Dr Reddy's Laboratories Ltd (RDY) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Limited Q3 FY '18 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.

Hi. A very good morning and good evening to all of you, and thank you for joining us today for Dr. Reddy's earnings conference call for the third quarter of fiscal 2018. Earlier during the day, we have released our results and the same are also posted on our website. We are conducting this live webcast of this call, and a transcript shall be available on our website soon. The discussion and analysis in this call will be based on the IFRS consolidated financial statement. 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 rebroadcast 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 this conference call and the webcast. After the end of the call, in case if any additional clarifications are required, please feel free to get in touch with the Investor Relations team.

Now I shall turn the call over to Mr. Saumen Chakraborty, our CFO.

Thank you, Saunak. Greetings to everyone. I will cover the key financial highlights. For this section, all the amounts are translated into U.S. dollar at the convenient translation rate of INR 63.83, which is the rate as of 29th December 2017. Consolidated revenues for the quarter at INR 3,806 crores or $596 million, grew 3% year-on-year and 7% sequentially. During the quarter, our Proprietary Products business secured the NDA approval from USA FDA of Impoyz that is brand low-concentration clobetasol cream. This had been recently out-licensed to Encore Dermatology Inc. for the commercialization of the product in the United States.

These approvals reserve the recognition of product milestone of $20 million in this quarter. Normalized for this, the balanced sequential growth was also aided by incremental contribution from new products, partially offset by the price erosion in North America Generics business. Revenue from Global Generics segment is at $472 million and PSAI segment is at $85 million. Consolidated gross profit margin for the quarter is at 56.3%, a sequential improvement of around 300 basis points. Gross margins of Global Generics and PSAI were at around 59.5% and 23.8%, respectively. Sequential improvement is largely attributable to the better product mix and also the above-referred milestone recognition in our Proprietary Products segment. SG&A spend, including amortization, is INR 1,205 crores or $189 million, a sequential increase of 9%.

During the quarter, we settled with the U.S. Department of Justice on the litigation involving packaging-related issues against a payout of $5 million. Barring this, the balance increase in our account of certain sales and marketing and other spends towards the events specific to the quarter. We continue to focus on optimizing cost as an organizational priority.

R&D expense for the quarter is INR 467 crores or $73 million, representing 12.3% to revenues. This is in line with our expectation of cumulative spend of around $300 million for this financial year. EBIDTA for the quarter is INR 806 crores, which is $126 million and is around 21.2% to revenues.

During the quarter, we generated $136 million of positive cash flow from operations. Consequently, our net debt-to-equity ratio has improved to 0.25 as on 31st December 2017.

As you all are aware that recently, the USA has enacted the Tax Cuts and Jobs Act of 2017. Consequent to this enactment, we have reviewed and remeasured the deferred tax assets and liabilities of our U.S. entity, resulting in a onetime charge of INR 93 crores recorded under tax expense. Normalizing this impact, the effective tax rate for the quarter is approximately 28%. However, on the adjusted basis, the annual effective tax rate would be in the range of 23% to 25% as guided earlier.

Key balance sheet highlights are as follows. Our operating working capital decreased by INR 33 crores or $5 million over this quarter. Capital expenditure for the quarter was INR 221 crores or $35 million. Foreign currency cash flow hedges for the next 15 months in the form of derivatives for U.S. dollars are approximately $290 million, largely hedged around the range of INR 65 to INR 67.8 to the dollar. In addition, we have balance sheet hedges of $212 million. We also have foreign currency cash provisions of RUB 970 million at the rate of INR 1.12 to the ruble, maturing over next 15 months.

With this, I conclude my section and 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. This has been a good quarter for us despite challenging market conditions. At an overall level, we have seen some growth on a sequential as well as Y-o-Y basis with most businesses doing well. We look forward to building on this growth momentum in coming quarters. 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 $246 million, registered a healthy growth of 12% on a sequential basis. This growth was predominantly driven by high sales for Sevelamer launch owing to channel cycle. The quarter continued to witness higher levels of price erosion for the base business in low- to mid-double digits, driven by customer price harmonization and increased ANDA approvals. We anticipate the market dynamics to remain challenging in near term, owing to annualized impact of pricing actions and incremental completion in some of our high-value assets.

On the other hand, we have launched 11 products in U.S. and 2 in Canada till date. In this quarter we ramped up sales of Sevelamer tablet, launched clofarabine and melphalan injection in the U.S. market and azacitidine injection in Canada market. We continue to gain traction on new launches and have performed well in contracting market share.

On the pipeline front, coming fiscal is expected to remain exciting, with fairly good number of new launches scheduled including some high-value assets.

Let me provide an update to you on the status of 3 key launches: gSuboxone, gNuvaring and gCopaxone. On gSuboxone we have received minor CRL recently and expect to respond in a month's time. We're closely watching the IP position and our actions would be in accordance with the development in the firm litigation front.

On the second asset, gNuvaring, we have responded to some additional queries received from the agency and our TAD now is early Q2 FY '19.

With IP situations behind us, we feel optimistic about the launch of this product by mid of FY '19. Finally, on gCopaxone we have received queries on the DMF. While there is some work involved, we feel we can respond in a few months and continue to progress on the asset.

On Europe business, we recorded sales of 36 million with a year-on-year decline of 11%. As you may be aware, this quarter we faced marginal supply issues following the German regulatory audit at one of our foundation facilities in Bachupally. The reinspection of the site by German authority was completed in this month. The audit outcome was positive and the site was cleared by German authorities paving the way for all dispatches to commence. We hope to get back on the job of rebuilding the business in near future.

On Emerging Markets business performance -- 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 5% Y-o-Y in constant currency and 9% in INR terms. Performance in other markets has also been in line with our expectations. We're looking forward to augment our emerging market footprint further, with opening up of few significant emerging markets in coming fiscal year by leveraging our oncology and biosimilars 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 613 crores and grew 3% Y-o-Y. The channel inventories have now normalized. Our sustained prescription growth has been encouraging, and we feel positive about the direction of the business. We look forward to revival in market growth rates back to historic levels of double digits in near term.

The PSAI business posted revenues of $84 million and has grown 5% on a Y-o-Y basis. The business has undergone strategic realignment in last couple of years, with focus shifted to cost rationalization, change in geographic mix and leverage of relationship with partners to move into dosage sales of select molecules. We believe that this will provide a sustainable growth for the business in the long term.

In our Proprietary Products business, as disclosed earlier, we were able to secure the approval from FDA on the NDA application of DFD-06. This was a critical milestone and in line with the agreement with Encore Dermatology, and we recognized related milestone value this quarter. Overall, we continue to focus on building our existing commercial footprint and also enriching the development pipeline.

On the commercial side, we're experiencing gradual increase in prescriber base for our lead products Zembrace, Sernivo and Trianex.

Lastly, let me provide an update on quality front. We began 2017 with the resolve to improve manufacturing operations and strengthen our quality management systems across the organization. We believe that we have made considerable progress on this journey. On USFDA side, multiple sites were audited over the last 1 year. Agency has sent some queries on the API site in Srikakulam, which has been responded now. Regarding the sterile injectable facility in Duvvada, the quality improvement program is in progress in line with the comments made to the agency. We await the reinspection of the site possibly in a quarter or 2.

Quality and operation transformation will remain top priority for the organization going forward in addition to our focus on growth and cost optimization. With this, I conclude my section and open for Q&A.

(Operator Instructions) We will take the first question from the line of Manoj Garg from Healthco.

A few on the U.S. segment. I will just go ahead and ask the questions and go back on mute. One, what was the approximate contribution of Sevelamer during the quarter, since you did have it for the full quarter? Two, on the U.S. price, can you share some additional color other than the 1 or 2 lines that are in the press release? And then lastly, I think you spoke briefly about Copaxone and Suboxone. Can you just maybe extend a little bit more color there as well as in terms of the nature of the queries? Or what the agency continues to look for there as well as provide an update on REVLIMID?

Okay. A lot of questions. Let me take the first one on Sevelamer. Without getting into absolute specific details, we were ahead of the other competitors by a few weeks, which helped us in launching the product and fill the channel. So it is significant, and we'll see some erosion in the subsequent quarters in terms of -- while on the other hand there is, of course, the innovator, the percentage of shares continues to be high, which also provides some opportunity for the future, but more players have entered and prices have fallen to the level with more competitors coming in. The second question was, I guess, the color -- a little bit of color on pipeline and launches, I guess. That was the second question, is it?

Yes.

Yes.

Yes. Just on U.S. price.

Okay. Broadly the next year, I think quality of launches we feel better than this year. However, this is all subject to approvals coming on time and litigation playing out in the right way. But having said that, it's clearly richer than this year. On the pricing, let me take it in 2 parts. I will borrow the term from another company: base product and transitional product. Base product erosion is likely to slow down and flatten in coming several quarters, if not immediately. But the transitional products intensity of erosion will continue to be fairly heavy. In -- net of net, I think we would continue to see annualized erosion in low double digits. But these are predictions and difficult to be very specific about this.

The third one was on the specific assets. So I think -- Suboxone, I think we -- it's still IP is being discussed, litigated as you know. There is still a patent which is being asserted and then a couple others which are not yet -- which are coming up. So we'll see. But we feel very strong about our position. But on the litigation, let us see how that progresses. Otherwise, assets per se are progressing in the right direction, in terms of our responses and site and all those things.

As far as NuvaRing is concerned, IP is clear, as you know. And it all depends on the approval of the asset. And I just sort of mentioned that it's progressing. And we have a TAD in the early Q2 of FY '19. Copaxone, the DMF, you'll recall we had a date of November, but it got 2 to 2.5 months delayed. We just received a week back or so the DMF queries. It involves some work in terms of analytical. But the good thing is, I think we feel and now our science team feels that there's nothing we should not be able to answer. Having said that, it will take 4 to 5 months to put it together and respond. And we'll see whether there are follow-up questions on that, et cetera. So beyond that, it's -- that's what it is at the moment. I guess I have more or less answered all your questions.

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

First question on actually the gross margins flowing down to EBITDA margins. Now if we adjust the onetime milestone payment that we received, despite the Q-on-Q jump in the U.S., we haven't seen much of a movement. I mean, it's actually flattish. Just trying to understand what has really led to this? Is it the pricing pressure, though we are getting top line, but we have not got the margins? Or how should we think about that?

The sequential improvement is around 300 basis points, slightly more than half of it is due to the Proprietary Products milestone-related revenue recognition. So remaining is on account of the U.S. growth as well as whatever other measures that we have been taking. But there have been -- there will be always some quarter-specific events. So that's why it is very difficult to predict accurately how the margin is going to move from one quarter to another quarter. But I remember in the last quarter call there were specific questions about margin. So we are targeting to keep in the same kind of range.

Okay. Until and unless your other major products start kicking in next year?

Yes. Of course. If there is like a significant product launch which happens with much higher margin that will help us improve.

And couple of peer groups have talked about some impact of the [bad] pricing from the consolidations. So has that also impacted in terms of pricing apart from the base business pricing erosion?

Yes. It had an impact. The agreement had its impact.

And it's a full-blown impact or we are likely to see more impact going forward?

No, mostly it is factored in. Some may spill over.

Okay. Understood. And secondly, you talked about TAD for NuvaRing I think, which has slipped to 2Q now. Would you have a TAD for Copaxone and Suboxone as well?

For Copaxone, we'll have to answer the DMF and post the DMF, the other dates would come through. It's still a while away. On Suboxone, as I said, our journey towards approval is progressing well in terms of the technical terms. It -- we'll have to watch the IP development and that would be governing the destiny of the asset.

And any time frame we'll be expecting? I mean, earlier we had talked about April time frame?

On the litigation front, it's -- it will be difficult for us to comment.

Okay. Understood. And one more question I had was on -- you talked about the quality of approvals and launches would be better going forward. So you are -- you mean or you're factoring in Srikakulam as well as the Duvvada facility resolution, or it's without that you're expecting both the number of approvals and the quality of filings to be better?

So we had mentioned about few assets. NuvaRing, more -- a little more potency around Suboxone, certainly, we feel optimistic as we'll see where it goes from there. So these are certainly, glutarimide, as I said, that we should be able to respond. These are all in public domain. But there are quite a few which are not -- certainly not of this size, but still meaningful in the course of the year, which can provide -- I mean, here I'm talking of 4 quarters of next financial year. We can provide good support to develop them. And taking all of it rather than getting into specific site is, why I'm saying -- not commenting on the site details because you'll appreciate that next year's launches it would not be fair to factor in too much site level uncertainty. So some get transferred, some maybe towards the end of the year and in the process of being tested on for and so on and so forth.

So given all that, of course, this is always a complete maze of what questions we will get from the agency and what intellectual property issues will crop up. So those are uncertainties which remain. But in the rest of our understanding, I think still -- I think we -- they're our assets.

Perfect. And lastly...

Prakash, I'm sorry to interrupt but may we request you to come back in queue for follow-up questions. (Operator Instructions) The next question is from Neha Manpuria from JPMorgan.

Sir, on Suboxone is it fair to assume that because we have a minor CRL, our TAD will now be pushed out versus the March-April TAD that we had?

Look, I think let me once again talk about the asset. This being the first wave generic, I think the approval pathway on the technical side in best of our assessment should not be a bottleneck. I mean, I'm pointing out to the IP development, which we are watching very, very closely. We'll be plugged to it and see what happens. And based on that, that will govern the path to approval.

And will this have to do with the new patent that has been filed by the innovator?

So those details I mean, we would not be getting into. I think there are several external opinion views. You can get the details there. And last but not the least, of course, there is not full certainty on first filer and so on so forth. But again, all this is in public domain. So I'm not repeating most of these. But the only thing I can probably say is overall, I think technically, we are moving in the right direction.

Okay. Got it. And sir, we had talked about cost savings 2 quarters back. We haven't really seen that much of it come through in our numbers of SG&A, even adjusted for the litigation settlement increase. When should we start seeing the impact of the cost saving reflect in our numbers?

So if you take away what I said specifically that there was a settlement for which -- settlement with the DoJ. So if you normalize that and I also made a statement. There will be always some quarter-specific things one has to look at. But we internally, have been seeing good effect from all the efforts which has been put for cost optimization. And going forward in subsequent quarters, we can see even a better traction.

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

First, if permitted one question on India and Russia. Despite the higher promotion spend this quarter, we haven't seen the strength of growth in either of these 2 markets. Especially Russia, the base was weak. And India, base was not great as well. What is happening in these 2 markets?

The SG&A in branded markets do not immediately translate into sales impact, okay. These are building brands and things of that sort. So it's not exactly immediately sort of applicable. Having said that, the mega brands in Russia have some -- these are very big brands and which are sort of the big brands where we have Nise, Omez, Cetrine, very big and they -- the growth has tapered to a certain extent. But there are new launches. But more importantly, overall emerging market I think we would feel -- we are feeling good about the institutional business ramping up in the new markets. So both Columbia and Brazil doing well and will further ramp up in Q4.

And as we go into next year, I mean, using our forward-looking little bit of projection, I think next year, we hope to open another 4 to 5 markets. And there is a strategy, and we want to extend the strategy all around the world. And that part we feel optimistic about. I mean, every quarter we wouldn't be able to explain SG&A to turnover. But given the stability in commodities, especially oil, I think we feel good in next several quarters in emerging markets.

Sure, Abhijit. That's helpful. One question more on the U.S. market, Abhijit. If you look at the U.S. sales are $246 million this quarter, there were 2 components I would feel like -- there were some benefit of seasonal sales and certainly, Renvela -- sevelamer was a high contributor. If you were just to normalize Renvela and take off seasonal, just to understand what's the true base to look at, would a 5% to 7% correction would be a reasonable number to look at?

I guess I will not exactly guide you. I said that it was the first quarter channel filling for Renvela. Some correction prices have come in. On the seasonal sale of largely indictable, this year was certainly not as big as previous years. The fact that the big assets have eroded on the face of competition to a certain extent, lesser market share, more on pricing. And hence the impact of that maybe to just an extent, but not as big as previous years. But these 2 factors have rightly picked up. We do have in U.S., I mean, there is a possibility of an indictable launch, which we'll see and most of it is in public domain, IP development and all that.

And the second thing is, we have one-off type of opportunity for couple of quarters also -- next 2 quarters. But then there is also price erosion saying, which is still continuing, and there is some more play out of erosion in the next 1 or 2 quarters. So we have to take that in totality. So overall, yes, I mean, there may be some erosion vis-à-vis this quarter.

We'll take the next question from the line of Christian Glennie from Stifel.

I just wanted to clarify, again, if I may on generic Suboxone, just from an FDA and a regulatory perspective, outside of any patent or litigation issue. Just to clarify, it sounded like you received a minus CRL recently. That's your -- if I understand that's your second CRL on the product. So what does that relate to because presumably all done on a technical level, it's not really related to patents and outside of things? And then what's your time frame from here? I mean, I think if I got it right, you talked about responding to the CRL in about 1 month. And then what would be your projections in terms of FDA review time lines of that response?

So on the type of questions, all I can say is, we think all these questions are easily answerable and hopefully satisfactorily. We won't be able to respond to this in give or take 3 weeks from -- or 3 to 4 weeks from now. And normally, in the first wave of generics, I think agency is really providing the resources to satisfy. So depending on whether there will be more questions or not, at least the technical approval pathway should be verified. You can do your own calculation. Yes?

So I mean, presume that there's still standard reviews that are on there for -- in terms of 2 or 6 months in terms of the nature of the response?

Yes. I mean, in a first wave generic that's a fair assumption from the response. It's normally agency code priority and such things.

We will take the next question from the line of Sebastian Sauter from RBC Capital Markets.

I know it's been asked before, but I think my line went a bit funny. So I just wanted to clarify. Can you -- if you could update me please on the generic Suboxone film product. I understand you are in contact with the FDA. Has it now been approved by the FDA? And, if not, how has the interaction progressed? And do you believe you have answered all the concerns that have been raised in the CRL? And then the second question relates to Indivior has recently accepted 2 new patents in the Orange Book. And we will be -- I'm keen to understand what impact this has on your launch time table like for your own film product?

Yes. Thank you. Firstly, on the litigation and the details, we wouldn't be commenting. As I mentioned, we'll be watching this very closely. It's our priority, but we won't be commenting on litigation and patents and quite a few things and in public domain, you will have to look up. But on the technical side, I think we are doing fairly well, which I just explained in the last question on the technical side. I would not repeat the same thing. I think we're doing okay. We got the minus CRL. We will be responding in, let's say, 4 weeks from now. And yes, it's probably a quarter from there. I think the technical side, but we'll have to watch that aspect on -- what finer aspects which we wouldn't ever have visibility about and I still will not comment on.

Okay. So basically, can I just summarize this? You said you got the minus CRL and you're going to respond in 4 weeks from now. And you would assume further response from the FDA probably a quarter from here from then and this is basically because you are the first filer, right?

Yes. I said first wave. It's still not been clarified who is the first filer.

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

Is it possible to give a split between Proprietary Products and Others, the $39 million for the quarter?

When you say Proprietary Products and Others means?

So you have $39 million. So how much is Proprietary Products in that?

So basically, we are giving segmental revenues, Saion.

Yes. I just wanted to know the Proprietary Product, excluding the license.

So if you have a specific question, you can get back to investor relations later.

Okay. And so continuing with the top products, can you basically give us the time line for your filings for Phase III assets, which are currently in development?

Can I ask Anil to respond to this?

Yes. This is Anil Namboodiripad. Let me answer that question. So we have one of our key flagship assets that's expected to be a major revenue driver for the Promius/Proprietary Products business. It's called DFA-02 which is nasal sumatriptan for the treatment of migraine. We expect to file an NDA in the next 3 to 4 months with that asset. We have another Phase III asset that has completed Phase III. And there are still some other preclinical studies and some C&P activities that are going on. And we expect to file that NDA sometime late in 2019 -- sorry, 2018.

Okay. So you have 2 more Phase III assets, right? When would you...

We have a third Phase III asset, which is currently in Phase III, and that's not complete yet.

Okay. And what is the time line for the asset which you in-licensed from Eisai, E777? When is that expected -- the trial is expected?

That one, the registration study is ongoing. And we expect to have a BLA filed sometime in 2019/2020 calendar year.

Okay. That's helpful. And just one last question if I can. On the biosimilar product, what are the current revenues that you're doing? Because you've guided for $150 million from emerging market by fiscal '20. I mean, what's the visibility on that number?

The target remains. So it's a question of whether it gets achieved in FY '20 or gets postponed by a year or so?

We're moving well. We are moving well -- next year, 4 reasonably meaningful emerging markets. We should be able to launch our first MAbs. Other 2 MAbs, India approval hopefully one in a quarter and another one in a few quarters. And immediately thereafter, we will extend these also into those markets. And meanwhile the footprint is getting ready in all these markets. On the specifics, I think revenue-wise, it's progressing. Every 3 months are providing us new data points. Beyond that I mean, just stay tuned. We will keep you updated on how it's progressing.

We will take the next question from the line of [Manushi Shah] from Research Delta Advisors.

I had a question on 3 products. I just wanted to know the status of Sandostatin LAR, Lovenox and Invega Sustenna?

Sorry. Can you repeat the name of the products?

Sandostat LAR, Lovenox and Invega Sustenna.

We don't comment specific to...

So you're talking about Sandostatin and octreotide. So it's some time away. I mean, we are -- it's a complex product. We're trying to sort of work on it. I mean, it's not -- it will take time. And Lovenox is already genericized and not high on the priority. And so there is a third one. Yes, third one, we would not specifically comment on. It's not in public domain. And we won't specifically comment on it.

So Sandostat LAR, is it because of Duvvada that it will take time or it has -- is that one...

One thing I would like to say, which we have said earlier that on our R&D pipeline and portfolio, we would not like to comment on specifics which are not there in public domain. So please don't insist on such questions.

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

Just a quick question on Duvvada. You were planning to do some site switches from there? Can you please update us on that? And do you expect any forms of site switched on products? Do you expect any major ones getting approved in fiscal '19?

It's an ongoing process, Sameer, ongoing process. I mean, very easy exercise in pharmaceuticals. But we are taking one by one. Several in the past have happened, I mean, from Duvvada and other site as well. Some operators, I'm talking of the last 18 months or so. But as we speak, I think more being done. We'll not go into specifics on this, but we had mentioned that we had a rich filing list from the site. And we're continuing to sort of site transfer.

Okay. And on Copaxone, your entire commentary was usually for 20 milligrams or also for 40 milligrams? Because for 40, I thought the TAD is in March?

No. So Sameer, everything will be hinging on the DMF, okay. As you know, the formulation is less -- the (inaudible) formulation. And a few follow-up questions. One, and also that should not be -- shouldn't be much to handle -- shouldn't be much of a problem to handle. And -- so we are focusing very deeply on the DMF. And once we address it, I think -- and of course, it's applicable to both assets. And both assets have been filed. We probably last time said that we had TAD dates for both, we'll sort of reissue. We are not so much preoccupied on the dosage thing.

Okay. No, that's wonderful. That's helpful. And just one final quick clarification on Suboxone and [the word]. Suboxone, Abhijit, when you say the IP is something that you're watching very closely. And I know you don't want to talk too much. But it's a little bit of a nuance for you. Is it your appeal case that you're more worried about? Or is it your competitors' appeal case that you're more worried about? And the second is on NuvaRing, I understand the patent is going to expire in April '18, and you probably are looking for launch in fiscal 2Q '19. So do you still think you'll be the first player, or do you think a competitor enters before you?

Okay. Let me answer the easier ones first. NuvaRing, yes, April '19 -- April '18 it goes off -- the patent goes off. Depends on approval. At the moment we have TAD, the responses have gone in, in early Q2. So that's a slightly clearer pathway. As far as Suboxone is concerned, again, I mean, anything on IP, Sameer, will be difficult to comment because you have to study this, but we are watching this very closely. We feel strong about the position we have taken -- very strong about the position we have taken. But then it's -- there are views which have come up. So we'll see how -- in which direction it goes. And we have to leave it there as far as Suboxone is concerned. And, of course, as I mentioned that the first filer exclusivity is not clarified as yet.

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

Two questions. So a DMF query essentially, it means that it's a major CRL. And if that is the case, given that this is probably your third or fourth cycle of review, there won't be a tax that will be applicable, right?

So it is a major CRL. As I said, there is technical work, the volume of growth is there. But it's not something which we cannot answer satisfactorily. So there are -- I think we will need some time. Beyond this, we'll see how that unfolds actually.

Fine. Second question. I mean, if I look at your U.S. sales, you talked about injectors -- injectables -- talking not being very high. But if we look at your penicillins portfolio and also some of your antihistamines or LTR efforts, that should also have been a seasonally strong quarter. So adjusting for these 2, I mean, can you give us some sense of how the quarter would have panned out?

So on the injectables, there is some -- as I said that's -- Renvela ramp up and injectables are the 2 factors. The other factors are not significant. I mean, when you're talking of fexofenadine and things of that sort, they -- I mean, would it make a substantial difference, I wouldn't think so. Yes, and -- but so the 3 factors, which I mentioned is scale up of these 2. There is, of course, some more price erosion to be played -- to be playing out. To be counterbalanced to a certain extent by probably hopefully an injectable launch and some one-off business. But all in all, I think would we be able to maintain similar level of Q4, less likely.

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

My first one is on the U.S. tax changes. This deferred tax in assets and liabilities, I think it's a onetime outstanding event. But can you talk about the flow in terms of the BEAT provision, the base erosion and anti-abuse tax? Does it apply to our U.S. subsidiaries for Dr. Reddy's?

No.

Okay. So we will -- so there is no incremental impact that we foresee from this act going forward in our business?

No. Because that's the onetime impact that has been taken. And depending on the inventory which is there, there could be a very marginal, but (inaudible). I think if it's liquidated during the quarter, it will depend on that.

Got it. Just a second question on the commentary on the Indian business which said the channel inventory has kind of normalized now. So are we working with a lower number than pre-GST? Is it like 25, 30 days now? Or where is the new normal at this point of time?

It has gone past 30 days, or it might not have gone back to 40 days.

Okay. And my last question if I can squeeze in. On the tax rate, you said normalized tax rate is 28% for the quarter. What gives us the confidence that we can do the 23% to 25% because I think you have been trending above all those numbers in the first 9 months.

So we said our annual ETR will be in the range of 23% to 25%. We are still holding to that. Of course, the annual ETR now will go up because of the U.S. Tax Act. And so if you adjust for that INR 93 crores, then it will remain within that range.

We will take the next question from the line of Vishal Manchanda from Nirmal Bang.

Can you update us on Aloxi litigation? There have been some recent events happening there.

I mean the whole lot is in public domain at the moment. So everything is in public domain. So just -- you can just click and read up actually. And we'll see. We are keenly watching, as we speak.

Sir, I just want to understand, does it affect? So can we expect the launch in the near term?

Depends on the way court outcome happens.

Okay. And, second, on your out-licensed effect Zenavod, which you out-licensed to Galderma. So could you guide us on when this would be commercialized?

Anil?

Yes. So we are still awaiting commercialization plans from Galderma. They have some internal strategic priorities and -- but we do know that they intend to launch. So we are still awaiting.

Okay. And finally, on the Sernivo and Zembrace SymTouch prescriptions seem to have plateaued for a while. So how do we look at it going forward?

Well, I wouldn't say they have plateaued. For example, Zembrace has actually been growing about 7-ish -- 7%-ish quarter-on-quarter and has gone -- grown about 25% over the same time last year. Sernivo has been slightly slower, but more recently there has been a pickup in prescription volumes. And one thing I want to remark here is that Zembrace has actually been trending quite favorably. And one of the key reasons for that is because we have -- we managed to snag a major PBM listing back a few months ago with CVS Caremark and that has had an impact on the volumes.

Sernivo, on the other hand, we are still waiting to get the CVS Caremark coverage, which I think will make a big difference in terms of the uplift, in terms of prescriptions. And we are constantly continuously working on getting unrestricted payer coverage across several other major plans. So we still are quite bullish about the uptake of these 2 assets over the next quarter and beyond.

So how long this -- how long will it take to put the coverage in place as you would wish for?

So that is something which is hard to specifically put a date on, the reason being that many of these major plans, or most of these major plans have specific calendars where their pricing and therapeutic committees meet and make these decisions. So I cannot at this time put a time table in place. But we are making every effort. We've actually beefed up our managed care group here. We brought in a few industry veterans who have the right set of connections and the right experience with many of these plans. So we're out in the field speaking with all of the major plans. And we are quite optimistic about a positive outcome in the next several months.

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

How should we look at the R&D expense over the next 2 years, assuming that you have had lot of filings and a lot of proprietarily related products? For the year we are still averaging lower than the last year's average. Any thoughts on R&D of '18, '19, '20?

There could be some reallocation. There have been for last few years, 60% of total R&D spend has been on GG and API. So that percentage, there could be a realignment based on the need, both on biosimilar as well as the Proprietary Products. We alluded to right at the beginning of the financial year that on an absolute R&D spend basis, FY '18 R&D spend will be similar to what would have been in FY '17. We expect Q4 R&D will be slightly higher than the previous quarter. But overall, we'll be within that $300 million. It will not exceed. For next year and year after that, for the next 2 years, maybe next or when we are doing the annual result, we'll give you some kind -- broad kind of guidelines on our R&D spend and kind of allocations that we are thinking.

Yes. So the first part of your answer. So I mean, so would that be -- would you be dealing any projects? I mean, so you referred to different allocations. So I'm just trying to understand, will the absolute amount be stable, but there will be higher allocation to one part of your business, or will the absolute amount increase, but allocation may not remain? I mean, what is it that we should assume here?

Let me answer this, Kartik. Deferring or not deferring is less important. What is important is we are looking deeply into R&D productivity. Now if we deferred something, it will be not at the cost of an asset which we would go through easily and just for cost reduction we will defer. That's not the purpose. But we're being less experimental in certain ways, and we're trying to be sort of make it a little less risky, especially on the GG side. And also, I think, we are being very conscious on the proprietary and as well as [valeric side]. So overall, productivity of R&D is the main focus. And then we'll see what best we can get over there.

Due to time constraints, we will take the last question from the line of Nitin Agarwal from IDFC Securities.

Abhijit, when we look at the U.S. business over the next, say 2 years, I mean, how could -- outside of the 3 products that you talked about, which is the public domain, I mean is it -- how should we look at? I mean, is all our growth or largely our growth contingent upon how these 3 products play out? Or there is enough which is there in the pipeline outside of these 3 products which can drive growth on the current levels?

I'll just probably repeat what I said. Overall, about the launches next year, given IP and approval pathways by and large go through our expectations, it looks certainly richer than the current year, okay. I also mentioned about these 3 products are very important on the revenue chart. But there are reasonably interesting midsized products which will also provide some support. Now I understand that I'm not able to give out much, but within that you have to read that how is that likely to progress given the fact that they'll be erosions or so, which will continue in this market. But I think the next few years certainly would be better than the previous 3 years -- previous couple of years.

And lastly, on the business, as we talked about the base business or the nontransitional part of the portfolio, where you believe the erosions should probably begin to settle and swing over the next few quarters, I mean, are you seeing any changes in market dynamics which is giving you that comfort, in terms of people vacating some of those products? Or is there anything changing out there?

No. People are not vacating. What's happening is that on the base product, which has been pretty much beaten up to a large extent, there isn't much for the generic companies to offer. So what is the -- the symptom, the way it plays out is that whoever has the majority share in a base product, if you track closely, you'll find that the higher market share player is further consolidating, which means that there is lesser play for marginal presence in any product. True for us, true for any other company, which if you can read from another angle, it goes to say that erosion in stabilized base products will eventually go down over -- now whether -- we're not talking of 1 quarter, 1.5 quarters, but over several quarters. Because there isn't much more to give up. So that's a basic thing. But having said that, every company will have those so-called transitional products which will always be subject to market erosion.

And if I just take that one on to just finish it off. And when you look at your portfolio say for the 9 months, I mean, could you probably roughly characterize it between transitional and base products, very roughly?

And why would you do that. I'm sorry. That would be getting into specifics.

Thank you. Due to time constraints that was the last question. I now hand the conference over to Mr. Saunak Savla for closing comments.

Thank you for joining us today on the call. And in case you have any clarifications, feel free to reach out to the Investor Relations team. We'll be happy to answer you. 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.