. I think we are still banking a lot on injectable products filed both from our site and the partner sites.

We'll take the next question from the line of Saion Mukherjee from Nomura Securities.

On this cost pattern restructuring, is it possible to share like which business areas this would really come from? And which line items? Are you talking about R&D, employee costs? Any color you can give on those?

Well, it's never too early to share such details, but it is -- when we will come to their global R&D sites, R&D expenses, manufacturing network, portfolio, where we don't have enough of margin from rationalization of portfolio, a number of different activities. So at this point, it's too preliminary to share that level of detail.

But you think it should come through next year? Or it will take longer on realizing these savings?

We should start seeing impact from next year onwards and some impact from this year also.

We'll take the next question from the line of Chirag Talati from Kotak Securities.

Firstly, is it fair to say that this quarter has not seen any impact from price erosion on decitabine from the new competitor?

Yes.

Some. Some, yes.

That will be marginal in overall context of things?

To an extent, yes.

Secondly, if you can help us understand, on your Suboxone product. Is there any pending CRL? And if there is so, have -- or what are the time lines for refiling?

We submitted the response on the complete response letter. Now -- what we are awaiting the judgment, maybe 4 to 8 weeks. As you know, it's in litigation. The outcome is important for this effect. Of course, either way, this can be -- if the generics win, and a way to kind of challenge and vice versa. But that's the next important milestone. On the development front, I think we have -- we feel very good about it.

Second, just kind of ask as a follow-up. When was the last response submitted to the FDA?

Yes, when? When? June, I guess. Yes, June.

We'll take the next question from the line of Girish Bakhru from HSBC.

Yes, just similar question on NuvaRing. Has the CRL been responded on that?

Yes, around the same time. And this is cleaner on the litigation front. We have that based on both Suboxone and NuvaRing in -- around Q4 of the financial year. So we'll see where it goes.

On the litigation front, there is appeals case going on, if I understand, although that's on the Actavis ANDA. But you don't see that, that should be, I mean, delaying it anywhere beyond April 2018, right?

You're talking of NuvaRing, is it?

Yes.

That appeal expires in April of next year, in any case.

Right. Abhijit, any color on, I mean, how soon you will see competition in this product? Would it be like 3-year no competition?

Those are difficult questions to answer. There is no -- certainly, difficult questions to answer. I wouldn't know. There is another [Actavis] that is in development. But these are complex, I said. I mean, in terms of development, [FDA may ask] questions and -- they've asked us as well, although we feel good about our development. But we'll see. Difficult to say about others.

Right. And on Copaxone again, when are we ready to refile for [TMG]?

Very soon, in a couple of weeks.

And just to follow up on that, If the decision on...

You're talking of the response to the [TRL], right? I mean, the [obligation] of this is India. Couple of...

Yes, yes, yes. So if I understand that add-on to [TMG's] close and if you get positive response, I mean, approval on that, would it make you confident on -- for [TMG] as well? Or do you think these 2 are kind of separately linked?

So -- well, so firstly, we have a TAD. But these are extremely complex assets. So naturally, they would be -- they may not be [TRLs], but there will be certainly questions. And could be others, (inaudible) as well. I don't know. I mean, although we have done -- we think we have done a reasonably good job, but -- so to assume that everything is done is certainly optimistic, but let's see. If the questions are not significant, I agree that -- then that gives certainly a directional signal towards the whole asset because it's not much in the formulation side. It's actually the DMF, which is the same, and the review of that is more critical.

We'll take the next question from the line of Kartik Mehta from Deutsche Bank.

So just if we look at the gross margin which is there for the last 2, 3 years, it has come up from about 60% to now around -- between 50% to 53%. Is that a reason where there is a structural issue where we believe that since we are using third parties to manufacture or there is higher competition? Is it fair to assume that this now remains here? Or is there any scope for improvement? I just wanted your thought on this.

Yes, there's certainly room for improvement. The primary reason it has gone down is also because of the price competition. And as we launch newer assets with higher margins, the gross margin can go up. Our costs and savings should also help us. And if you look at the current quarter, there is some onetime stuff also happening there. So I think gross margin should go up.

I mean, also, when you...

About your question about manufacturing third party, would that erode, I don't think that's a very significant factor. While it is a strategy of ours, it's not a cost which can really change the economics of our gross margin.

Sure. And if we have to look at the cost savings which you spoke about, would that -- and you were getting into other markets, would, I mean, it be a part of it because we are pretty low on that? Then if we have to make an entry into any of the larger emerging markets with the pipeline that you have, would that be something that you'll consider?

Largely, we are looking at not -- inorganic entry because you are looking at institutional sales as the [way] for entry into emerging markets. We don't require large sales forces or establishments. So I don't think we really need to do inorganic growth to expand our footprint in the markets that we're considering today. But if there's a good opportunity, we will not be shy of it.

No, I meant in the markets where you are not there now, maybe some other markets in Europe, yes, or...

Well, in Europe, we already entered the big 5 markets. We have 2 markets where we're selling products for a long time, and we've established a presence in 3 other markets. So we don't really need to do anything inorganic.

Yes. And on Doxil, just this one. So have -- so how do we record your -- the revenue and the profit given that we have a partner and so that will just tell in terms of the margins that could flow in the next quarters?

And so it is a significant asset. It is -- certainly, without giving specific numbers, it is significant. And we are the dominant partner in the partnership. So based on that, you'll have to sort of work things out.

Yes. So I just actually wanted to know that -- do we record the revenue up front and then there is a profit share? Or -- I mean, so how is it recorded? I don't want to...

We -- full revenue. We book full revenue on orders.

We'll take the next question from the line of Aditya Khemka from DSP BlackRock.

So what will be the product concentration now in the U.S. business for us? I mean, would the top 5 products account for 30%, 40%, 50% of our sales? Just a ballpark number?

It will reduce over the years. Right now I think if you take a comparative figure, we are lower than quite of few peers group companies if you take the first 2, 3 asset stables, I think. But the figure which we have readily available is top 2 assets. It's...

Top 5 would be around 25%.

Yes. Yes.

Okay, that's helpful. And so I just wanted to verify what number which you have mentioned that of Q-on-Q because of azacitidine and one more asset you mentioned. For these 2 products, the price erosion has been about $11 million Q-on-Q?

No, no, no. There's VIDAZA and Valcyte that...

Yes, yes.

No. So between them, it's $11 million, yes.

Okay. And that was a sequential number, right?

That was a Q-o-Q.

Okay then. Okay. Yes, I just wanted to check that. And just one last question on your take on the Bachupally Form 483, have you seen any product approvals since the Form 483 has been issued from Bachupally? And if not, then would you -- is it fair to say that is on OEI status with the FDA?

The only one which is pending we mentioned, I think, last time is atomoxetine, and I think it's too immature to conclude anything. I think we had -- we responded very quickly, and there was just one follow-up question out of many observations, which we have also responded. So we'll see where it goes.

Is there any time lines, discussion with FDA on Bachupally? Or it's just something that you have to wait for and see what the FDA does?

With time lines, we have responded. So as I said, the response that was sent -- there was one clarification on one specific point. We have responded to that as well. So...

When was this response, sir?

The last one was about a month, I guess, give or take. I cannot -- we'll come back to you. A month back maybe, or about 15 days back or something. If you think back, 15 to -- days to a month's time.

We'll take the next question from the line of Nitin Agarwal from IDFC Securities.

Sir, on -- I know you alluded a couple of times about this emerging market strategy. So just -- can you just help us understand a bit in terms of potential of maybe either some illustrative examples of what are the kind of potential some of these assets have because -- relevant U.S. assets have? We'll just have to take them on a pan-global footprint of sorts?

It's significant. I think I would maintain what I said in the earlier call. I think we are betting on this institutional strategy and leveraging of assets globally. We are getting to Brazil as we speak into Q2, and we have 3 approvals, 3 products obviously getting launched. Q3 may see a couple of more approvals. These are big markets. Smaller markets like Colombia and ASEAN markets, biosimilars are taking and gaining more momentum. So overall, it's not something which will be a quick, one-quarter type of thing, but we're doing it systematically, leveraging these assets globally in these markets, putting the footprint just what is needed because it is not -- while it's B2B, but it is needing our contact with the clinics and all that. So we will be deep into these markets, understanding how exactly each of these clinics sort of operate on this -- in this area. And hence, it's a significant involvement, focus, which will bear results, I guess, in next 2 to 3 years.

Okay. So do you think it is going to be a couple of years before it starts to show up meaningfully in the numbers?

Well, yes, true, but you will start seeing something even this year itself. Meaningful, meaning what is meaningful? I mean, for us, even $5 million to $10 million is meaningful if we can get going.

Okay. And sir, secondly, on the distribution angle, the distribution consolidation plus the -- which is -- angle. What's your experience? I mean, any sense on a net part of it? I mean, obviously, the price erosion in the business is a combination of the asset erosion because of competition. But if you were to see, if there's a way to sort of dissect that, so what is the distribution consolidation-driven price erosion, which is probably a little more sustainable long -- going forward in your assessment?

Not sure I understood your question. You're aware of the consolidation. There are 3 players, right. [Clara's] one, [Reduc] and Walgreens (inaudible). I mean, it was more than combination. So what's the specific question?

So you're saying you've had an erosion in the business on account of compression in our key assets as well as pressure which was brought about by the consolidation of the distribution consolidation. So I mean, is there a way to sort of segregate the 2 in terms of erosion, which is being brought about by the consolidation process? Or -- and what -- and how do you see that playing forward?

G.V. will answer.

It's very difficult to answer your question in terms of numbers because it's very asset specific. It depends on the number of complicators for a given asset and so on and so forth. But it's very difficult to give you a general answer. But it is a fact that price erosion is higher than what it needs to be because of the high concentration of market shares among these 3 players. So if somebody -- anybody who has a market share will hang on to it for a long time and convince us that you need a bigger discount. I'm betting that's where this price erosion is coming from.

We'll take the next question from the line of Shyam Srinivasan from Goldman Sachs.

The first is on Aloxi. Is there any update on the launch of this product?

The 505(b)(2), I think we have challenged a local decision. So that's one aspect. The more happening one today is 505(q) one which is being fought by 1 company, and a few of us -- a couple of us are watching that closely. There, I think they're waiting it out for an en banc hearing and the generic company who is responding to it. So in summary, I think the verdict on that, we would see in, give or take, 8 weeks -- within 8 weeks or around 8 weeks from now. If positive, then it moves ahead. Negative, then it goes into a hearing, which is a little long term, maybe another 7, 8 months.

So -- and your settlement with them lets you launch with the generic company, with them perhaps, if all goes well?

You make your own -- we are tracking it closely, so that's -- I can -- how do you get.

Sure. My second question is on the new FDA commissioner, not new anymore, Dr. Scott Gottlieb. He's talking about more generics being on the market and priority of use for the first generic on the market. So there has been a lot of talk, but have you seen any walking-the-talk kind of a thing? So do you foresee more complex generic approvals or limited competition approvals in the next 6, 7 months?

Yes, look, I think firstly, it's difficult to sort of expect a reduction. They are very excited about his comments and been very, very forward looking in the right direction, and I think we welcome that a lot. So -- and he's talking a few very -- sort of act on relevant issues. And so let's see. One sort of positive change which is coming is in terms of clarified, expedited review. Here was just one generic. It's been extend -- it's been increased. Still 3 generics are approved. So quite a few assets are coming in to expedited, which is a good move. And then the rest, we will see as it unfolds actually. But overall, comments are in actually absolutely right direction.

And my last question is on your R&D. What levels should we be assuming for the rest of the year? Is it 15% first quarter? And where is the incremental kind of R&D going into? Is it going to more clinical trials? If you can give any color, that will be useful.

So instead of us taking as a percentage because the sales now, there's a wide fluctuation in the percentage in just -- I mean, that mix, I think we should take R&D will be in the vicinity of INR 500 crores per quarter. We will take INR 10, INR 20 crores, plus minus.

We'll take the next question from the line of Alok Dalal from CLSA.

Just one question. Mr. Prasad, how do you measure R&D productivity in the company? And how has it progressed over the last few years? Has it declined? Has it gone up?

So when you look at the NPV of assets, so we look at the money we spend and the NPV of like blend that we did as well. There has been some fluctuation in the last 2, 3 years. It can be a very small year-on-year curve. Last year has been a good year. We hope to continue that this year, too. So the numbers themselves or number of filings, while they are not as high as some of our competitors, we believe the kind of assets we have will justify the productivity of the assets. So we have complex assets and then we have simple assets. We have the blend for -- on it. It's difficult to have a number beyond an NPV number that we can field internally.

Yes. This is helpful. Sir, when do you expect the R&D to get monetized? Because the problem is that the R&D spend is hitting your P&L, but the assets have not yet come maybe for multiple reasons. So when do you think -- whatever you spend on R&D so far, is it a 2-, 3-year cycle? Or is it beyond that?

I think in the next 2, 3 years, we should see significant growth in the company which will unlock the R&D investments that we make.

Sir, just going back in time, you had a vision of $3 billion by FY '13. Do you think you will realize that in the next 3 years?

We hope so.

In a few years, it will be even more.

Due to time constraints, we will take the last question from the line of Anmol Ganjoo from JM Financial.

My first question is to Mr. Prasad. Mr. Prasad, you spoke about these initiatives around costs. I know it's too early to get into details. But as you embark on your initiative to purge costs, what other strategic areas -- what are the areas which you think are non-focused and non-strategic? And what will come under your crosshairs first as you move to purge costs?

We are not looking at divesting or cutting any businesses. So the businesses won't get impacted. But there's a significant amount of inefficiencies due to the way we've grown over the years. And we have never stepped back and looked at our networks. We're just spending what we are getting out of them. And we did that exercise recently, and we found significant scope for tightening every year without impacting outcomes. And we believe that we can achieve that -- the next 2 to 3 years a very significant saving over our operating base.

Okay. That's helpful. My second question is that you spoke about whatever approvals you've gotten this quarter. They peak only in subsequent couple of quarters. If you look at this quarter, the impact of the scale-up of the market shares thus far, how far would be -- we -- with respect to just these 3 assets from our peaks? This quarter contains an impact of about 40% of peak, 50% of peak. If you can just help us understand that, that'll be helpful.

Of new launches.

You're talking about new launches?

Yes, yes. So you said in...

New launches is a small portion. I mean, the first quarter, it doesn't make a very big impact. I mean, it's not 0, but it's not that significant.

No, that's not what I meant. What I meant was that in terms of the peak sales potential of these 3 launches. How far are we? Are we 40%?

No. So in Q2 -- let's not talk of Q1. Q2, I think the 2 major assets, I think, we would almost get there like (inaudible), slight -- they spilled to Q3 slightly, spilled to Q3. But by Q2, these assets will -- are the run rates we should get.

(inaudible).

Yes. That's what I call...

Fourth quarter is very small.

Quarter -- so (inaudible) is almost there. [Byproduct] being [an insufficient] asset and sometimes there's channel loading. So it takes a little bit of time. But our market share of this asset is very good. I mean, so I think it will scale up by -- certainly by end Q2 or early Q3.

And so when (inaudible)...

(inaudible) affects market share.

Affected market share, yes.

And my last question is, if I may, that you sounded optimistic that we will be restocking fairly soon and -- as far as India is concerned. But if you look at a full-year basis, I know it's early yet, but what's your assessment that on a full-year basis -- what is the prognosis of India market this year? Is the lost sales for this quarter going to be compensated in subsequent quarters? And to that extent, do you think GST is a neutral event from an India growth trajectory standpoint? Or what are your thoughts around that?

Okay, let me try and answer this. A little early at the moment. But as we have seen the momentum coming back in July, and we are -- I think we are reasonably satisfied. So given that, I'm not sure this would be a very significant derailer, I mean, in terms of India business. Yes, we'll -- let's see how the economy unfolds. And it's still possible for growth to be in a reasonable range, high single-digit, low double-digit (inaudible), I think.

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. And in case -- if you have any additional clarifications, please feel free to get in touch with the Investor Relations team. Thank you.

Thank you. 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.