Dr Reddy's Laboratories Ltd (RDY) 2018 Q4 法說會逐字稿

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Q4 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.

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 fourth quarter and the full year ended 31st March 2018.

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 very soon. The discussion and analysis on 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. Erez Israeli, our COO; Mr. Saumen Chakraborty, our CFO; and Mr. Anil Namboodiripad, who heads our Proprietary Products business; and the Investor Relations team.

Please note that today's call is the copyrighted material of Dr. Reddy and cannot be rebroadcasted or attributed in press or media outlets without the company's express written consent.

Before I proceed with the call, I would like to remind everyone that the safe harbor language that is contained in today's press release also pertains to this call.

Now I would like to turn the call over to Mr. G.V. Prasad, our CEO.

Thank you, Saunak. Good morning, and good evening, friends. Thank you, again, for joining us today. We have concluded a challenging year with a relatively muted fourth quarter performance, primarily on account of disruption in the channel sourcing pattern in Russia and higher competitive intensity with respect to some key molecules in our North America Generics business.

During fiscal '18, we invested significant effort and resources in the foundational areas mainly strengthening our manufacturing and quality system, optimizing our cost structure and, of course, revitalizing growth. I am satisfied with the progress we are making on this journey, and I do expect to see the results of these efforts during the current year. There is, of course, more to be done, and we remain firmly committed to this path.

I'd like to take this opportunity to introduce to you our new COO, Erez Israeli. As you are aware, Abhijit Mukherjee has retired recently and after his retirement, Erez joined us in April, this year, as Chief Operating Officer and Global Head of Generics and PSAI business. In addition to the responsibilities that Abhijit handled, Erez also handles the R&D function as well as the biologics business.

Erez joins us with over 25 years of experience in the pharma industry and proven leadership in general management and handling large-scale global operations. He joins us from Enzymotec, where he was President and CEO. Prior to that, he spent 23 years in Teva Pharmaceuticals, where he held several leadership positions. And he has also had strength in certain corporate functions and briefly as the Head of the Global Quality function for Teva. Erez will be based out of Hyderabad, and he will lead all aspects of the Global Generics and PSAI business -- businesses. We are pleased to have him on the management team and look forward to his contribution to bring us back to industry leadership with sustained growth and profitability.

I now invite Saumen to take us through the key highlights of the quarter.

Thank you, Prasad. Greetings, everyone. Let me begin with the key financial highlights. For this section, all the amounts are translated into U.S. dollar at the convenient translation rate of INR 65.11, which is the rate as of 30th March 2018.

Consolidated revenues for the year are at INR 14,203 crores, that is $2.18 billion. Consolidated revenues for the quarter are INR 3,535 crores, that is $543 million, and declined 1% year-on-year and 7% sequentially. Though the sequential decline was on expected lines, there was further softness in the Russia and North America Generics business.

In Russia, we witnessed some shift in the channel sourcing pattern emanating from seasonal variation. Also if you recollect, we had a onetime out-licensing fee with respect to DFD-06 in the previous quarter to the tune of $20 million. During this quarter, we accrued a follow-on milestone of $2.5 million. Revenues from our Global Generics segment were $428 million and PSAI segment were $96 million.

Consolidated gross profit margin for the quarter is 53.5%. The above-mentioned sequential decline largely addresses the reduction in the gross margin. Overall, on account of the lower revenue base, there is also an element of manufacturing overhead deleverage which needs to be factored in. Gross margin for Global Generics and PSAI were at 59.3% and 24.2%, respectively.

The SG&A spend for the quarter is INR 1,207 crores, that is $185 million. This is on the same line as that of the preceding quarter and 10% higher from that in previous year. This quarter spend also considers some of the year-end activities around ANDA filings, and hence it's a bit higher. Overall, as we have mentioned earlier, we continue on our journey. We improved the same productivity and the resulting impact will be more visible during the quarters to come.

R&D spend for the quarter were at INR 435 crores, that is $67 million, representing 12.3% revenues and is in line with management estimates. For full year, it's 12.9%. Overall, there is no change in the focus from the long-term strategic outlook. However, we are taking a calibrated approach in terms of the project prioritizations and selections.

The resulting EBITDA for the quarter stands at INR 578 crores or $89 million, which is around 16.3% of the revenues. For the full year FY '18, it is 17%. The effective tax rate is coming to around 19% for the quarter and 32% for the full year. Normalizing the impact of the recent amendment in the U.S. tax laws, the effective tax rate for the full year is 22.6%, which is within the range we guided earlier.

On a reporting basis, we end the year with an EPS of INR 59. Again normalizing for the impact of the U.S. tax law amendment, it would be around INR 67 or so. Overall for FY '18, we generated operating cash flows of around $277 million and reinvested $140 million towards capital investment.

During the quarter, we generated operating cash flows of around $83 million and the operating working capital decreased by $13 million. Our net debt equity ratio is 0.24 as on 31st March 2018. We continue our focus on optimizing the same.

Foreign currency cash flow hedges for the next 10 months contain the form of derivatives for U.S. dollars are approximately $255 million, largely hedged around the range of INR 65.14 to INR 68.23 to the dollar. In addition, we have balance sheet hedges of $219 million. We also have foreign currency cash flow hedges of RUB 1,350 million at the rate of INR 1.12 to the ruble, maturing over next 10 months.

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

Thanks, Saumen. Greetings to all the ladies and gentlemen, and I extend a warm welcome to you on this earnings conference call. For long, I have known Dr. Reddy's from the outside. I am honored to be part of Dr. Reddy's team. Dr. Reddy's has high focus on innovation and a fine balanced approach to the market between pure generics and branded generics. Over the coming few months, we will continue to focus on growth opportunities and optimize our cost structure.

Let me take you through the performance highlights across key markets and businesses for the past quarter. Please note that in these sections, all references to numbers are in respective local currency.

Our North America Generics revenue for the quarter are at $222 million, registered a sequential decline of approximately 10%. As indicated earlier, the sequential decline was predominantly driven by high onetime sales of Sevelamer launched during limited competition phase in the third quarter, coupled with full quarter impact of WBAD-Econdisc price harmonization activities for our base portfolio.

The value erosion driven by incremental competition in some of our high-value assets, like decitabine and azacitidine, further contributed to this decline. On the new launches front, we had fairly decent quarter. Overall, we launched 3 products in North America during the quarter, which including the commercialization of the first-to-market assets, palonosetron injection and OTC levocetirizine. Beyond the performance this quarter, overall base business has held up reasonably well in line with our expectation, and we remain optimistic about eventual stabilization in generic market space over medium term.

On the pipeline front, coming quarters are likely to see a fairly good number of new launches scheduled, including some high-value assets. We continue to make reasonable effort toward bringing first-to-market generics for the complex assets in our pipeline.

Let me update you on the status of 3 key near-term launches: generic Suboxone, generic NuvaRing and generic Copaxone. On generic Suboxone, we have responsed to our agency. We are closely watching the IP scenario and our exchange would be in accordance with the developments that are on the litigation forms. On the second asset, generic NuvaRing, we understand that the file is in active review. However, given the fact that this is a complex drug-device combination product, we await for agency feedback on this. We remain optimistic on the launch of this asset in this fiscal year. Finally, on generic Copaxone, we are shortly going to submit our comprehensive response to the agency on earlier DMF-related queries.

Overall, we continue to actively engage with the agency on many complex assets in our pipeline. Beyond these near-term launch opportunities, we are committed to augment our pipeline with complex assets to sustain long-term growth for the company.

Our Europe generic business revenue were EUR 22 million. The quarter's revenue was impacted by temporary disruption in supplies of few of our products. This is expected to be back on track soon. Our emerging market business performance for the quarter got impacted by lower offtake of Russia. The Russia revenue is RUB 2,258 million, declined 25% year-over-year. This was primarily attributed to a temporary shift in the channel purchasing pattern, led by seasonal variation. Through subsequent periods, we are witnessing improving trends.

This aside, we continue our focus on new product launches, entering to new markets such as Brazil and Colombia and geographical spread of our oncology institutional business. Performance in other markets has been in line with our expectation. Overall, we remain optimistic towards a double-digit growth rate in FY '19.

Our India business revenue are at INR 614 crores. Through the -- though the growth is flat sequentially, it's 7.5% year-over-year. Normalized for the good and service taxes transition-related adjustment, it's around 16% year-over-year. We are seeing progressive improvement in the business performance over the last few quarters, and we strive to perform better than the market through fiscal 2019. Overall, we remain optimistic towards a double-digit growth rate in FY '19.

Our PSAI business revenue are at $24 million...

$94 million.

$94 million, sorry for that. Our efforts are directed towards improving the supplies and building a healthy order book. Our Proprietary business during the quarter received a follow-on milestone of $2.5 million with respect to DFD-06. As you are aware, towards the end of the quarter, we have filed DFN-02 with the US FDA, and we are awaiting grant of PDUFA date, which is estimated toward the end of January 2019.

Prelaunch preparations are ongoing for an estimate launch of the product in Q1 F '20. Overall, we continue to focus on building our existing commercial footprint and also enriching the development pipeline. On the commercial side, we are experiencing increase in the prescriber base in volumes for our lead products, Zembrace and Sernivo.

And with that, I would like to open the floor for questions and answers.

(Operator Instructions) The first question is from the line of Manoj Garg from Healthco.

A few questions from me. So with the ongoing structural changes that you talked about and that we're seeing in the U.S. market on the buying patterns, can you talk about how you are adjusting your cost infrastructure or portfolio to reflect these new realities? And I'll just quickly ask my other ones and then go back on mute. Out of Russia, the 25% year-on-year decline on account of lower offtake by the channel, does that mean destocking? And then lastly, on generic Copaxone, you had indicated on your last call that you had received queries on your -- on the steps, but that you should have a response in 4 to 5 months. So I was wondering if you could provide us an update there in terms of whether those responses have been submitted to the FDA?

So this is Erez. Thank you for the questions. So on the first question on the adjustment to the U.S. recent trends, naturally is on the portfolio side, the main thing is naturally to continue to work on the very promising portfolio. And we are diligently working on this, plus naturally to clear up -- and with the FDA, there are certain quality issues from the past. This will serve us well in the future. And we are actively engaging on the cost as well and naturally looking into cost optimization in many assets that we may have. On the Copaxone, we are targeting to respond to the CR in the next couple of months, so we did not submit it yet. Post that, we will be having a new goal date. Right now it's too early for that. We do expect approval and also this for some time in the first half of the next fiscal year. And as for Russia, yes, it's an offtake of the trends. We believe that this is temporary and we believe that we will be in normal patterns in the next coming quarters.

Next question, please.

I am sorry. It was a little bit difficulty to hear. So on Copaxone, you're saying that you expect to refile the data that the agency had requested in the first half of fiscal '19. Is that correct?

No, no, this is different. So let me clarify. We are target to respond to the CR in actually the next couple of months, already in this fiscal year, with the anticipation that the launch of the product will be sometime in the first half of the next fiscal year.

Okay. So in the first half of fiscal '20?

Yes. That's right.

The next question is from the line of Neha Manpuria from JPMorgan.

Can you please update us on the status for Duvvada and Srikakulam? One, when can we expect us inviting the FDA for an inspection in Duvvada? And second, what is our sense on Srikakulam, would that required a reinspection too?

So on Srikakulam, we are not yet clear whether it will require a reinspection because the inspection that happened was fairly straightforward. But the FDA has asked us to do some additional work with respect to past years of working on the investigations and data. We are doing that. And we expect to have -- fulfill the request that the FDA has made with us in the next 2 -- the next month or 1.5 months. And after that, we will have to ask the FDA what next steps will be. Duvvada, I think, we've done a lot of work on remediation over the last 12 months. We expect to go back to FDA end of June and request a reinspection. So we cannot predict when they'll come, but it should be several months before they come back and inspect us.

Fair enough. And my second question is on NuvaRing. Did I understand correctly that we are back and forth -- going back and forth with the FDA with more queries after our response to the query that we had received as per the last earnings call? Sir, would that mean this would probably be a second half, late FY '19 product?

So the point is, what we're trying to put out is that in the earlier call we had mentioned, if you recollect, that there are certain queries which are coming and we were working on them. So at this point in time, we are closer to the endpoint. So that's why we said that on the same set of [queries] then. We have balance around a couple of months of working before we reach out to the FDA and provide them all the comprehensive inputs. So that is the beginning and then hence forward -- from that point in time, we wait for the FDA to guide us further.

Okay. So this -- that would mean this is a later second -- FY '19 opportunity in that case?

Naturally.

The next question is from the line of Sebastian Sauter from RBC Capital Markets.

So you may have mentioned it in the business highlights earlier on, just now but the signal -- my line went a bit funny. So I was just wondering if you could provide a little bit of color around the generic Copaxone, please? I understand you had said -- if I've heard correctly, you said you've spoken to FDA and you're closely watching the IP situation. I was just wondering if I heard that correctly. And if you could just provide a bit of color around this?

So as we stated in our last earning call, we received a minor CR in the mid of January. We responded to this CR in mid of March. And basically now we are in discussion with a new goal date probably mid-June for that. So we believe that the file is progressing in the right direction. As for the launch, again, we believe that we have a good IP position, but naturally we need to see how this will fold out. And so on that perspective, whatever this will fold out, it will create an opportunity to us.

Okay, great, great. Okay, is that just to -- you said the new goal there is around mid-June. Is that right?

This is for the FDA.

Okay, yes. Okay, great. And so if I -- what sort of launch date do you think you could -- would be realistic?

It depends on the IP situation. I -- unfortunately, we cannot commit today in that respect.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Beyond these 3 key assets that you talked about, what else do you think you have for launch pipeline for fiscal '19?

Sameer, we have not been generally discussing specific products in our portfolio.

Yes. No, without going into names.

So if you are specifically asking, say, FY '19, what could be the number of launches in U.S. market? Normally every year, we say, based on our portfolio and our investments, we prepare for 10 to 15 launches. But this year FY '19, it could be 15 plus.

Over 15.

Okay. And of these 15 plus, other than these 3, could there be more niche launches? Or others are all me-toos?

It's a blend. It's not all me-toos, not all specialty products for the moment.

(multiple speakers) And couple of products, which you had exited and which are sort of in public domain products, like Zenatane where you had 2-year supply issues. So when do you think you can come back in the market with Gleevec and daptomycin? If you can just update us on that.

With Zenatane we had some issues, we are refiling that. So it will come back in a few months. We have finished our work and we are filing soon.

Okay. And Gleevec and daptomycin?

Gleevec also will be a launch in mid-fiscal year hopefully.

Okay. Okay, great. And, sir, just one more for, with your permission. So I'm a little confused on your commentary on NuvaRing and Copaxone and here it is. So NuvaRing, I thought the TAD was, I think, somewhere around July. And given that this is a first ever generic approval, FDA generally accelerates these kind of launches. So why do you think you would be coming in end of fiscal '19? That's question number one. And question number two on Copaxone. Once you do respond to FDA in the next couple of months, again we are looking over June, July, why do you think FDA -- your launch would be first half of fiscal '20, which is giving another 9 months to launch? I mean, why do you think after multiple submissions on Copaxone, why would still this submission take that long?

So, Sameer, on the NuvaRing question, the thing is that, as you all know, it is a drug-device combination. And as far as the FDA protocol goes, so there is a -- the final review goes through multiple sections and departments and considering it's a drug/device it also goes through additional rounds of clearances. So the point that we were trying to emphasize was more in terms of that we acknowledge the complexity of these products in and let's [see it happen.] We don't know either way. So the point we wanted to make was that from our side, we have responded to the queries in and we wait for FDA.

And we might get one or 2 more queries.

So that's more from that perspective. The second one, you are putting on Copaxone. So if I understand you correctly, see, the thing is that there in the last call if you recollect, we had mentioned there is the additional set of activities that FDA has asked us to do, something which will take around 4 to 5 months, at that point in time, what we have commented. So a large part of the work has been done. It's ongoing. We now have a very clear-cut view of what exactly needs to be done. And based on that, we have a visibility that is within the next couple of months. We should be in a position to reach out to the FDA and provide the info. Now then it rests with the FDA, and as we are now considering if it's a major CR, the turnaround time can be anywhere between 8 months to 10 months from an FDA perspective. However, we will definitely engage with them, try to push them for an early clearances. And so that's how we're kind of looking at this asset. And just to be on safer side, we have put that view.

We can only get a new goal date after we file our CR response. So when it comes back, then we'll know what is the TAD. So the commentary that we can have in the first half of next fiscal year is more a -- on kind of a -- on a conservative timeframe of 8 to 10 months.

Okay, great.

Is that clear, Sameer?

Yes, it is.

The next question is from the line of Vishal Manchanda from Nirmal Bang.

I have a few on your Proprietary portfolio. So basically on DFN-02, just wanted to understand how this effect is differentiated when compared to other nasal sprays in the market?

You should have clearly...

Yes, I'll take that question. DFN-02 is a nasal formulation of Sumatriptan, as you know. We have established that the pharmacokinetic profile of DFN-02 is comparable to that seen with injections. We have also established the efficacy profile through a clinical study that was conducted and completed more recently. The difference from other nasal products is that we, none -- no other nasal product that exists within migraine has been able to show the type of efficacy that DFN-02 has shown in terms of comparison with an injection.

If you look at the original nasal product that was launched by GlaxoSmithKline, the Imitrex nasal, because of the absorption of the drug -- or lack of absorption there -- of the drug through the nasal mucosa, the efficacy was only slightly better than the oral and, therefore, it did not see much uptake. In contrast, with DFN-02, we believe that, given the absorption pattern and the similarity of efficacy or closeness of the efficacy to what we see with injection, we will see a completely different reception -- receptivity to the drug. Hope that answers your question.

In absence of head-to-head data comparing DFN-02 with a Sumatriptan nasal spray, would this be claim acceptable?

Yes. I mean, if you look at most of the studies that have been done in the space, they have been done against placebo and that is what's required by the FDA. But given just the absolute patient experience, we believe that physicians would be convinced to prescribe the drug.

Okay. So you would need to take a...

We do have head-to-head data against -- on the pharmacokinetics, we do have head-to-head data against the injection, by the way.

Right. So you mean that translates into clinical benefit to -- and that has been observed in clinical trials?

That's correct.

Yes, okay. And secondly on Sernivo and Zembrace SymTouch, what are the milestones that we should look for, which should kind of put more growth into these opportunities? Because it seems like they have been stagnating at correct levels for a while.

Yes, actually they are not stagnating. If I -- let me give you some metrics that will provide more clarity on the 2 products. I'll start with Zembrace. If you look at the performance in FY '17 versus FY '18, prescription volume grew by 88% for Zembrace, and the prescriber base grew by around 48%. So that's one metric to follow. What is the rate of growth of prescription compared to previous quarters or previous years. The second is, how many new prescribers have we added in this year? So in FY '18, we added 1,400 new prescribers for Zembrace. What that tells you is that the product, as it's being experienced by patients, give physicians -- encourage physicians to prescribe more. The other part is coverage. Coverage as in -- insurance companies willing to pay for the drug. If you look at that, for Zembrace, in fiscal '18, we were able to get a few big wins in terms of large managed-care organizations or insurance organizations that were willing to reimburse the drug. So those are the metrics that you need to continue to follow, that is prescription growth and prescriber growth.

Now for Sernivo, it was a bit more muted than for Zembrace. The prescriptions grew by about 13% in FY '18 compared to FY '17. However, number of new prescribers was around 1,800 for FY '18. So that's another metric showing that Sernivo does have the potential. What really held back Sernivo in FY '18 was that we were not able to secure coverage by some of the larger plans that would be required in order to drive prescription or volume growth for this asset. But in FY '19, we expect to see more coverage. As I had mentioned in previous quarters, we have put in place a systematic process to approach insurance companies and negotiate with them. We have a team in place for that, and we have -- we believe we have strong capabilities now moving forward to ensure appropriate coverage. Does that answer your question?

So it's like, should we expect the numbers also for your Proprietary products to move up in tandem, because they haven't moved up as much?

No. I mean, it's actually that you should expect -- you will see improvement in the numbers as we move along. And again, it is contingent on how we do on the coverage front. But I can just give you an example of Zembrace, which -- where there is a clear correlation between coverage and performance. Zembrace, what -- we tripled the net sales between FY '17 -- full year of FY '17 and full year of FY '18, and we expect continuous growth. Sernivo, we will -- based on how we do on coverage this year, you will -- you should be looking for revenue numbers to grow as well.

Right. And finally on Zenavod, this is in reference to the --

Mr. Manchanda, may we request you to come back in the queue for a follow-up, please?

Yes, sure.

We take the next question from the line of Surya Patra from PhillipCapital.

So I just wanted to have a sense --

Excuse me, this is the operator. Mr. Patra, there seems to be some static noise coming from your line. Can you use the handset, please?

Okay, one second. Hello?

This is better. Thank you.

Yes. So just wanted to have a sense on the base business -- base U.S. business. So we have already seen the kind of impact of whatever the channel consolidation and all that. So the challenges what we have been discussing since last one year or so. But going ahead, what is the kind of visibility that we're having about your base business apart from the new launches that we are talking about?

So it's very difficult to speculate what would be the scenario of price erosion in the U.S. market. As you know, consecutively for last 3 years, it has been a double digit, moving up to mid-teen to high teen. So last year, at the same time, we said within the next 2 consecutive years, it has happened, probably this is a time it will stabilize. So this time also we can just hope it will stabilize a bit, but we cannot speak emphatically. Only thing we don't see more consolidations happening, as you have said. So that it forms a factor of customer consolidation and new competition. So we have to just watch and observe and appropriately respond to the competitive scenario.

Okay. Sir, just differently if I ask the same question like, see, what was the kind of erosion or what were that normal erosion, the base business weakness is every year. If we factor that -- and if we just leave apart the kind of a special product, what we have been talking, then based on the kind of a new product, a new me-too product or Para III product, what we are planning to launch, so put together whether there is a positive delta in the base business or in the U.S. business or not? If I ask that way.

Given that, we are hoping that there could be 15-plus kind of launches which happen. And some of that, whatever we have launched in the last 3 years, every year then, in the consecutive years, that becomes part of the base.

Correct.

We -- again, it depends a lot in terms of price erosion. This is very difficult to respond straightaway. These price erosions comes back to a single digit kind of thing and probably can go up to -- grow even in that. But normally, we factor in that there will be price erosion, there will be a decline in base, and we focus more on approval and launches to make it up. And actually there are significant launches, then we can grow. And that's how we factor in, in terms of U.S. business.

Okay. And in regards to the Proprietary product or the NDAs, what we have launched or we are planning to, what we have been discussing. So what is the kind of -- whether the NDA contribution has become like relatively meaningful as of now? Or when will we the release the number (multiple speakers)

For the Proprietary Products business to become meaningful, I think we'll have to wait another couple of years. With the DFN-02 launch, it would be the first uptake and after that, we should see a significant growth.

Just on the biosimilar, if you can update us? That is the last question from my side.

It's a very broad question, update. What update do you want?

So like, is there any progress that we are filing here in terms of a new market or any product?

We have been rolling out rituximab to many emerging markets. We are planning a trial in the U.S. And it's a bit early, but we are planning to take rituximab to the developed markets.

Okay. And so whether there is a kind of a planned -- R&D spend program has already been set for the biosimilar for current financial year or?

So we know how much it costs, but we are looking at whether we should finance it ourselves or partner with somebody. But the asset is moving forward.

The next question is from the line of Nimish Mehta from Research Delta Advisors.

Just 2 questions. One, on Suboxone. With the evolving litigation landscape, are we still confident of making an at-risk launch if we get an approval? Or it will then -- or has there been any change in that strategy?

We cannot give you that level of specificity in the strategy.

Okay. And you are...

(multiple speakers) milestone is to get the approval.

I'm sorry?

We can't give you that (multiple speakers)

So we are focusing on that. We are not going to, at this point of time, speak further on our strategy.

Okay. Is it fair to assume that approval is the only hurdle here?

No, we cannot give you that level of detail. We will be giving away our strategy which we can't do at this point.

Okay, fine. No problem. And just on -- understanding on the domestic piece that you mentioned that you were adjusted to GST, the growth has been higher. So, I mean, why are we adjusting to GST in this quarter? I mean, I thought it was over last quarter. So just for our understanding.

So this adjustment -- GST adjusted growth will continue from the time GST has been introduced that was from 1st of July. So one more quarter, we'll have to do the same kind of a thing. Then what happened with GST, the excise duty kind of thing gets changed and also -- so we do have very like-to-like kind of an impact. Has GST not been there, what would have been the growth? And that's how you get the figure.

Okay. So in that, we only kind of factor in the reduction in excise duty component. I mean, in gross-to-net, is that the only adjustment we make? Or is there anything else?

If you compare like-to-like, we remove GST and ED and compare the numbers. [That's what we do.]

So you can discuss off-line with Saunak to get such detail. So it will be only applicable for one more quarter after that, of course...

The numbers become...

(multiple speakers) it will be like-to-like.

The next question is from the line of Kartik Mehta from Deutsche Bank.

I had a question on the R&D cost. How do we see this in absolute amount? There has been a reduction on a Y-o-Y basis. I think it was in the Q2 call or in the Q3 call we had mentioned that second half R&D cost is likely to recoup back. That in absolute terms is almost the same as we had in H1. In fact, it is actually lower. So how should we look at this percent and in terms of (multiple speakers)

If you take the full-year numbers, don't look at quarter-on-quarter because that depends on the timing of what we do and how we pay and how we incur the costs. So at the absolute level it's 12% to 13%; something that we should have at the same level even going forward.

Do you see any areas where you can still maybe bring it down as we did in FY '18 or FY --

We are doing, but at the same time, we are really clear in investing in clinical development of proprietary products or biosimilars. That will offset the savings we have. There will be some reallocation of how we do our R&D spend in that -- that's the absolute level it should remain at where it is.

Okay. And on the tax rate, is there any guidance that you can give, whether it will be -- for FY '19?

So in terms of the effective tax rate for last few years as well as this year, what we have guided to and what we have actually done, adjusting some of the one-off events which is happening for the year, is between, say, 22% to 25%, in this range. So it will remain in a similar kind of thing. This year even though it is not a tax -- kind of a tax, but because of the -- some tax law which came up in U.S.A., we had to take government-deferred tax assets adjustment, which happened partly in Q3 and partly in Q4. So overall, INR 130 crores additional impact has been there. So that has taken the ETR up for the year. But if you adjust that, then overall ETR for the year is 22.5%.

The next question is from the line of Saion Mukherjee from Nomura.

Prasad, in the last call, when you came last, you talked about hundreds in crores of cost saving which will be visible by fiscal '19. We are halfway through that. What do you say we have achieved so far of whatever your targeted cost saving was? And how much is left in which we can see in fiscal '19?

So cost saving has been successful. We have seen relatively flat cost structures in multiple areas and also reduction in some areas. It's a journey. We'll save in the range of hundreds of crores, and it's an ongoing journey. We will continue to do that.

I was just wondering like has the large part of it has been achieved or will be achieved in the next year?

A significant progress has been made and we'll start seeing effectively in 2019. But 2018, we saw a partial effect. 2019, we'll see a full effect of that -- of our savings.

Okay, okay. On biosimilar PEG G-CSF, do you have, or can you share, some time line with respect to when you can make filing for the U.S. market?

Later on this year, I think Fresenius should file the biosimilar application. The clinical trial is over. I think they're just finishing the report. And in the next few months, it should be filed.

In next few months. Okay. And finally, on the PSAI segment, we -- I was just wondering in general there's been this comment of API prices moving up because of certain capacity constraints in China. How does this impact for the whole business and for the PSAI segment in particular? And how should we think about growth in margin in the following year?

So yes, in some of the starting material or ingredients that we would been importing from China has seen some increase in their price, you are right. Because of certain Chinese government states and some of the industries closing down there. So you see our overall cost optimization initiative, you will not get to see the full reflection in SG&A line because there is something which comes and then we'll take in the cost-cut revenue. Now in one hand, you'll see some of the price erosion in North American market, but if you see the overall gross margin, the reduction is much lesser compared to that. So we'll have to look at overall how much effect is going on cost optimization, and the benefit that you are getting may not be completely visible to you, only through the SG&A analysis.

And the absolute amounts you will see.

Yes. Absolute impact in terms of profit that you will see. Yes, some of these things have gone up but we have been trying to see wherever there have been opportunities otherwise.

And any comment on growth and outlook for PSAI you would like to make?

We're not going to be that specific.

The next question is from the line of Anmol Ganjoo from JM Financial.

I have 2 questions. One is that from a regulatory calendar standpoint, how does FY '19 look like? What is it that you consider to be the most significant regulatory time lines from an FY '19 perspective? And my second question is again a slight repetition of the earlier question. On the cost optimization front, just trying to understand it better, you've had 2, 3 quarters since you embarked on this program of -- embarked on this journey of saving hundreds of crores in costs. What is the lowest hanging fruit that you seem to have identified? And are there any very visible or stark noncore areas out of which you would like to exit and how should we be thinking about it?

So in terms of the most important asset, that was clearly generic Suboxone and NuvaRing. The IP is there, but further down. These are the big assets. For your question on cost, there is opportunity in many areas from rationalizing our manufacturing network, optimizing our portfolios, removing wastefulness in many areas, including manning levels and multiple places. And we so far have not touched the core, it's only looking at areas where we can save without any impact on operations. Moving forward, we will actually see divestments of some sites and also other noncontributing expenditures that we have. So it should not -- it's a programmatic approach, and we will continue doing that.

Okay. That's good. I think you didn't hear my first question properly. I was referring to the regulatory calendar, not the big product assets. So in terms...

What do you mean regulatory calendar? What do you mean by that?

Sir, for example, in Srikakulam, Duvvada, what is it that we expect in terms of inspections and...

Prasad already responded to it.

I already said this several times. There is no calendar as such. The FDA has asked us for some information on Srikakulam. We are working on providing that back. We hope to complete the request in June. And after that, we have to talk to them about a way forward. The Duvvada site has to be inspected. We've done a lot of remediation work and the inspection request will go to them in the end of June, early July, and then we will await a reinspection.

The next question is from the line of [Rajesh Prasad] from [Wellspring]. As there is no response, we take the next question from the line of Alok Dalal from CLSA.

Mr. Prasad, so if we look at the last 3 years for the company, it's been a very difficult journey. There have been investments made in R&D and compliance, but results are yet to be seen. So do you believe some time in fiscal '19 will be a turnaround year for you? Or do you feel the company will take more time to achieve results?

I certainly hope to complete this request that we have from the FDA by -- in this fiscal. I remain optimistic about the work we do. I think the delays have been due to probably some disconnect between the expectations that the FDA had and what we did. We are now completely engaged, and we hope that we can satisfy the regulator in the upcoming few months.

And, sir, any response on R&D? Because what we hear from the company is about, let's say, NuvaRing and Suboxone, and those are acquired assets, whereas we don't hear a lot about internally developed assets. So do you feel R&D to some extent the productivity is not there? And hence only these 2 names are being spoken about?

No. We don't tell you everything and for competitive reasons, we don't disclose all our assets. We have a very rich pipeline. We have over 100 ANDAs pending, many of them first-to-file, many of them complex assets, both at the API level as well as the finished dosage level. The fact that we don't talk about them is (multiple speakers)

Yes. So, sir, in the past. Yes, sorry, go ahead, please.

So we cannot disclose everything that we do for whatever reasons. We feel confident -- of course, there has been a shift in our strategy towards complex generics in the last few years and as a result, there will be a little bit of a lull because complex assets are like major difficult to crack. And there are a lot of work-in-progress assets as well as some which have been filed. And we will -- as and when they become public, we'll let you know about the progress.

Sir, in the past, company has done some very good products. Do you think that phase will come back for the company again?

Actually, the complexity of the assets we have today is multifold of what we had in the past. So I would say that the work in progress -- the number of the R&D assets that we have are among the highest value that we ever had in the history of Dr. Reddy's.

Sure. And in between you had people leaving you. Is that -- and then there was some gap in the team. So those issues have been addressed now?

I don't think we ever had a gap in our team. We replaced the people who left with even better people.

Okay. So more or less you're saying it's more about timing now, that the company should be back on the recovery path?

Yes.

Ladies and gentlemen, we'll take the last question from the line of Ranvir Singh from Systematix Shares & Stocks.

Just wanted to understand this gross margin in this quarter. We have separate that -- Global Generics and PSAI. So the remaining portion of gross margin when I tallied with your reported number is related to Proprietary products. That's what the math is, right?

Yes. Proprietary products and others, yes.

So that's like some 98% of gross margin. So should I believe there is no manufacturing cost or raw material cost, that it is purely like a royalty or licensing-type of income from there?

So there is what we have reported, a $2.5 million of milestone within this quarter, we have approved I read out in the script.

Yes, fine.

And further to that, there has been some milestone also in our Aurigene, which is a 100% subsidiary.

Okay. That's the only difference I think. And another thing, in the U.S. now, what would be the contribution of top 10 products if I say -- or if you would give some -- just I wanted to understand the product concentration vis-à-vis the last year we had?

So yes, we can speak about this off-line. I will guide you on that.

Okay.

Hello?

Yes. Saunak has said that you -- he can take this question off-line from you.

Okay, okay, sir. No issues, no issues. Okay, that's it from my side.

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

Thank you all for joining the call. In case if there are any additional clarifications required, please feel free to get in touch with the Investor Relations team. Thank you all.

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