Dr Reddy's Laboratories Ltd (RDY) 2019 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Q2 FY '19 Earnings Conference Call of Dr. Reddy's Laboratories Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Saunak Savla from Dr. Reddy's Laboratories Limited. Thank you, and over to you, sir.

Thank you. 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 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 the transcript shall be made available on our website soon. All the discussion and analysis of 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. Erez Israeli, 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 express written consent.

Before we 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.

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

Thank you, Saunak. Greetings to everyone. I'm pleased to inform that our financial performance for the current quarter shows an improvement to both year-on-year and sequential quarter basis.

Let me take you through the key financial highlights. For this section, all the amounts are translated into U.S. dollar at the convenient translation rate of INR 72.54, which is the rate as of 28th September 2018.

Consolidated revenues for the quarter are INR 3,798 crores, that is $524 million, and grew 7% year-on-year and 2% on a sequential basis. Despite the pricing pressure in some of our key products in U.S. arising out of incremental competition and the lack of contribution from gSuboxone, we were able to record marginal growth on the back of performance led by the branded generics market and a favorable currency environment.

Consolidated gross profit margin for the quarter is 55%, registering a sequential decline of 70 basis point, normalizing the contribution from Suboxone in Q1. There is a marginal increase backed by input contribution from branded generics market and favorable currency after absorbing the impact of price erosion.

Gross margin for Global Generics and PASI (sic) [PSAI] were at 59.3% and 28.1%, respectively. The SG&A spend for the quarter is INR 1,237 crores, that is $171 million, with a sequential quarter increase of 2% and a year-on-year increase of 12%. Sequentially after normalizing for the impact of ForEx-related increases, salary increments and other inflation-linked incremental spend, we were able to achieve reduction in the spend in line with expectations.

R&D spend for the quarter is INR 412 crores, that is $57 million, which is largely at similar spend level compared to both year-on-year and sequential quarter. As a percentage to sale, it is 10.8%, which is lower than the trend of last 2 quarters. However, the R&D spend in H2 is expected to increase and overall, it should be within the level as in the preceding year.

On the cost rationalization side, we feel good about the progress made to optimize our spend productivity and building higher cost consciousness across the organization. In line with our intention, during the quarter, we have concluded the sale of our antibiotic manufacturing facility in Bristol, U.S.A. and select brand divestments.

Further, during October, we have entered into a definite agreement towards divestment of our API manufacturing facility at Jeedimetla, Hyderabad. We believe these efforts would help us in improving our asset utilization and manage our cost structure better.

Other income includes gain of INR 46 crores on account of sale of rights relating to Cloderm brand, including its authorized generics and profit on sale of antibiotic manufacturing facility in Bristol, U.S.

The EBITDA for the quarter stands at INR 865 crores, that is $119 million, which is around 22.8% of revenues. The effective tax rate for the quarter is around 12.8%. But for the full year, it is expected to be around 20%.

EPS for the quarter is INR 30.31. Operating working capital were normalized for the ForEx translation adjustment, decreased by around $29 million during the quarter.

We invested only $19 million towards capital investment in this quarter. The free cash flow generated during this quarter was $131 million.

So our net debt equity ratio has improved to 0.26 as on 30 September 2018, even after dividend payout during this quarter.

Foreign currency cash flow hedges for the next 6 months in the form of derivatives for U.S. dollar for approximately $240 million, largely aged around the range of INR 67.4 to INR 71.4 to the dollar.

In addition, we have balance sheet hedges of $272 million. We also have foreign currency cash flow hedges of RUB 1,010 million at the rate of INR 1.12 to the ruble, maturing over next 6 months.

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

Thank you, Saumen. Greetings to all. Thank you for attending this earnings conference call.

Let me begin with the current quarter performance highlight. It has been a good quarter for us with a strong all-around performance across key businesses. It's in -- at the overall level, we have seen recovery on a sequential basis, particularly across our branded generics markets and our operations.

Please note that all references to numbers are in respective local currencies. Our North America Generics revenue for the quarter are at $207 million, registered a sequential decline of about 13% and year-on-year decline of 6%. Adjusting for the sales of gSuboxone Film in the first quarter, the sequential decline is a mid-single digit and is broadly in line with our expectations.

During the quarter, we did not have a significant launch and the business continued to witness increased competitive price pressures across some of our key products, including, but not limited to, metroprolol, decitabine and palonosetron. Overall, after normalizing the heat of such transition products, we have not witnessed major shift in price erosion trends relatively to earlier quarters and overall base business has been fairly steady.

Let me also provide a quick update on 3 key products: gSuboxone, gNuvaring and gCopaxone. On gSuboxone, the Court of Appeals for the Federal Circuit held its hearing on 1st of October, and we await court's ruling in this matter.

On gNuvaring, we have comprehensively responded to the agency. Agency has granted Priority Review status for this application. We continue to remain optimistic about potential approval and launch for this critical asset in the first half of calendar 2019.

On gCopaxone -- on Copaxone, we have comprehensively responded to the agency on CRL for the DMS and also our ANDA. We continue to gear up towards potential approvals and launch around the second half of calendar 2019.

For both the above products, there may be additional queries from the agency as part of response review process. We remain committed to actively engage with the agency to work toward faster conclusion. Overall, new launches run rate has been fairly healthy. And even within the months of October, as of date, we have already launched 4 products. We expect the momentum to further accelerate through rest of the year with 10 to 15 launches lined up, including some exciting limited competition opportunities.

Our European business recorded sales of EUR 23 million, with a sequential decline of 7%. This decline is primarily on account of negative price erosion impact on a few of our key products. We expect the performance in the second half of the fiscal year to improve on the back of new product launches and stabilization of supplies to the market.

Our emerging market business performance has been consistently improving, registering a strong year-on-year growth of 36% and sequential growth of 17%. The sequential growth is primarily on the back of improved volume offtake in our existing market and scale up in our new markets.

Following the first quarter recovery in Russia, the team has done well in sustaining performance momentum in the second quarter. Overall, we remain optimistic toward delivering healthy double-digit growth for this business in fiscal 2019.

Our India business revenue are INR 686 crores, with year-on-year growth of 8% and sequential growth of 13%. We are very excited with the traction witnessed in the launch of Hervycta (trastuzumab), a biosimilar of Roche's Herceptin in the domestic market. We are quite optimistic of growing our India business double digits for fiscal 2019.

PCAI (sic) [PSAI] business revenues are $87 million and have largely been in line with our expectations. As mentioned earlier, we continue to focus on reenergizing this legacy business and regain global leadership.

On the biologics side, recently we have seen the press release by our partner, Fresenius Kabi, on our Pegfilgrastim biosimilar candidates meeting all the primary endpoints in 2 pivotal clinical studies. We are very happy with this positive development, and we will continue to work closely with Fresenius Kabi towards eventual filing and approval in the U.S. and Europe.

On our Proprietary Products business, we have been granted PDUFA date for DFN-02 in January 2019. Prelaunch preparations are ongoing, and we expect to launch the product in Q1 FY '20.

On the commercial side, we are continuing to see an increase in prescriber base and volumes for our lead neurology product, Zembrace. We saw a decline in volumes for Sernivo over the previous quarter, mainly due to a suboptimal coverage and seasonality in the category. However, with improved access from CVS Caremark coverage starting Q4 and changes to a corporate program, we should see volumes and net revenue grow consistently.

Further, we divested Cloderm in Q2 with a view to optimize our [steady] product basket. As a result, increased sales force focus on the other products should yield growth across the Derma portfolio.

Progress on our key R&D programs is on track. On the 2 warning letters-affected sites, currently, the sterile injectable facility in Duvvada is undergoing inspection by the USFDA. Since the audit is ongoing, we will not be able to comment until -- on it until the conclusion of this audit.

On Srikakulam plant, as committed, we provided our response to the agency. And as part of the review of the response, we have received certain follow-up -- follow-on queries, which we plan to respond back within the coming months. We continue to engage actively with the agency to ensure concluding the issues at the earliest.

Please let me make a few minutes to provide you with a quick update on the company-wide strategy planning we have been working on over the last couple of months. In the coming years, the company will focus on growing its profit derives from the 5 key spaces, namely U.S., India, Russia, China and API.

For the U.S. Generics market, the key focus will be to leverage our improved cost structure, leverage the depth and the breadth of the portfolio within over 110 pending ANDAs accumulated over the years to significantly enhance offering to customers.

For India branded generics market, we plan to leverage our brand equity to further strengthen our existing brands and focus on new brands in selected therapeutic areas.

For Russia, we plan to leverage our existing brands, work on the life cycle management and also build new brands in selected therapeutic areas, including new therapeutic areas.

For China, we plan to leverage our global portfolio to expand our presence in the market in light of the recent changes in the Chinese market.

For our API business, we plan to leverage size capability, our cost structure in India and our access to intermediates to gain global leadership.

Businesses, such as biologics, Proprietary Products and Aurigene will continue to be driver for further growth. We will work on ways to ensure that are financially self-sufficient over a period of time. Multiple initiatives are being undertaken with high focus on product launches, cost efficiency and superb execution to support growth across key businesses.

Having spent more than 6 months now in the organization, I feel really excited about the growth opportunities available for key businesses ahead of us. Good performance for the current quarter has been a result of our ongoing efforts on profit growth as well as improving productivity levels. It is a journey, and we will continue to build on it for a sustainable growth for the company.

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

(Operator Instructions) We have a first question from the line of Aditya Khemka from DSP Mutual Fund.

So first question on the 2 plants, Duvvada and Srikakulam. So now that the inspection is undergoing on Duvvada and Srikakulam began to see follow-on queries. Can you comment on how many ANDAs are dependent on the clearance of these 2 plants? And how many are [dearest] by transferring to other facilities?

The exact number will be difficult to give straightaway, but it will be around, say, 15 to 20 we can expect over a period of time.

So this 15 to 20 ANDAs out of the 110, which are pending approval, are from these plants. Is that the correct assessment?

Rough. We can get back to you with a precise number.

Yes. Some of them we have risk mitigation. And if we will be able to launch from this plant, naturally, it will be better profitability, as naturally, it's a one person. We are not sharing the profit with others.

Fair enough. And secondly, on the R&D spend, so can you comment on the split of the R&D spend between generics and nongeneric ventures like innovation, biosimilars, 505(b)(2), et cetera?

To date, our ratio remains unchanged. That means roughly 60% will be on API and generics and remaining 40% over Proprietary Products, biosimilar and Aurigene, in that order, even more on Proprietary Products, then biosimilar and maybe less on Aurigene. But going forward, this ratio will change, as I spoke earlier. So that 60% will come down. And the other part will increase, but that will happen over a period of time, not as a step-jump.

All right. And lastly, if I may, on the India business site. So we have seen 8% year-over-year growth, which seems to be quite good actually, given the base of previous year. So what is the aspiration here? You think we will be able to grow consistently on a double-digit basis in India. Is that a fair argument?

Well, in terms of aspiration, yes. We'll have to see every quarter how we are growing. Over the recent time, we are catching up in terms of our growth in line with the industry. So our aspiration will be to beat the industry. So let's hope; cannot commit.

The next question is from the line of Prakash Agarwal from Axis Capital.

First question is on the launch guidance that has been given about 10 to 12 more over the last 6 months. Did I hear that correct? And this is coming from the nonaffected facilities, just wanted to check? Are we assuming couple of facilities to come back operational?

So this is unrelated to the facilities because we don't -- we cannot commit yet when we will have it. Naturally, we hope that this will be [between them] and then the numbers can increase.

So you're looking at 10 to 15 for the remaining 6 months, and you already launched, if I heard it right, 12. So total about 20 to 25 for the year?

For the -- just want to make sure what we said is that we launched, in this quarter, about 3 products. In October, we launched 4. An additional 10 to 15 products remains until the end of this fiscal.

Understood. Fair enough. Thank you for clarifying. Secondly, on -- you mentioned on the Suboxone case that it's [weighted]. So just wanted to hear some -- what could be the possible scenarios here, I mean, if you could help us on that?

There are actually 2 scenarios. One that we will win and one that we will lose, if we will lose. So if we will win, and naturally, we will launch our product -- relaunch our product. If we lose, we will have to be -- continue to be adjusted until there is a solution of the patent case.

So I was just trying to understand the competitive landscape actually. So if you win and continue to sell -- if you can start selling again, can the competition, I mean, the other guys settled and others in the race can also come in? I just wanted some color there, please.

I cannot speculate on other people's behavior because I don't know the nature of their agreements or disagreements with innovator.

Okay. Fair enough. And lastly, on the noncore disposals that you have taken initiatives. So just wanted to understand how much more is there in terms of creating a more profitable organization? I mean, do we see these activities on an ongoing basis for the next 6 months, 12 months? Or we are largely done?

In terms of a manufacturing site, we are in the process of, let's call it, rationalization of our network. I don't -- I do not expect a near-term additional activities. On the products and brands, absolutely, this will continue.

(Operator Instructions) The next question is from the line of Neha Manpuria from JPMorgan.

First on, if I look at your SG&A spend adjusted for these things and employee, there isn't -- it does not seem to be showing too much improvement from the cost optimization that we are talking about. So you did mention in your opening comments that we have seen a decrease in cost. Could you give us some clarity on how much that has been and some number around what we're expecting out of cost saving over the next year?

Yes. As we told during the last year call that we actually had affected the increment during this quarter only. So this quarter, we have got the effect of the increment. If we take into that and also because of the rupee depreciation, some of our manpower cost, which will be there in overseas, so those costs goes up. And if you normalize the impact of that and in the normal inflation-linked incremental spend, then the kind of reduction in the spend that we have is completely in line with our expectation.

And can -- do we have any sort of your number, let's say, that X amount is what we are looking to save?

No. We can't give further breakup or further guidance. But all we can say is that we are continuing to focus on cost improvement and productivity improvement, and we are seeing results of that, that you can see is reflected in our overall EBITDA margin.

Understood. And sir, on the U.S. business, you mentioned that we have over 100 products in the pipeline. Excluding the 3 products that we have discussed, what would be your estimate of meaningful products that we can expect from the pipeline over the next 2 years, 3 years?

We are not giving guidance. And it's also very hard to predict the value of the product because, as we know well, product can go down in pricing 60% or 80% or 40%. And also, it's hard to predict market share. But let's say that in those 100 pending ANDAs, there is some very, very exciting products and some that we'll -- probably we'll have it [so seriously]. So overall, we feel that it's a very healthy portfolio.

Okay. And my last question is on Russia. That business seems to be doing particularly well over the last 2 quarters. Is this improvement linked to the biosimilar spender and, therefore, could be lumpy? Or is this a sustained base of improvement that we should assume for the Russia business?

Biosimilar will be lumpy because it will be just out of the tender outcome. But -- and also in Russia, there is a seasonal impact, which happens. And it all depends on when the winter sets in and that cannot be very predictable given the whole global climate. So to that extent, there is a little bit of unpredictability or some fluctuation. But overall, based on new product launches and [tax sense] in the share market, we are seeing healthy performance in Russia. But beyond Russia, if we really look at overall emerging market in this particular quarter, whether it is China, whether it is Ukraine and specifically Romania because last year Romania was not -- could not do well because we had a supply constraint because we had that Q2 problem. And similarly from new market like Brazil. And I think we have been performing quite well. So emerging market is performing well, and we remain bullish. And we'll see how much we really deliver.

The next question is from the line of Aishwarya Agarwal from Reliance Mutual Fund.

Sir, can you please help us when do we anticipate the court judgment on Suboxone? Any time line?

The hearing happened on October 4, and it could be -- the judgment should be there within 90 days. So technically, 90 days means 4th of January, but we can expect any time now onwards before that date.

Sure. And sir, next is, how you see this Nuvaring as well as Copaxone in the approval process? And where are we and when we are anticipating the launch?

As I mentioned in my presentation is, first of all, we submitted all the required information and we have listed CRL that we got for both. Both of them are now on the normal regulatory track. And we feel that we can launch -- it is within the time that we discussed last time, which means that Nuvaring, we said, has got to be in the first half of calendar 2019 and Copaxone in the second half of calendar 2019.

Next question is from the line of Anubhav Aggarwal from Crédit Suisse.

One question is on PSAI segment. We've seen the sales increasing with the segment almost 11% sequentially. Question is how much was of this price driven and how much was volume driven?

It's primarily volume created.

So then what explains margins really shooting up for this segment sequentially from 22% to 28%? I understand the operating leverage, but incrementally, almost 85%, 90% of sales has come as gross margin -- gross profit sale?

It's a combination of product mix. And also, we have nice cost efficiency products.

I'm sorry, you have nice what...

Some impact of credentials will be there in the work. It helps because primarily billings happens in dollars, but also it is a product mix, which makes a lot of difference in PSAI margin.

And cost efficiency products.

Oh, cost efficiency. Sir, but are we now -- is this -- so is this product mix that we benefited this quarter, is this a sustainable mix? Or should we -- because if I look back, of course, other than currency, we have never done sustainably more than 25% gross margin here. So that's why I'm asking that is this a one-off benefit that you're seeing in PSAI segment or this is a new base for us?

See in PSAI, earlier also I have said, there will be fluctuations. It is 28% has not been the highest. Sometimes, we've been -- we have done 30% in a quarter. So it is so dependent in terms of the product mix. And if there is, say, more development quantity, then definitely it shoots up. So there are multiple factors. In this particular thing, there is an impact of currency as well. So depending on where the currency stabilizes and that will also have an impact on the margin. So sustainability cannot be assured, but obviously, always attempt within the company will be to increase the margin as far as possible.

That's helpful, Saumen, sir. One question is on R&D. You mentioned about R&D being almost similar to last year here. But directionally, can you talk about roughly about fiscal '20 roughly? Can we think when you guys try to consider biologics and Propriety Business living on their own? Can we think about R&D, which is, let's say, INR 1,700 crores to INR 1,800 crores this year and last year? Fiscal '20, can we bring it down to less than INR 1,500 crores? Or what will happen as...

I will talk about next year in the next quarter.

I was not looking for a quantitative number, but I was just looking it for, let's say, directionally that you guys need to increase R&D spend on specialties. That's -- you guys have talked about that earlier. And you also mentioned that the 60% that you're spending on generic needs to come down going forward, right? So that means that...

Proportion.

So the spend on specialty has to be increased?

Proportion. I have not alluded to an absolute. Let us make a few points clear. R&D is our primary lever for future growth, and we'll never trade off that. We will continue to focus on R&D. Our activity level on R&D has not come down a bit, but we are trying to improve the R&D productivity. So that's why there will be sometime some advantage we will create in the overall spend without trading off anything on R&D. You're right. Going forward, it could be more spend towards specialty and biosimilar side; to that extent, a proportion of overall R&D, and gets skewed in favor of that compared to the generics and API. Having said that, we will continue even in the generics and API to spend wherever there are opportunities or potential [opportunity].

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

Yes, sir, couple of questions. One is, how much do you think is going to be the cost efficiency or cost decline? Do you think that [many of your] facilities are one step from advance? [I mean, now that you've mentioned it].

Can you repeat the question once more? You were talking about the facility divestment?

Yes. Due to the facility divestment, how much is the annual cost likely to come down? And when it starts getting reflected in the numbers?

We cannot give you a specific number at this point of time. But definitely, it will bring down our overall cost. Maybe going forward next time when we're speaking, we can give some flavor.

And no ballpark outside is possible?

Not at this point of time. We are in the midst, right? As you know, even in this quarter, specifically in October, we have signed a definitive agreement for our CTO-IV facility from Jeedimetla. So we are focusing on closing that agreement as well. So with all this being over, we will -- definitely by the time we prepare the business plan for next year, we'll have a clear idea about what is the savings in our cost structure due to all the actions that we have taken during the year.

Okay, okay. The other thing I just wanted to know the -- and correct me if my understanding is wrong, we have just in this second quarter, we ended the 180-day exclusivity on Aloxi, that is palonosetron. So just wanted to know, are we likely to see sharp decline? I mean, obviously after 180 days is -- what was the market share we obtained during that 180 days? What do you feel now likely to be the scenario given the competition after 180 days?

So Nimish, on palonosetron, I think the market is already quite competitive. And incrementally, as of now, we don't have much visibility. We will not like to comment at this point in time. Let's wait for that. But I think at this point in time, it's quite competitive. And to a larger extent, it incorporates a lot of players already in the market.

What was the market share we obtained in that 180 days that you can tell me, that would be helpful?

So by...

Nimish, we had around 26%, if I recall.

Yes. So it's around there. But maybe on the specifics, we'll take it off-line and we'll be specific there.

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

Is it possible for you to spell out your plan for China? And how much can this business grow when it's 3 years, 4 years?

So we don't want to share guidance, but we see a great opportunity as China is giving certain advantage for products which meet certain criteria. So if you meet those criterias and quality and speed, you can get access to hospital in a different way than they used to be in the past. And quite a -- quite a large number of our global portfolio actually around 65 to 70 products are meeting those criteria. And naturally, part of them, we hope, will bring that. This is a significant number of what we are selling in China right now.

Okay. And any clue or anything that you can suggest that what do these 65, 70 products -- what sort of adjustable market is it targeting? And second, would you necessarily take this through your joint venture route? Or can you also do it 100% own entity?

So it's -- I don't know exactly market access, but these are fairly large molecules. In the sense of some will go to the joint venture and some will go with the partners depends on the ability to access the market. As the joint venture has certain therapeutic areas that are working on and other therapeutics areas, we will use other partners.

Okay. Great. And second question is on Duvvada ongoing audit. And then I know you can't speak too much, but the broad question is, is this audit only going on for onco site or also for the non-onco site?

At this stage, I cannot comment of where the audit is. We will wait until it will conclude and see that.

Okay. No worries. And just one final question. Is it possible for you to update us on your anti-psoriasis oral compound, which you had partnered with XenoPort?

Yes. I think I can take that question. So you are referring to our product XP23829, which we had licensed from XenoPort for moderate-to-severe psoriasis. That product is currently in Phase IIb study. And the recruitment is going on right now. It's a blinded study. So we do not -- we cannot have the data until the study is complete. We expect the study to complete by the late Q4, early Q1-- late Q4 2019 -- FY '19 or early Q1 FY '20. At that point, we will make a decision about moving this product forward.

Okay. And if you do move it forward, it would necessarily go through Phase III?

That's correct. It will have to go through Phase III.

Okay. Anil, just curious, was it not already done Phase II way back in September 2015 by the time when you in-licensed in March 2016? So...

Yes. So the -- yes, there's a little bit of a technicality there. It was -- it had completed Phase II. But what we call as Phase IIa, in other words, there was a proof of concept that was established at that point in time. And then we recognized that this instant -- and we could directly have gone into Phase III, but that would mean we are taking on a lot more risk and significantly higher expenditure in terms of how we power the Phase III study. So instead of the risk and the higher expenditure, we felt it was prudent for us to do a Phase IIb study where we looked at the dose response as well as the duration of the study, so that we get a clear signal to power our Phase III study, which then would be more -- significantly more de-risked as well as will be much cheaper.

And it has taken you 2.5 years or almost 3 years by the time you ended? Isn't that too long for a Phase IIb study?

Well, that -- no, no, no. That's just the nature of the R&D in -- on the proprietary side. So this is 6 months study. So you have to follow up the patients for 6 months. So each patient has to go through that. This is a 400-patient study, 4 arms, 100 patients in each study and monitored for 6 months before the blind is broken.

Yes. That's right. Sorry to persist on this. One final point from my side. So if you had in-licensed March 2016 and if the study was to get over by middle of 2019, it's been 3 years since the product has been with you and you took it up to Phase IIa and Phase IIb, it has taken 3 years?

Yes.

I mean, why is that so?

So we -- there were a number of activities after we licensed the product. So we did -- we had to meet with the FDA to get concurrence from them. So all of these take time. So to actually schedule a meeting with the FDA, put together a plan for both the Phase IIb and Phase III, get their concurrence and then after that to get the product going, manufacturing of clinical material and so on, that was the time.

(Operator Instructions) The next question is from the line of Saion Mukherjee from Nomura Securities.

Sir, you mentioned about the proprietary and biosimilar businesses being self-sustaining over a period of time. I understand they are not at the point. And talk -- you mentioned about increasing R&D spend. So in a way what you are saying is in the near term, there would be even more revenue and cost mismatches in these businesses. So there seems to be some kind of a contradiction here. If you can help us understand what's the time line you are thinking in terms of both these businesses breaking even?

Yes. As we said, also, we expect Proprietary Products to improve on the total revenue front, particularly now that DFN-02, the PDUFA date is in the quarter 1 -- sorry quarter 4 of FY '19. So we expect to launch in Q1 FY '20. And that's a very significant product for Proprietary Products business. As you know, it will take some time to ramp up, but we will expect that also to give the revenue. And on the biologics side, as you know, in emerging India and emerging market, we have the pipeline and we are launching. For example, in India now, we have launched trastuzumab and some of the emerging markets also will be followed up. So we expect the revenues also to come in as we are putting some more, like in biosimilar, it will be basically for the developed market that we need to take couple of products, which we'll do. Our salesforce, we can even potentially sign up with a risk-reward kind of a sharing with someone else to do that. So all these, we will see and we will come back to you with a time line by the time we finalize our plan and we'll give you an indication. But the goal that has been set is that how these 2 business can get self-sufficient at the earliest possible without taking several years. So that is a complete planning exercise we'll have to do and then get back to you.

Okay. Sir, is it possible to share the biosimilar revenues overall India plus EMR separately? Even approximate size of the business?

Yes. Around INR 180 crores that we get in -- Saunak, why don't you share what he's looking?

So it's roughly around -- you can take INR 90-odd crores a quarter, so it kind of culminates to INR 350-odd crores of run rate between India and EM.

Okay. And sir, approximate splits are possible for it...

Split, maybe I'll get back to you on this.

Okay. That's helpful. And just one last question on the EM where we're seeing good growth. And I think you mentioned about a few markets, but the growth that you're seeing today, is this -- I don't know whether you consolidate the China numbers because you mentioned China also is doing well. And just wanted to have a clarity on that? And Brazil where, I think, you started operations last year, revenues are quite small. What's the uptake we can expect in the Brazil institution business?

So first in China, we have to scale up revenue. One out of the joint venture, which we do not consolidate in our financial reporting, only the profit part. But there are some which is our direct and that gets reflected in the sales. In Brazil, even though we started operation only last year, there has been considerable growth given within a year. And we hope to improve going forward with new launches. But apart from China and Brazil, as I indicated earlier, there have been other markets we have been doing well in emerging markets.

The next question is from the line of Surya Patra from PhillipCapital.

Sir, just, I believe, in the opening remarks, you talked something about the product escalation in the U.S. So whether that is a kind of a continuing process? Or -- just sequential decline in what we are seeing, what percent of that is because of that? Or how many products that we have curtailed? So any clarity on that would be useful?

So the main impact is on few products that we -- that's got competition from other players. So it's not the cost above, it's primarily on key products.

Okay. So that means whether the base business is getting impacted by this effort in any meaningful manner?

It's meaningful to both products, yes.

Okay. And just one clarification about whether the financials include any ForEx gain for the quarter?

Absolutely. Yes.

Can you please quantify that, sir, why because the financial income seems relatively a bit higher in the quarter?

So some part of the financial income will include [AGA], but as we've said, we have divested the Cloderm brand as well as we have got the other income will reflect that. So in the finance income, some part will be the hedge gain and some will be the interest income that we'll be getting.

Okay. But you're not quantifying the ForEx gain or hedge gain?

We are not specifically quoting, no.

Okay. And just one more question on the -- sir, whether any benefit PSAI business have witnessed because of the Chinese supply disruption what has been there since some time, so either in terms of the prices or in terms of the volume, anything that you have witnessed in the quarter?

We absolutely see no engagement with us because of the Chinese situation, and we believe that physically it's going to help us a lot.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

First is on the U.S. generic market right now. Did I get you right when you said if you adjust for Suboxone and take it out last quarter and this quarter, it was a single-digit decline, is that what you said? I missed that, sorry.

Yes.

Yes, yes.

Okay. So -- and -- so would that mean like annual still low double-digit kind of an erosion in the environment because you seem to indicate price erosion in your press release at several points. So how are you seeing the market right now from a pricing standpoint?

So in general, it's stabilized. But when there is new approval that is hitting one of our products, then naturally, we see the impact on that product. If the product is important, then naturally, it impacts the overall basket. And also, it's not so much from a price harmonization. It's more of a specific competition for a product.

Got it. And you think the only way is like what you alluded in terms of more product launches like the 10 to 15 additional products is the only way one can actually grow the U.S. business? It's up to $200 million right now quarterly. And do you foresee that you will be able to kind of grow this sequentially now for the -- to the end of the year?

So we are not giving guidance. Long term, for sure, we are planning to grow. The -- when I was saying, [loss] for us, it's primarily focus on growing the profit. So it's naturally launching products, but also our cost structure and the ability to increase share in our product. So it's a combination obviously.

Got it. And my second question is on REVLIMID. I think we've had IPR challenges that we put in sometime around August, if I recollect right. Can you give us an update on what's happening on the REVLIMID side, please?

Shyam, we will -- we can take this on off-line basis.

The next question is from the line of Kunal Dhamesha from SBICAP Securities.

So my first question pertains to growth in branded RoW business. So the growth has been solid, I think, for 185 counted, it's approximately 25% growth year-on-year. So -- and our guidance is low double digit until last quarter. So where do we stand in terms of guidance for the remaining year or on a consolidated FY '19? Is this a new base that we are seeing in this business?

I don't want to give any new guidance in this respect. Overall, we are still with 2 digits. I don't recall we said -- that we said lower or maybe we did, but I don't recall that we mentioned the exact amount.

Okay. Okay. And just kind of following up on previous participant's question. So you said the pricing pressure, in general, it has stabilized. So stabilized at what level, mid-single digit, high single digit, in base businesses?

Stabilized is that whatever RFPs that we filled we are selling with the similar prices. But naturally, as you know well, some of the customers are issuing new RFPs, so I cannot comment of what prices will be those new RFPs, but let's say, for whatever we filled, which is most of the customers, naturally we feel that these are the prices that we will continue to sell these products.

Okay. In terms of follow up, are you continuing to see some rationalization from other players in the market, creating new opportunities for you?

Absolutely. Absolutely. And then -- yes, naturally, there will -- I believe that we will -- we continue rationalization in this market.

The last question is from the line of Anik Mitra from Stewart & Mackertich.

My question is on Suboxone. Sir, what do you think or how do you see the opportunities added on the backdrop of fevers in [DSF]...

We didn't get your question. Can you repeat it, please?

We seem to have lost the line for Anik. We'll move to the next question. The next question is from the line of Ranvir Singh from Systematix Shares & Stocks.

Sir, just one clarity. Your product DFN-02, which was returned back to you. So just wanted to understand what's the status there. Are we going to outlicense it again or we will develop ourselves? Or how important it's for us...

Yes. I'll take that question. Actually, it is not DFN-02. It's DFA-02, the antibacterial -- topical antibacterial combination. Yes. So our plans are -- it is certainly a very attractive product, requires a Phase III to be conducted by a partner. And we are actively seeking other partners, and we are getting some input. So stay tuned.

So how important it is in terms of finances, if I talk about? So whether we are expecting some meaningful upfront or milestone payment out of this product? Or...

It is not -- yes, it is hard to predict. As you know, with licensing deals, it depends on various factors. So it will be hard to predict what it will be, but our expectation is to get, for any deal, it doesn't -- not just for DFA-02, our expectation is to get an upfront payment and pre-commercialization milestones and then royalties. That's a standard ask for any of our products.

Okay. Fine. And secondly, our cost rationalization program, when we chose site to sell, what exactly is the criteria, like, we see that Jeedimetla API facility has been sold. So was that not profitable? Or when we rank these facilities in terms of contribution and then we scrap the bottom one, this is the way we do or what exactly -- what does -- or point to consider before doing this rationalization?

So naturally, we look at the products and the quantities that will be needed for the future. We look at the way to make them and we see whether we can condense them in fewer lines and do it with less people and we see which of the plants, their cost structure will not fit the new infrastructure that we need, and this site was selected based on it.

So this Jeedimetla, we assume that was not a big contributor to our revenue, right? Revenue or profit?

No. We sold products out of it, right, and absolutely. But we feel that long term, it did not give us what we needed from that lines in the future.

Okay. Fine. And the last, if I may, that in European market, we see that price erosion has been for quite some time. So where we see this going to stabilize for now?

So you asked about Europe?

Europe, Europe, I'm asking about.

So naturally, our -- the baseline is relatively small at this stage and consisted of -- of new product. So it's more of a product to product phase than anything. And naturally, most of our product is being sold as hospital tenders. So naturally, it depends on a tender.

So we can see now this getting stabilized going forward in subsequent quarter?

There are 2 things. First of all, we'll have more products, and we also suffer from an execution issue as we did not supply Europe all the products that they could sell. And we are absolutely working on changing that.

We'll take that as a last question. I would now like to hand the conference back to the management for closing comments.

Thank you all for joining the call. And in case if any of you have any additional queries, please feel free to get in touch with the Investor Relations team. We will be happy to address them. Thank you, all.

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