Dr Reddy's Laboratories Ltd (RDY) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and a very warm welcome to the Dr. Reddy's Laboratories Limited Q2 FY18 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.

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 second quarter ended 30th September 2017. Earlier during the day, we had 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 on this call will be based on the IFRS consolidated financial statements.

Now, to discuss the business performance and outlook, we have the leadership team of Dr. Reddy's, comprising Mr. Abhijit Mukherjee, our COO; Mr. Saumen Chakraborty, our CFO; Mr. Anil Namboodiripad, who heads 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 I proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast.

So now, I hand over the call to Mr. Saumen Chakraborty, our CFO.

Thank you, Saunak. Greetings to everyone. I'll begin with key financial highlights. For this section, all the amounts I have translated into U.S. dollar at the convenience translation rate of INR 65.30, which is the rate as of 29th September 2017. Consolidated revenues for the quarter at INR 3,546 crores or $543 million, grew 7% sequentially, however, marginally declined 1% year-on-year. The sequential growth was primarily driven by part normalization of the channel inventory for our Domestic Formulation business and the improvement in the PSAI business after a subdued quarter 1. This was partially offset by the continuing pressure of price erosion in our North America Generics based business.

Revenues from Global Generics segment is at $438 million and PSAI segment is at $87 million. Consolidated gross profit margin for the quarter is at 53.3%, sequential improvement of 170 basis points. Gross margins of Global Generics and PSAI were at around 59% and 20%, respectively. Sequential improvement is largely attributable to the overheads leverage benefit.

SG&A spend, including amortization for the quarter, is INR 1,103 crores or $169 million, representing a sequential decrease of 6%. A part of the improvement reflects our ongoing efforts on optimizing spend. SG&A spend is at 31.1% of sales now as compared to 32.8% for Q2 FY17 and 35.5% for Q1 FY18.

R&D expense for the quarter is INR 418 crores or $64 million, representing 11.8% to revenues. Lower spend was primarily on account of deferment in some of the milestone payout towards the balance part of the year, and this does not reflect any change in our R&D strategy. On an absolute scale, we expect to close this financial year in line with the previous year level, that is around $300 million or so.

EBITDA for the quarter is INR 689 crores, which is $105 million and is around 19.4% of the revenue. During the quarter, we generated $130 million of positive cash flow from operations. Our net debt-to-equity ratio stands at 0.30 as on 30th September 2017. The effective tax rate is around 26.5% for the quarter. However, 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 decreased by INR 100 crores or $15 million during this quarter. Capital expenditure for the quarter was INR 281 crores or $43 million. Foreign currency cash flow hedges for the next 12 months in the form of derivatives per U.S. dollar are approximately $240 million, largely hedged around the range of INR 65.9 to INR 68.3 to the dollar. In addition, we have balance sheet hedges of $322 million. We also have foreign currency cash flow hedges of RUB 600 million at the rate of INR 1.131 to the ruble, maturing over next 6 months.

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

Thank you, Saumen. Greetings to everybody and a warm welcome on this earnings conference call. Let me take you through the business highlights for each of our key markets. At an overall level, we have seen recovery on a sequential basis and we believe that we will be able to build on this further. Please note that in this section, all references to numbers are in respective local currencies.

Our North America Generics business revenues for the quarter are at $221 million, a decline of 4% on a sequential basis, mainly driven by accelerated price erosion of the base business. The Generics market is undergoing significant structural changes leading to adverse market conditions in the short term. On the other hand, we have had a good year in terms of new launches with 8 product launches in U.S. and 2 in Canada. Many of these launches have been limited competition space and expected to contribute meaningfully to our business. We are on track to achieve our target market shares for key assets like liposome and doxorubicin, bivalirudin with revenue recognition reaching peak potential by end of next quarter.

As you may be aware, we launched Sevelamer Carbonate towards the end of second quarter with revenue recognition expected to begin Q3 onwards. This has been yet another significant launch for us in limited completion space and we are in the process of ramping up our market share. The remaining part of this fiscal is expected to remain busy on few new launches as we continue to work with agency on the approval of our tests and remain optimistic on 2 to 3 launches per quarter.

Our Europe business recorded sales of EUR 32 million with a year-on-year growth of 35% and sequential growth of 10% supported by new product launches. As you might be aware, this quarter we've faced marginal supply issues following the German regulatory audit at 1 of our promotion facilities in Bachupally. We are now focused on addressing the concerns as for committed, corrective and preventive action.

Our emerging market business performance has been consistently improving on the back of new product launches, entry into new markets such as Brazil and Colombia and supported by stable currency. Russia business grew 13% YoY in local currencies. Performance in other markets has also been in line with our expectations. We are working towards strengthening our portfolio across emerging markets with a focus on biosimilars and leveraging our strong institution business portfolio. We remain optimistic of building this momentum further leading to a healthy and sustainable growth in these markets.

India business revenues are at INR 637 crores and grew 2% YoY and 36% on a sequential basis. After normalizing for the adjustments post GST implementation, the like-to-like YoY growth would be around 10%. While there has been gradual pick up by the channel, the inventory holding hasn't fully recovered to the pre-GST levels.

The PSAI business posted revenues of $86 million and has grown 20% on a sequential quarter-wise basis on the back of improvement in customer orders and supply situation. The business has undergone strategic realignment in the last couple of years with focus shifted to value accretive segment. We believe that this shift will help sustain the growth for the business in the long term.

On the Proprietary Products business, we continue to execute our strategy of maximizing our in-market portfolio. In FY '18, we saw a significant increase in the prescriber base for our lead product, ZEMBRACE, Sernivo and [Trianex]. Our near-term imperative which will accelerates commercial business path to profitability through volume growth initiatives and managed care strategy for this business, and at the same time optimization of portfolio through selective licensing of strategies, we are also focusing on the development of late-stage, high-value assets that have the potential to be transformative for the business.

Before I conclude, let me reiterate on our three key priorities as laid out by our CEO in the last earnings call. First, strengthening our manufacturing and quality system. Here the three tasks is to systematically implement our quality management system. We continue to make meaningful progress on this journey. Our critical sites, including the sterile injectable plant in Duvvada and oral solids plant in Buchapally where remediation activities and continuous improvement efforts to strengthen the quality processes at these sites are on track. We are putting our best efforts to resolve these quality issues in the next few quarters.

Second, focus on building a healthy pipeline of complex products. For our near-term pipeline assets, pending approval, we are actively engaging with regulatory authorities to address their concerns and taking all possible actions to secure timely approval and launches.

Third, optimizing our cost structure. We believe we have made a firm start here and progressing well on the journey to realize significant cost savings in coming quarters.

With this, I conclude my section and open for Q&A.

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) We will take the first question from Manoj Garg from Healthco.

Congrats on the results. It's good to see the business start to stabilize. So I have a few questions, I will now just go through the questions and then go back on mute. One, can you segregate the 11% revenue decline in North America into volume and price? Two, I believe that you have a target action date for the 20 mg glatiramer acetate product in November. Just what are your expectations there, especially in the wake of the recent Mylan Natco approval. And then three, post the EIR at Srikakulam, which was I think about a month ago, what's the status of getting that backlog cleared there, and did you have any correspondents regarding glatiramer as a backlog at that site?

On the 11% decline, we would probably send you a break-up of the price and volume, but this is the value, which has been reported. Maybe we'll come back. Let me take the other questions which you mentioned. The second one was the target action based on glatiramer. It's 10th November actually for 20 mg and sometime in March for the 40 mg. I think the last we have heard that post Mylan's approval, our file is in active review. Beyond that I actually can't comment, and so we hope to hear something next month in terms of -- certainly there would be a follow-up question. And some of those questions will also be on the -- mostly on the -- we get from the BDNF side, which will be applicable for the 40 mg as well, and hence -- so to that extent all the work would be done ahead of the TAD of 40 mg.

I'm sorry, I didn't -- just to interrupt. I didn't catch that. You are expecting questions on what aspects of the file?

On -- the asset is very heavy on the drug substance side. So I think that, okay common what I mentioned is, I think some of the questions which we see would be -- also be applicable to the 40 mg asset. Your next question was on the sites. I think -- you also just asked about our Duvvada site or Srikakulam site? Srikakulam.

I asked about Srikakulam. So the EIR was issued about a month ago, I think on September 28. So just wanted to see what the status was starting to -- starting to get the backlog cleared there, and if -- and then a follow on to that is glatiramer also filed out of there?

So there are 2 dosage sites in Srikakulam. So both has been through in audits and these are oral -- one is in oral solid side. And the second one is topical and few other dosages. So this is not the site from where glatiramer has been [found]. So the manufacturing has always been on. But we earlier had EIR audit happen and so the approved status continues and (inaudible) launched from this site. So that continues. This is -- this is the finished oral dosage site. And you also asked about the German inspection, I think we have provided details about that. This was the Buchapally site, which we had a series of drug observations and we are at the moment, sort of -- we have responded and we are implementing the commitments we've made to the authorities. We will have to go through our another audit maybe sometime in Q4, we wouldn't exactly be able to sort of let you know the date. And then we will see where it goes from there. But we are putting in concerted efforts to sort of make sure that we remediate all the observations.

This is very helpful, thank you for the color. And then perhaps if later on in the call, if you able to provide that break-up in terms of volume versus price.

All right, maybe Saunak will respond to you separately on that. Yes.

We will take the next question from the line of Anubhav Aggarwal from Credit Suisse.

Abhijit, just one question on the market. Several companies have mentioned that with the price erosion happening in the U.S., companies are reaching a pinpoint where returns are less. I just wanted to get some understanding that if you look at your portfolio, roughly, very roughly, what would you indicated at what percentage are portfolio now? If you just put a threshold as return of capital or let's say some return as 10%, 15%, what percent your U.S. portfolio will be making returns less than that? Just to understand that when companies says a pinpoint, is it just making lesser margin versus what they were making earlier, or we have come to a point where we're not even covering our cost of capital?

I don't think we are, or maybe any other companies that that point is when return on capital is getting challenged. I mean where we are is, compared to the industry, the margins industry were used to in the past, has taken a severe, very severe hit. The various companies have [messaged] the erosion business base business, which is eroding and will continue to erode, I think with more, the consolidations happening, plus once in a while we would have that and I think they have pretty much mentioned that in their con call that there will be assets for every company and for them as well, which are more meaty, which will once in a while take a higher hit. So, return on capital is at least for established companies, is not that big an issue, I would say. But certainly for someone putting up greenfield sites, starting from scratch to approval, that is going to be a challenge. Can't speak on behalf of those companies.

Yes, but just to ask this further, my question was not on your total portfolio in the U.S. Let's say, of course, there were some products like, for example, Doxil or Decitabine which are pretty good products. But even if the products which are let's say in quarter 4 or quarter 3 in terms of returns, even are we not making money on those products or should we assume that if you are not making return, you're simply exiting those produts already?

That's true for every company. I think the moment you are not making money in the sense, but the moment even the gross margin dropped below a certain level, I think the company tends to exit, at least organized companies I think, and it's true for us as well, more so true for us.

Sure, the second question was on the India growth. So even if we take our adjusted growth of 10%, given these stocks in this quarter, doesn't this number look a little lower. We have seen a mixed trend, some companies reporting 20% like-to-like, most of the guys have been around 12%, 13%, so somehow this 10% number looks a little low, what happened in this quarter?

Well, I mean, look -- firstly, I wouldn't challenge your observation. I think are we pretty happy with the existing state of business, no. Certainly there are some paths, some divisions where there's scope for improvement, but where -- from the lows of last quarter, I think there has been substantial catch up, but overall, India business, I think we have some more work to do, we certainly have some more work to do. Certain areas, we are doing well, oncology and genetics launched getting great deal of traction and certain parts of the business doing -- business gastro assets doing well. On some other parts of the business, historically Dr. Reddy's have not been very strong, there is some work to do for us in the India business, yes.

If I can just ask one question to Saumen, sir. Sir, employee cost was down 3% year-on-year this time. Historically, we have seen our employee cost increasing. Just wanted to ask that what's the outlook here? The full year number if I look for that year, we had one of lowest sales in the quarter for last year, but like-to-like, what kind of employee cost increase should be built in on an annual basis?

This year we have focused a lot in terms of optimizing our cost structure and that includes the manpower cost -- includes saving the manpower cost, the kind of increment which has given this year results a comparatively much lower than what we -- our people were used to for the previous years and all. And some of the manpower cost which is completely performance linked and this kind of Q1 performance which was quite a bit of disaster, there will be definitely to that extent, that at least impacting. So we will try to control. So the thing is, the kind of growth we are accustomed to in terms of the manpower costs, we don't expect that kind of thing to happen this year, which is a healthy sign in terms of controlling. But beyond manpower cost overall, the [SG&A] productivity, we would like to improve and that's what it's something which Prasad has alluded to last time, that one of the three priorities is, one on optimizing our cost structure which had just seen from our (inaudible).

We'll take the next question from the line of Neha Manpuria from JP Morgan.

Is it fair to understand that the U.S. business seemed muted this quarter despite having some good launches, but launches you know launches like Doxil et cetera probably didn't contribute too much into the quarter, therefore, we should expect that ramp up only in the third quarter?

So one thing I would like to clarify that, Sevelamer we launched on 29 of September, so it is beyond the cut-off date for the revenue recognition. So there has been no revenue recognition on count of Sevelamer.

No, no, I am talking about Doxil.

Abhijit, you can continue to that.

May I just -- last part of the question, what was it?

No, I was talking about Doxil, sir, because I would have assumed that would be a good product to sort of start gaining ground in this quarter. Is it fair to assume that Doxil hasn't contributed at all, or the contribution is very minimal in the quarter and therefore, we should start seeing an improvement in that contribution of sales as we go into third quarter?

No, Doxil is not insignificant this quarter. Doxil is in double-digit this quarter and it's been a good month. We are going to build a little more, could be, can't comment on that, but it is not certainly insignificant this quarter.

Second on the cost savings. So what I understood, we have already, if I exclude the D&A, we've seen 10% cost savings already quarter-on-quarter. My understanding is that our cost optimization efforts will be more gradual from your last call. Is it fair to say that a lot of the low-hanging fruit is probably captured in the cost saving that we did in the quarter, and you can't bid as much as you have or save as much as you have shown in this quarter?

So I'll comment in generality first and then someone can get -- add some specifics on that. I think you will have to look at cost savings in a broader perspective. I think there is serious effort in changing the cultural context of our spend base, okay. And we are trying to be diligent and frugal in many ways. The model is changing, not just in North America, in the home country as well there is pricing pressure. So we will have to realign ourself and we are seriously putting effort. Now that's playing out -- in general, that's playing out in manpower and that will play out in many other activities. It's been led by a very competent team internally. It's very, very driven by internal managers and showing traction. So, beyond that, Saumen, you want to comment on anything on the figures?

Some of the things which we have right to focus on includes manpower cost, includes travel cost, [or else] repair and maintenance and all such things, but having said that, trailing cost, there could be fluctuations quarter-wise, because in some quarter there would be specific state of activities which would be planned. But there is a concerted effort in terms of structural cost, which will eventually get realized, comped in maybe this system, comped in next fiscal also. So it will be a continued effort. Yes, I know, low-hanging fruits are something which would have immediately given us some impact.

We'll take the next question from the line of Surajit Pal from Prabhudas Liladhar.

So, I mean -- my questions -- Saumen, my question, I was going through your ANDAs consolidation numbers, and I have two questions. One question is that, if I go by your cost items and if I see the total expenditure to sales is [90] in Q1 and Q2 it is in [81], so quarter- on-quarter 8% is quite a big jump in terms of improvement. And if I go further, I see that your raw materials, I mean, all items -- purchase of finished goods, I can understand your Sevelamer thing, but be it raw materials or be it employee cost, or be it selling expenditure, be it other expenditure, everything quarter-on-quarter has been down. Optimization is one thing, but how come it has come down so drastically? I mean, if I compare almost INR 50 crore to INR 60 crore on every of the items, so that is one. Second thing is that your receivables, if I go by your current receivables, in the last 6 months from March to September, it has been increased by INR 411 crore. And if I go by first-off year-on-year growth of your sales, that is INR 42 crores. Could you tell me what are the source of high receivables?

So I'll take the second question first, because of the consolidation, customer consolidation which is happening in USA, the credit period there would have been in various ranges. So now the moment consolidati0n takes place, all the (inaudible) goes towards which is beneficial for the customer. So that's why the credit period itself is going up and any sales innovative where there is quite a bit of charge-back and all, the actual receivables effectively is much more than the credit period. So that is something which has impacted the year in terms of the receivables, but very specifically for the quarter, there is some more receivables than normal which we have seen in both the PSAI business and Russia business, which will get corrected. But the credit period impact in terms of receivables for North America is there to stay. Then I --

I'm sorry, I want to interrupt over here. You said -- what is the current receivable days in this?

No, the credit period -- earlier there was a range fluctuation. Now most of the contracts it is now 90 days kind of a credit period, but in effective credit periods, as we look into that charge-back impact we do need to pay immediately, it goes beyond 110 days effective with DSO. With that if you take 90 days, it goes beyond 110 days. And then to come to your first question, the material cost will definitely depend a lot on the business mix, so that means if we give it to PSAI, if there is a variation in the ratio, that will have an impact. And second, there are some parts which are the quality-related provisions which happens from quarter-to-quarter there would be definite fluctuations there.

If I can squeeze one more ...

In terms of the other improvement that you've seen where you were just sitting to Neha earlier, selling expense this specific quarter is low and which does not mean the other quarters' selling expense cannot be higher. As I said these will be activities which are planned quarter specific, specifically for the branded business, there are calendars. Okay?

So from that perspective, do you want to mean is that your Sevelamer, where the sales you have not booked this quarter, but cost you have booked fully this quarter, right?

No. The sales and costs matching always takes place. The way to do it will be, if you look on the India standalone and vis-a-vis concentrated, there may be a different impact. So far as the consolidated sales that's there, every dollar of sales we have to match with the cost of revenue.

Abhijit, could you throw some light on Suboxone and Nuvaring current status?

Not a great deal of change. I think we've messaged that in the Q4, we have TAD for Suboxone. On the litigation side, you're aware, I think we remained fairly optimistic. And let's see where it takes us, so we have responded to the PR about 4 months, 5 months I think June -- In June I think we responded. So we'll see how that goes and nearer TAD date, whether there are some more questions or -- but we remain optimistic on the litigation front. As far as Nuvaring is concerned, our TAD is in March and anyway the IP, concerned IP is expiring in early April or something. So if that is the concerned event, so it all depends on whether we will get approval on time, it's a drug device combination. Again, we have responded a few months back on the PR and let's see how that goes. So, so far so good.

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

Just wanted to knowthe U.S. GMP status on Bachupally has knocked in before (inaudible) going back on whether we have a VAI, OAI or anything on that front, that will be helpful.

If you recall, we had a quarter few observations in that site. So we received a query from the agency specifically on 1 observation dealing with investigation and validation, and we provided that data about a couple of months back if I recall correctly. And then we had received another follow-up to the same question, some more data requests, and which we have compiled and all that is going out towards the end of this week. Beyond that we'll see how that quarter goes. So we would just start off with the compilation of that data and we'll send it out. So out of all the observations 1 specific observation they had more questions, which we are responding which is in the area of -- basically validation and litigation.

Have you not heard anything from USFDA on the regulatory state of that facility, and specifically asking whether we have got a OAI of that -- sorry?

So still the questions -- this normally happens. If there are more observations, there are questions and observations. Till the questions are satisfactorily answered, we will not get -- that we were going through. So the questions we have to answer and answer and then if the agency is satisfied then it sort of approval starts from site.

Any timelines that you see by the time you will be able to see it and also if you can give me some color on the number of approvals dependent on the facility over the next 18 months, more so to the important ones, important approvals from that, that will be helpful.

So specific timing on anything we are dealing with the agency will be -- it will be difficult for us to comment, because our job is to turn it around on the committed date and sort of engage with them as and when any questions come up. As far as approvals and launches are concerned, we have 8 so far from North America and 2 from Canada, why I mentioned in Canada as well, because it is clubbed under the same geography and give or take, maybe 6 more or so till end of the financial year. Well, specifics we will not get into and we'll see how that unfolds.

If this happens -- sorry. Yes, go ahead please.

You are asking, from Bachupally?

No. I'm talking about the full company, right.

No, I was asking about Bachupally specifically as to how much -- I mean how many approvals are dependent on Bachupally, which are -- which we expect over the next 12 months to 18 months?

So that we will not be able to comment, you will have to -- I just mentioned that we have done another oral solid to this site as the IR has talked and many filings have been taken from that site. Bachupally site was our erstwhile (inaudible) site and we wouldn't be able to specifically give the break-up of what else is spending, but yes, overall, for the company there are quite a few assets between Duvvada and Bachupally, that there are quite a few assets which are complete in terms of review and some of them are certainly in the new site potentially, which had impacted because of the GMP status.

Okay. Finally, last one if I can squeeze, the gross margin has been a lot fluctuating over the last 2 quarters, 3 quarters, and I understand the reasons were many. So is this the gross margin, I mean, we can consider to reach stable from here on, I mean obviously depending on the product mix? But is there anyone-off in the gross margin, or this is kind of [what's expected]?

Last time also -- last quarter we said that it will improve from Q1. But if we cannot hope to go back to a level of like a 60% kind of gross margin, that will be very difficult because of the site (inaudible) which has happened. So one can, depending on the business mix and new product launches, one can see the range between say, 53% to -- at a very good quarter, it could be around 55% or those kind of level.

I see. But there is no one-offs related to let's say the revolution process or any other thing right? And that's all I'm saying.

No. There is -- I said there is a lot of overhead leverage benefit which happened, anyhow [sales go down]. So the first quarter it cost the overall sales and of course with the GST (inaudible) impact in India was a major contributor there, which was low to that extent it impacts (inaudible).

We will take the next question from the line of Saion Mukherjee from Nomura.

Sir, you mentioned 2, 3 launches every quarter. I'm just wondering, given all the uncertainty around sites, both Duvvada and Bachupally, I mean what kind of visibility you have? Can you just take us through mitigation steps that you would have taken and what kind of confidence you have on the key assets which are out of these sites that they will ultimately get approved even if, let's say, there is a delay in resolution?

So as I mentioned that, we certainly have a few assets which are -- with reasonable earnings potential which are at the moment review completed and unfortunately waiting on the sides. So the priority on hand is to do a very, very active site transfer not just for (inaudible) piece, but prospectively for the important assets and -- which is going on as we speak. But some of this impact is -- we are already seeing in the current moment. But we would continue to do here onwards a much more sort of proactive site transfer. Not to say that this doesn't mean that we are not -- we are very, very actively working on the site. We remain eventually optimistic that we will be able to mitigate these and go to the others. But we will always continue to put a high focus on de-risking, especially the important assets.

And then, if I go with this run rate like you are talking about maybe around 15 launches over the next 18 months, how many would you say would be like high-value assets that we should expect?

That could be difficult, as I -- same answer which has been given, because first is the destiny of assets are better known after the launches come through or the approval comes through, one. Two, the uncertainty on -- even in the sites -- in the sets where in general there is no site issue, uncertainty in terms of what questions you will have and what type of CRL you will receive is -- has been varying a lot and -- I think from our expectation angle. And so it will be completely incorrect to sort of comment on that how many would be high-value. But the pipeline which we have continues to be very good. It's -- we have great confidence on the type of assets which we have filed. So let's see how -- what destiny has in store for us.

And, sir, just one thing on the proprietary product, if Anil sir can answer, I mean, we have talked about trying to get the sales there. We have stopped the discounts et cetera. It's been almost like a year now, more than a year. So isn't it like for a reformulated asset that we've launched it's taking just too long to get those sales? And -- I mean you talked about I think $30 million, $40 million both for Sernivo and Zembrace (inaudible). Do you see risk to that given what has happened so far in the market?

So, let me try to answer your question by first -- the first part of your question, which is reformulated assets and performance in the marketplace. First of all, it is not about reformulated or a new chemical entity. It is more around the payor landscape, which is changing in the United States. It's evolving and manufacturers such as us and any others in the market need to adapt to these changing -- to the changing landscape. So, again, it's not about reformulated assets. Second, we -- so what that means is that as opposed to in previous years -- 3, 4 years ago, today the difference is that it takes a little longer in terms of getting listed on formularies. And what we have done with both the Zembrace and Sernivo is that we have made significant progress since last year. For example, if you just look at the overall Promius sales as compared Q1 to Q2, we have made a -- we have jumped 30% in terms of our revenue. Why that has happened, well, first of volumes -- I mean physician uptake has been catching up. Second, in case of Zembrace we have got coverage with some of the bigger plants, in this case [CDS care] markets now covered Zembrace. Sernivo, we are waiting for that coverage, some of the bigger plants. So Sernivo is slightly slower than Zembrace but Zembrace has been doing well. So to your question of the peak sales, it is too early to comment right now because as we speak we are continuing to get coverage across multiple plants and we hope that by end of this fiscal year we will have a significantly better coverage than when you started out. The bottom line to note here is that the business has been progressing, and we are seeing quarter-to-quarter differences in terms -- quarter-to-quarter increases and significant increases in terms of sales.

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

Abhijit 4 big T-A-Ds, TADs over next 5 months, so holding your breath I guess. So are we looking at a blockbuster year next year or philosophically speaking how should we think about the final approval? Would FDA give out many questions to you and then again goes into multiple months or would it be shorter period to respond and hence approval getting in quite quickly?

Let me try to be as specific as I can within ambits of whatever we know. Broadly the two assets I already covered, Suboxone and Nuvaring. I think we have answered well but both are not me-too straightforward assets. So what question the FDA would have we will probably know only when we get a CRL. But overall, we feel reasonably good about the way we have responded to the CRL and hopefully should be [IF], but let's see. Glati is a little more of -- I mentioned that we have done to the best of our capability, a very good job. But then there are certainly -- this one certainly will have -- I mean some questions which we are proactively working on a few things and trying to advance as much as possible. And rest of the assets, a few are not in public domain. Again we are prioritizing these activities, is all I can tell you Sameer. We are prioritizing a lot organizationally trying to sort of put our best scientific minds together to sort of preempt as much as we can. There is a lot of uncertainty today in terms of how questions are being asked at times and how the [assets] are progressing, more -- made more complex by the site issues and all that. So beyond that I wouldn't be able to throw much light whether it would be a blockbuster or a rather average year but let's see wherever it goes.

And more specifically, Abhijit, on Copaxone. Now, I'm talking about Srikakulam API site. Why is -- why we have not received EIR over here and I think the Copaxone API is coming from this site. So does that put the product at risk? And the second follow-on on Copaxone. My understanding is that Teva has got fantastic patient support system and nurse call center which is so critical to getting the market share. So would you be having the same?

So let me take one by one. So the API, we are going by a 2-site strategy. I'll respond to your [PDD] plant, API plant compliance status. But we are going by 2-site strategy and there is next to it another site which we received EIR and very soon we are halfway through validation and we are just sort of updating the file. But having -- coming back to specifically about Srikakulam site, so what you have heard from the agency is there is -- regarding the last specific audit, there doesn't seem to be further questions. As we have mentioned the audit had gone well. But there are a few questions -- further agency wanted regarding details about post-WL some more details. Those are sort of put together in the form of a questionnaire. And we will probably receive that in about a week or so, and we have a fixed date tele con in the month after, two or third week of December on that so that we will answer those telephonically once we receive those. And then we'll see where it goes from there, but it's hopefully moving in the right direction. But as I mentioned, we are anyway -- we are getting the 2-side strategy for that (inaudible).

And on the Patient Support System and those call center?

So to that extent, I think Mylan's approval half paves the way for -- by the way, we are also absolutely ready, we know the support system. We were paying now sort of -- we will be certainly ready as and when we get through the assets. But with 1 more generic coming in, I think that path will be hopefully smoothened.

And Abhijit, on your Duvvada facility, I thought that it mentioned that you're expecting a re-inspection end of this calendar. So what's the update over there?

We -- that's by far the most important fight for us, and as I was mentioning assets which are completed review, we are waiting approval, fewer from there. So, high, high management focus, substantial activity going on, some consultant help also has been sort of taken at the moment as we speak. We don't want to rush into -- absolutely that's not a bright -- we want to be absolutely certain that it's not about the compliant. It's also about the generic sites all over the world being scrutinized very heavily. So we want to make sure that the work culture, the way people operate as much as we can thought of, spend time on that and make grassroots improvement and we are focused on that specific question on the timing of audit more like towards the end of Q4.

Okay, and Abhijit my understanding is the problem was on -- the warning letter was for the oncology block. But why are you not getting approval from the non-onco block at Duvvada?

You know the way agency looks at it, it's -- they look at it one side. So we will have to deal with -- although other side has not been audited, but we will have to get through this site to sort of go into the other one as well.

Okay, one final question with your permission. Renvela, I mean, is it still an exciting opportunity because soon after your (inaudible) won the approval and maybe a couple of more coming, or do you think this should get a lot diminished?

It is significant and it is exciting. And being the second in front, we have our fair market share. This is the entry of you could see is happening in sequential manner and it depends on how the competition sort of looks at it. But yeah, I think it's still going to be significant and exciting.

Okay. Abhijit sorry, but one more. Aloxi, any thoughts on it? I thought it was IP, was getting a lot resolved, so approval was coming towards us. Any update on this?

So [environment] decision, I think, one of the first things in morning when one opens up a mail one is looking at it. Behind that what can I say? I mean that anytime I guess. But we don't know what the outcome is going to be of course. But we will -- we hope to hear soon enough.

We'll take the next question from the line of Prakash Agarwal from Axis Capital.

So question on Doxil. You did mention -- you would have done about early teens on Doxil. I'm just trying to understand what was Natco's role here? I mean the filing is in your name and so -- and what kind of, if you can add roughly what kind of sharing agreement we have?

So the file is ours and we -- it was developed, probably I had mentioned a little bit that we have put in a lot of effort in characterization capability in this company. And these products need a very large amount of characterization. So we played a big role in that in terms of sort of proper characterization and working with agency to see that the asset gets approved. Specific details of the business deal we won't be able to share, but we are the dominant of the two partners.

Fair enough. And going to Copaxone, is the understanding clear that even if the TAD is there, and as you said, the facility, the API issues -- API facility Srikakulam is yet to be cleared. So what happens, I mean if the TAD is due and facility still not. So do we get a -- what happens really?

Firstly as I said that we -- the audit -- the recent audit went well and there were no further questions on that specifically. We are answering our questions -- still pending questions from the last WL. So -- and there is a clear pathway. So let's see what happens. And can't really comment on the outcome, but we await optimistically on the progress of the site. Having said that, as I mentioned, we are certainly by another couple of months, we have the new API filed in along with the T0 data as well. And then we will see depending on how things go [grow site life] or just rely on the new site.

And one clarification on the R&D comment that you made that there has been some deferment of milestones. So this is related to the Teva -- you already paid the Teva piece. So what is this referred to?

There will be a lot of our development happening to [some of the] partners as well. So there will be some which will trigger in a specific quarter. So -- and some activities planning in all, so it is not evenly spread across the year. But as I alluded to, for the full year in terms of absolute R&D spend, it will be similar to that of FY '17.

And, Saumen, lastly for you. On the other expenses, you did mention there has been optimization measures that's been taken. I'm just trying to understand with the proprietary product expansion and new launches that are happening, plus India, Russia, so is this the base and we should build some cost inflation here or how should we look at it going forward?

Some of the things on, for example, like Colombia has already been factored in terms of -- because we have entered last year Brazil also, now whatever we are required we have put it. These kind of countries now we've gone with a business model where there is a lot of reliance on institutional sales and all for the biosimilar complex in products. So it is not an intensive self-forced kind of a thing, unlike Russia, India, where it is a completely different model. So having said that we have planned on almost every aspects of our -- each category of spend, we are analyzing in great details. We are doing a lot of analytics-driven kind of cost optimization which will continue.

Okay. So this is likely to be the base about 22%, 23% of sales?

Which one?

The SG&A as a total group?

No, SG&A is at 31.1% this quarter which actually if you see last year, it was 32.8% and in the previous quarter it was 35.5%. From 35.5% it has been brought down to 31.1%.

And this 31% plus-minus 1% or 2% is possible? I mean --

It is. That is the range we are looking at, yes.

Due to time constrains, we will take the last question from the line of Shyam Srinivasan from Goldman Sachs.

Just 2 short ones. One on generic REVLIMID. The patent -- the IPR filing dates, one of them has passed October 20 I thought. Do you any specific strategy or how is Dr. Reddy's thinking about this opportunity?

Big asset for us in litigation. So (inaudible) that early stage. We have -- I think we think that we have a good position, but too early to comment on this. As you know the product patent goes in 2020, I guess, and the others are in litigation. Yes, others are in litigation. So difficult to comment, but, yes, big asset for us.

Okay. So do you think it's a medium-term opportunity? Would that be a fair comment or no?

No. I just said it's in litigation.

Sure. Okay. My second question is on again Suboxone, just a follow-up. The TAD is in Q4, you said. The District Court has given it in your favor. Is there -- if all things come through and if the FDA gives the approval, do you think there is a potential for an at-launch risk sometime next year, do you think?

I think we are very focused on the approval of the asset at the moment. As I said, we remain very optimistic about the litigation part of it and what's the current focus is getting the asset to approval.

But I thought that you're not like -- you don't have the first-to-file on the one, right? So is there -- do you know how the FDA would treat this case because the other guys are all stuck up? So any thoughts there would be helpful.

Yes, my information is as good as yours. 30 months -- within 30 months the approval didn't come through for that first. Beyond that how would it be treated is agency's prerogative.

Okay. Last -- my last question, you've given a lot of the numbers on margins and stuff. Would you also venture to give us some kind of an EBITDA margin guidance for FY '18?

No.

Okay. I was just trying my luck.

Thank you very much. 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 Q&A session today. In case of any additional clarification, please reach out to the investor relations team. Thank you all.

Thank you very much. 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.