Dr. Reddy's Laboratories Limited (RDY) Q3 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and welcome to the Dr. Reddy’s Laboratories Limited Q3 FY ‘11 Earnings Conference Call. As a reminder, for the duration of this conference, all participant lines will be in a listen-only mode and there will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions) Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kedar Upadhye from Dr. Reddy’s Laboratories. Thank you and over to you, sir.

Good morning and good evening to all the participants. And welcome to Dr. Reddy’s earnings conference call for the third quarter ended December 31, 2010. Earlier during the day, we have released the unaudited consolidated financial results under IFRS and the same are also posted on our website. We are conducting a live webcast of this call and a transcript shall be available on our website soon. The discussion in this call will be based on IFRS consolidated financials. To discuss the business performance and outlook, we have on the call today Satish Reddy, our Chief Operating Officer; and Umang Vohra, our Chief Financial Officer. Our CEO, G. V. Prasad is traveling today to Davos for a prescheduled engagement in the World Economic Forum, after today’s Board Meeting and Press Interaction and hence he has not been able to join today’s call. Please note that today’s call is copyrighted material of Dr. Reddy’s and cannot be rebroadcast or attributed in press or media outlet without the company’s expressed written consent. Before we proceed with the call, I’d like to remind everyone that the Safe Harbor language contained in today’s press meeting also pertains to this conference call and the webcast. I would now like to turn the call over to Umang Vohra.

Good morning and good evening to everyone. I welcome all of you on this call today. I will discuss key financial highlights of this quarter. All the figures referred to in this section are translated to U.S. dollars at a convenience rate of 44.08 per U.S. dollar. For the purpose of business highlights and Satish’s section, the analysis is based on performance in respective local currencies. The financial highlights are as follows. Consolidated revenues for the quarter are at $424 million and represent a year-on-year growth of 10% and a sequential growth of 2%. Revenues from our Global Generics business stand at $303 million for the quarter, representing a year-on-year growth of 16%. Revenues from the Pharmaceutical Services and Active Ingredients segment at $111 million for the quarter represent a decline of 5% over last year. Gross profit margin for the quarter is at 55% versus 51% a year back. This improved margin reflects the contribution from new products launched in the U.S. this year in our Generic segment. Gross margins for the Global Generics and PSAI segments are at 65% and 28% versus 60% and 31% respectively in the previous years. This quarter expenses include certain items which are non-routine in nature and total up to approximately U.S. $9 million. These are as follows. A, There are expenses pertaining to our OTC business in Russia. You will recall that we had committed to building a strong OTC portfolio in Russia. This quarter has seen a higher spend on the top four OTC products from our franchise in line with the season at Russia. B, in addition, we refinanced the betapharm loan in this quarter and as a result had to take a non-cash charge pertaining to debt origination costs, which were capitalized on our balance sheet in line with…

Thanks, Umang. Welcome everyone on the call. As mentioned earlier, Prasad is traveling today for Davos, hence he’ll not been able to join our today’s call. Well, before I talk about the performance for the quarter, I also wanted to share the news that just came in. Dr. Reddy, our Chairman has been awarded one of the highest civilian honors in the country, Padma Bhushan. Our performance in the nine months of the current fiscal, I would say somewhat mixed. We have launched a number of low competition products in the U.S. and delivered strong growth across the key markets of India, Russia and other rest of the world countries in Global Generics. The [medical] from these launches and growth was partly offset by decline in PSAI and Germany. During this period, we have been investing for future growth through higher R&D, spends for OTC portfolio in Russia and field force expansion in India. In addition, as announced in November, we have also agreed to acquire GSK’s penicillin facility in the U.S. Our performance for the full year will be shaped to an extent by the developments in Q4 for Fexofenadine Pseudoephedrine higher strength product and Fondaparinux. The case hearing for Fexo-Pseudo is scheduled to start by the end of this month. We remain confident about our non-infringing position and expect to receive the final judgment before the end of this fiscal. On Fondaparinux the U.S. FDA audits of our partner’s facilities scheduled as part of the ANDA review process are complete. We continue to work with the agency for the completion of the balance procedural part of the ANDA review process. While the launches of both these products were delayed compared to our earlier expected launch dates. We are confident that we will benefit from the limited competition opportunity.…

Thank you very much sir. (Operator Instructions) The first question is from the line of Ranjit Kapadia of HDFC Securities. Please go ahead. Ranjit Kapadia – HDFC Securities: My question relates to this settlement with AstraZeneca for those two products Nexium esomeprazole and Accolate. Now, this, is a supply of API included in the Nexium launch because this launches are in 2014 onwards?

No, it is not, sorry today for that. Ranjit Kapadia – HDFC Securities: And then the zafirlukast we have launched in November 10 at risk and now the product is without the risk. So is there any possibility of getting for this period from November to the two months any compensation to be paid?

No. There is no compensation to be paid. The product is no longer at risk. Ranjit Kapadia – HDFC Securities: Okay. Thank you very much and all the best sir.

Thank you.

Thank you, Mr. Kapadia. Our next question is from the line of Hitesh Mahida from Marwadi Shares. Please go ahead. Hitesh Mahida – Marwadi Shares: Congratulations sir for good trade off numbers, just wanted to know how much your one-time litigation amount have you paid, litigation settlement amount?

We have not paid any litigation settlement amount as yet. Hitesh Mahida – Marwadi Shares: Okay.

What I mentioned in the script that we had communicated. The expenditure on our legal litigation has been high in this quarter. Hitesh Mahida – Marwadi Shares: Okay. And how was the refinance betapharm loans?

The betapharm loan has been refinanced. It was about €120 million earlier. Hitesh Mahida – Marwadi Shares: Okay.

We refinanced it to about $110 million right now and it’s been refinanced at rates which are more attractive than what the earlier euro loan was. We are not communicating exactly what component of the total cost that I mentioned to you was on account of the betapharm refinancing, but you could look at the P&L and probably make an impression of it. Hitesh Mahida – Marwadi Shares: Okay, okay. Thank you. And I wondered, what’s your market share as far as Tacrolimus is concerned?

Yeah. It’s about 16%. Hitesh Mahida – Marwadi Shares: 16%. Okay. Thanks. That’s it from my side.

Thank you, Mr. Mahida. Our next question is from the line of Kartik Mehta of Daiwa. Please go ahead. Kartik Mehta – Daiwa: If you could explain the low tax rate first and we have had several one-off upsides in this year, so if we look at the pipeline with Fondaparinux would be and D24, which could be there effectively for the next year entirely. Can you guys share if the y-o-y growth for the U.S. business for FY ‘12 will be somewhere between 15% to 20% of commissions, can you share some thoughts on that?

We won’t be able to give any specific sales guidance as per U.S. performance next year, right? Having said that, I think this year, what we are trying to say is the growth is also led by limited competition products, so you cannot absolutely count it as one-off upsides, right? So that’s what it is, and Umang can you also explain the tax rate.

Yeah. So what’s happened in this quarter is that we’ve had a much higher R&D element to the expenses and we -- as you know we get a way to deduction on R&D, which is allowed by the Indian Government. Also simultaneously we have further launches that have to take place in the U.S. including the ones that we launched in late quarter three like Lansoprazole et cetera. There have been inventories built up in the U.S. and the result of these inventories being built up in the U.S. there are some tax account -- tax adjustments that needs to be made in order to eliminate the profit that’s lying in these inventories, because these are largely inter-company transactions that makes the difference to the tax rates. Overall, for the full year we are committing to 12% as we said earlier and quarter four will catch up as a result of this. Kartik Mehta – Daiwa: So this 12% is for FY ‘12 also?

No. FY ‘11, FY ‘11 is 12%. Kartik Mehta – Daiwa: Okay. And on the CapEx, I guess, that is for the planned acquisition, can you share what amount of revenues and when would you record that?

The CapEx has already been accounted. The revenues from this, since this CapEx has been incurred for expansion in our existing facilities, as well as the SEZs. Depending on where the CapEx is spent some of the revenues may come in in a shorter period whereas the SEZ revenues typically would take about a year or so. Kartik Mehta – Daiwa: I was asking in particular about the plant that we acquired in the U.S.

Yeah? Kartik Mehta – Daiwa: So, any timeline when that revenues will be recorded or have you started recording anything or?

No. We haven’t started recording anything. This would be recorded in the next fiscal. Kartik Mehta – Daiwa: In the next fiscal?

Yeah. Kartik Mehta – Daiwa: Thank you.

Thank you, Mr. Mehta. Our next question is from the line of [Ehshan Sood] of (Inaudible). Please go ahead. Christen Sood – Analyst: Yeah. Hi. It’s [Christen Sood] from (inaudible). Two questions please, one, can you shed some more light on Germany? Are you expecting a sequential improvement from here? Is the business profitable post these tender losses? And the second question is on Lipitor, are you expecting to be a participant in the U.S. Lipitor market after the six month exclusivity? Thank you.

Yeah. We will be a participant on the Lipitor post exclusivity. That is correct. On Germany, the situation is like this, already we have talked about the overall sales group going down and that’s the result of what’s happening in the market, which is post this process of tender that has happened in the market what we have seen is, there is steep erosion in prices and that’s something that, we have to live with, the market has been totally unsettled because of that. So quarter-on-quarter, obviously you’re seeing that kind of a decline by that compared to the previous year, that’s the reality. What we’ve done is, over a period of time we have also taken steps to reduce the SG&A as a result of which in terms of profit we’re doing mostly sequentially as far as the quarters are concerned. For example, last year you would have had seen a higher expense on SG&A because of the higher manpower but we don’t have that this year. So, lower sales but it is still a profitable operation. Going forward, I think based on more tender wins or in spite of a disappointing AOK tender result coupled with the fact that we are trying out a few initiatives to also address the month in the market. So this would start trying to go but you have to give it a few more quarters for that to materialize. Christen Sood – Analyst: Okay. Thank you.

Thank you, [Mr. Sood]. Our next question is from the line of Bhagwan Chodhary of India Nivesh Securities. Please go ahead. Bhagwan Chodhary – India Nivesh Securities: Yeah. Can you update on this Allegra-D24 what the market price you are expecting and one more product that’s Fondaparinux?

Allegra-D24 is 200, approximately $200 million innovative product. Bhagwan Chodhary – India Nivesh Securities: Okay.

And at generic prices this could obviously be lower. We are expecting, the court case starts hearing on the 31st of Jan and we expect that hopefully in this quarter it would get resolved. Fondaparinux is approximately a $300 million product, again at innovative prices. Bhagwan Chodhary – India Nivesh Securities: And what the update of this Fondaparinux by what time you are expecting?

Our partner’s facilities have been inspected and we’re awaiting, we’ve been in discussions with the FDA, they’re awaiting an approval on this front. Bhagwan Chodhary – India Nivesh Securities: Okay. And what about this ANDAs, how many ANDAs you have filed this quarter?

We have filed about six ANDAs in this quarter Bhagwan. Bhagwan Chodhary – India Nivesh Securities: Okay.

Can we please restrict the questions to one or maximum two, so that ... Bhagwan Chodhary – India Nivesh Securities: Yeah. Thanks.

Yeah. Thanks.

Should we move on to the next question sir?

Yeah, yeah, yeah.

Thank you. Our next question is from the line of Nimish Mehta of MP Advisors. Please go ahead. Nimish Mehta – MP Advisors: Yeah. Hi. Thanks for taking my question.

Thanks. Nimish Mehta – MP Advisors: I have two questions. First of all on Nexium, I understand as per the settlement that Dr. Reddy’s will be launching the product on the same day on which Ranbaxy also is going to launch. So can you just explain as to how can this happen given that Ranbaxy has 180-day exclusivity and Dr. Reddy’s does not enjoy 180 day exclusivity?

We are not going to comment on competition and their part of the settlement. All we can say is that we have, if there is a 180-day exclusivity then obviously it does imply that we would have to launch after that. Nimish Mehta – MP Advisors: Okay. So this is subject to the 180-day exclusivity.

That’s right. Nimish Mehta – MP Advisors: Okay. I understand. And second, I wanted to also know as to when do you expect generic competition in the usual Allegra Fexofenadine because we were expecting from this month, but I understand nothing has come in, right?

We do not expect generic competition for Fexofenadine D24, which is Allegra. D24... Nimish Mehta – MP Advisors: No. I’m talking about usual, it is currently at risk launch and all the...

Are you talking about base Fexofenadine? Nimish Mehta – MP Advisors: Yeah.

So base Fexofenadine which is at risk launch already has generic competition. Nimish Mehta – MP Advisors: Already has generic.

Yeah. Nimish Mehta – MP Advisors: Non at risk competition?

Yeah. Nimish Mehta – MP Advisors: Okay. And finally on Accolate, you mentioned that you’re expecting after 180-day, me to generic stranger, but our understanding was that because it is a non-infringement maybe others will have to wait, so anything that you can comment as to where am I missing?

We do not want to comment on that and we’d rather not comment on that. Nimish Mehta – MP Advisors: Okay. Thank you. I’ll join back in the queue.

Thank you, Mr. Mehta. Our next question is from the line of Bino Pathiparampil of IIFL. Please go ahead. Bino Pathiparampil – IIFL: Hey. Thanks for taking my question. Just a question on the Russian and domestic markets despite the higher spends on OTC and marketing Russia growth seems to have tapered off after several quarters of stellar performance. So what has happened historically in this quarter, third quarter has been a very strong quarter as well. So what has happened in this quarter, the same with domestic market despite the sales force being ramped up, we see a slowing growth rate there, so what is your expectation for the full year?

Okay. The two issues are slightly disconnected. The OTC spend that we talked about is to expand on our OTC sales in a much more classic way than what we did before. So which means, there will be more marketing spend on advertising and things like that. So that’s the OTC spend in Russia. And the field force expansion in India is also to do with our peripheric and geographic expansion, so that’s something we got disconnected from the skills issue that’s talking about. As per sales are concerned, Russia it does looks low because of the high base that they had last year, but that’s something that is to be noted. But overall if you see in terms of the market growth trends, our growth as compared to the market, these indicators are looking really good as per the market research data. As far as India is concerned it’s more to do with the seasonal effect, like I’ve also said, if I see the cumulative growth for the first nine months that’s at 19%, which is definitely above the market growth rate. Bino Pathiparampil – IIFL: Right. So the domestic market you think you can maintain yearly 20% rate, 19% to 20%?

Yeah. We expect about an 18% to 20% on a full year basis, Bino, and that’s been very consistent with the way we’ve communicated in the past two, three quarters. Bino Pathiparampil – IIFL: Right, right. And in Russia, is there any lag impact of the price control?

No. I think also, Bino, it will be good because in Russia what happened in quarter three of last year, on account of what was happening in terms of pricing control et cetera, there was a fair – that was a fairly large quarter for most companies including us. So, we’re seeing this growth that you’re seeing in this quarter over a very large base of the previous year’s quarter. Bino Pathiparampil – IIFL: Right, right. One final question on then the exceptional SG&A of the quarter, the – do you need to say that the entire $9 million is unlikely to – you should be taken off from a quarterly run rate going forward?

That is right. That would be right and we would also say that in every quarter three it’s likely that you’ll probably have a slightly higher expense curve because that’s the season in Russia and that tends to result in the lights – an increase in the SG&A. Bino Pathiparampil – IIFL: Great. Thank you very much.

Thank you, sir. Our next question is from the line of Manoj Garg of Edelweiss Capital. Please go ahead. Manoj Garg – Edelweiss Capital: Yeah. Thanks for taking my question. This question pertaining to the increase competition both in the U.S. market, just wanted to understand the overall market with regard to Tacrolimus and do you know how is the price erosion and kind of market share, though you have mentioned around 16%. So effectively like if you look at on the branded innovative price, what kind of price erosion you have seen so far in that market?

Yeah. Manoj for Tacrolimus we have seen Watson coming in for one strength and Mylan getting approval for all those strengths. Manoj Garg – Edelweiss Capital: Yeah.

Particularly what we have experienced for this product is it takes a bit of time for the new entrant to acquire market shares. So, over probably for couple of quarters, we could expect a stable market share. However, on the pricing point of view there is not a significant erosion. Manoj Garg – Edelweiss Capital: Okay. So when we talk about the 16% market share, that means is that the market share of the new prescription?

It’s a total market share, so the generic market share will be roughly 30%. Manoj Garg – Edelweiss Capital: 30% of the overall branded market share.

Market share. Manoj Garg – Edelweiss Capital: Okay, okay. And how, like, with regard to Omeprazole, thought we have been inching up quarter-after-quarter, is it fair to assume that now the quarterly run rate is somewhere in the range of some $10 to $12 million?

It’s approximately in that range Manoj. What happens is from external data perspective a large part of our customers data does not get captured within the our database, the Nielsen database. Manoj Garg – Edelweiss Capital: Okay.

So, but the evaluate could be approximately in the range you’ve mentioned. Manoj Garg – Edelweiss Capital: Okay. And just my last question before I get into the queue. Despite if when I just take $9 million one time kind of expenditure in SG&A, I think if you look at the year on a sequential basis, the SG&A expenditure are higher by 5% to 6%. So is it largely attributed to higher expenditure with regard to OTC in Russian market or is there something more to read there?

Can you repeat your question please? Manoj Garg – Edelweiss Capital: Like if I look at after adjusting $9 million from the SG&A...

Yeah? Manoj Garg – Edelweiss Capital: I think sequentially the SG&A cost has gone up by 5%, 6%.

That’s right. Manoj Garg – Edelweiss Capital: So, is it largely attributed to the higher expenditure or spending on OTC portfolio in Russia or there is something more to read there?

If you adjust the $9 million... Manoj Garg – Edelweiss Capital: Yeah?

It is my belief that you’ll come to roughly the same SG&A percentage as you had in the half one of the year. Manoj Garg – Edelweiss Capital: But like in terms of absolute numbers if you see it has gone up from 530 crores to 565 crores?

Yeah. Okay. So, you’re, so if that is on account of high, slightly higher expenditure on India as I mentioned in the script that I read out... Manoj Garg – Edelweiss Capital: Okay.

We’ve seen an increase in manpower and associated spends on account of field force expansion. Also for India, this quarter also has constant spends which are probably slightly higher. Manoj Garg – Edelweiss Capital: Okay, okay. How many like medical reps you have added during the quarter or maybe last nine months in India?

We have added totally 400. I don’t believe we added any reps in the last quarter. Manoj Garg – Edelweiss Capital: Okay. That’s all from my side. All the best.

Thank you.

Thank you, Mr. Garg. Our next question is from the line of Suryadeep Das of Centrum Broking. Please go ahead. Suryadeep Das – Centrum Broking: Hi, sir. Thanks for taking my question. I had a question regarding Russian market, regarding the deal you have with Cipla and Vitabiotics. Just wanted to have some colors to whether these deals are already in progress and if, yeah, then what kind of fraction our products should I join this and yeah, I’m seeing right now?

Our sales for the Cipla’s products have already started. Suryadeep Das – Centrum Broking: Okay.

Already commenced. Suryadeep Das – Centrum Broking: Okay.

So, this year we won’t have the full benefit of it, but next year we’ll have the benefit of the full year, so that’s... Suryadeep Das – Centrum Broking: Okay. And about the Vitabiotics products?

Also I think it’s, we have started sales, sales have just commenced on that, yeah. Suryadeep Das – Centrum Broking: Okay. And just one more question just wanted to know if you have any tax guidance for this fiscal?

We have, for tax we’re saying it will be about 12%. Suryadeep Das – Centrum Broking: On an annualized basis?

That’s right. Suryadeep Das – Centrum Broking: Okay. Thanks a lot.

Thank you, Mr. Das. Our next question is from the line of Prakash Agarwal of RBS. Please go ahead. Prakash Agarwal – RBS: Yeah. Good evening, sir. Question relates to the gas leaks that happened in December, any updates there?

I think it’s – the issue has been somewhat exaggerated in the media, right. So but the issue is clearly that whatever happened that evening, that actually inspectorates, which is actually the authority has given us a notice. We have responded to the notice and we expect further -- to hear further from them. So, there is no further updates to that. Prakash Agarwal – RBS: But the production facilities are all functional and there is no...

It’s all functional, I mean, we’ve only been restricted just on that particular clean room not to produce, which was the only thing affected there. So, beyond that everything is functioning normally, just one clean room, that may be 10, 15 clean rooms in the theater its just one clean room issue. Prakash Agarwal – RBS: Perfect. And so the second question is on the PSAI segment, we have seen good improvement in the margins, as well as the decline has been much lower than expected. So, I mean, clearly in your press release you’re mentioning, but any particular products or what has actually happened, can you elaborate there please?

We don’t give product guidance, but I can tell you that the order book in the API has significantly improved. And this quarter we’ve seen a fair number of products which have been added. The second thing is also in the first nine months, we’ve decongested capacity in each of these plants which was limiting our off take. So, the capacity is in place, the order books improved, some of the new products are tracking well and we’re actually expecting API to do also relatively well in quarter four. Prakash Agarwal – RBS: Okay. And looking at the fluctuation in margins from 31 to 22 and now back to 28, so what kind of margins do we assume going forward?

I would tend to think, we don’t guide for margins, but I think the historical averages of in the range of 28 to 31 would be probably the right averages to look at. Prakash Agarwal – RBS: And last question on the euro, basically I mean we just had an update from you on the Forex exposure, but that’s largely the U.S. Do we also hedge over euro sales or say sales in Germany or they’re all in dollar terms?

The sales in Germany are in euro terms, up till now we have not had to hedge this because on a net cash basis we had very little or very marginal exposures due to the interest and debt principal repayments in euros itself. Prakash Agarwal – RBS: Right.

However, now that we’ve moved this debt to dollars, so the dollar leg is not an issue, but the euro leg now will have, we will be taking a look at it from an hedging perspective for our next year strategy. Prakash Agarwal – RBS: Okay. You said it’s a dollar denominated debt, so it’s LIBOR plus something, is it?

That’s right, it’s a LIBOR plus 60 to 90 basis and we’ve – for us this is a natural hedge with our business. Prakash Agarwal – RBS: Perfect. Thank you so much.

Yeah.

Thank you, Mr. Agarwal. Our next question is from the line of Nitin Agarwal of IDFC Securities. Please go ahead. Nitin Agarwal – IDFC Securities: Hi. Thanks for taking my question. I just wanted to check on Prevacid, if you can give us some idea of the competitive situation out there, and how do you see the product really shaping out over the next couple of quarters?

See on Lansoprazole there are about four players now in the market, Nitin, four to five players in the market and we could expect a stable market share in the next couple of quarters. Nitin Agarwal – IDFC Securities: What’s the kind of market share we’ve been able to get in the initial, since, I guess, it’s a very early launch, it’s early days yet for the launch, but what’s the kind of it is...

So, we have launched it in the month of October, so it’s early for the IMS to reflect this number, the market share number. Nitin Agarwal – IDFC Securities: Okay. So, I guess, but in terms of the full impact of the product, is yet to be felt in the numbers even for, Q4 isn’t probably the full impact of the numbers are going to be reflected for Lansoprazole?

What Satish referred to is that all these three launches, Lansoprazole, Zafirlukast and Valacyclovir are sort of late quarter launches in this quarter. So the full benefit of the quarterly sales will get reflected in the quarter four. Nitin Agarwal – IDFC Securities: Okay. And secondly, when you look forward in FY ‘12, we’ve got about these two products on Fonda as well as Allegra D24. We’ve got, before we get some visibility as we go along, I mean when we see the full year around we have the remaining FY ‘12 clearly the next one year forward. Which are your other launches, product launches where you’re really comfortable or clear about the visibility kind of are very much there on those launches on some of these limited competition products?

As of now, we’re mentioning fully Allegra D24 and Fondaparinux. Nitin Agarwal – IDFC Securities: Okay.

We do have a few other products in the pipeline but we have not been public about it. Nitin Agarwal – IDFC Securities: Okay, okay. Perfect. Okay. Thanks very much.

Thank you, Mr. Agarwal. Our next question is from the line of Sameer Baisiwala of Morgan Stanley. Please go ahead. Sameer Baisiwala – Morgan Stanley: Hi. Good evening. Just on the U.S. market, I’m just wondering if we see sequentially, our revenues are up $7 million, but what we have is Lansoprazole, which is fairly sizeable market, middle of October launch Omeprazole OTC ramping up plus base business market share gains and little bit of Accolate towards end of the quarter. So, all four of these put together, translates into just $7 million sequential revenue growth. Is there, how do you explain this?

Sameer, we’re looking at $11 million, $95 million of last quarter to $106 million in this quarter. Sameer Baisiwala – Morgan Stanley: The sequential, I’m talking?

Yeah. That sequential only I mentioned. We are looking at $95 moving to $106, that’s about $11 million. We’ve also had pricing pressure on Amlodipine Benazepril. Sameer Baisiwala – Morgan Stanley: I see.

So there have been some adjustments even in terms of stock in trade on account of Amlodipine Benazepril, which has reduced the increase that we are seeing. Sameer Baisiwala – Morgan Stanley: Okay. But I mean, $7 could jolly well be $11, but I would have expected with bunching of so many catalysts, the rise still should have been fairly more meaningful, so is there something that we should expect in the fourth quarter?

Yeah. I think the, it’s a valid point Sameer, the issue is that we’ve launched both Lansoprazole as well as Zafirlukast has been even though we’ve launched them in October the off take has really taken off only in December on account of stock in the trade and therefore, I think, you would be able to see a bigger effect of this in quarter four. Sameer Baisiwala – Morgan Stanley: Okay. And the other question is on Lipitor, you mentioned that you would be launching this post 180-day exclusivity. Is it respective of the outcome of your court case? In the sense would you if the court decision is not delivered would you still be launching it at risk at that point in time?

I doubt that there would be – we won’t comment on it, but it would be hard to believe that there would be a launch at risk for such a big product. Sameer Baisiwala – Morgan Stanley: Okay, okay. And the final question is on R&D spend you are taking it up fairly meaningfully and almost going to 7% to 7.5% of sales including next year. Which component of the business are we really spending, is that (inaudible)?

There are two three areas Sameer. Sameer Baisiwala – Morgan Stanley: Yeah.

There are two to three areas. So first obviously is the generic products itself, you also have get up filings and other products that we’re working on. Now the second thing is also on the biologics space, because as we start now working towards regulated markets and more scale up of the number of the products that we’re working on that could also see an increase. That’s the second part of it. The third is the proprietary products, right. So we also talked about earlier giving indication that at least two INDs is what we will keep filing every year right, from the products in the proprietary product space. So if you could bunch altogether you would actually see this R&D spend which has been somewhat low in the first half reflecting very low, but that’s something that’s getting scaled up as this year concludes. And then as we move on to the next year that’s how – that’s where we think 7% to 8% is what you should expect percentage of sales. Sameer Baisiwala – Morgan Stanley: Okay. Thank you.

Thank you, Mr. Baisiwala. Our next question is from the line of Sushant Dalmia of Pioneer Investcorp. Please go ahead. Sushant Dalmia – Pioneer Investcorp: Thanks. And my question has been answered.

Thank you, Mr. Dalmia. Sushant Dalmia – Pioneer Investcorp: Thank you.

Our next question is from the line of Sonal Gupta of UBS Securities. Please go ahead. Sonal Gupta – UBS Securities: Hi. Thanks. Partly my questions have been answered. Just on the PSAI can you elaborate, I mean you’ve earlier given guidance for about a single-digit sort of a mix single-digit sort of a growth. But, I mean, fairly things have been much slower, so any thing in terms of visibility for next year how do you see that this business shaping up for next year?

I think the main issue is about the services part of the segment. API looks all right, I mean, we have seen the products gain traction and everything looks fine. Only on the services side of the business I think the pickup will take longer than what we anticipated. Because I mean as, you know we serve innovate the customers on the pipeline services, as well as on product services, right. So pipeline services what quarter you had and by the time you really start building up that side of the business, it could be a slow ramp-up. So I’m not expecting anything positive to report on that at least for the next few quarters. Whereas on the API side I think things are looking good as of now. Sonal Gupta – UBS Securities: But shouldn’t API be majority of your business, I think probably predominantly it should be API right?

It is about two thirds of that business, yeah. Sonal Gupta – UBS Securities: Okay. And fine and sure. Thanks. Thanks a lot.

Thank you, Mr. Gupta. Our next question is from the line of Akshay Shah of Quest Investment. Please go ahead. Akshay Shah – Quest Investment: Yeah. Good evening, sir. I just want to check something, there has been a lot of hue and cry about DPCO flexing its arm in India, especially from the multinational companies. If you look at Germany, you’re talking about it being a tender market. I think U.K. is also willing to become a tender market. Plus there have been reports of asking for discounts on less prices and so on and so forth. Is that another form of DPCO which is emerging in those global markets?

You’re talking about Europe specifically? Akshay Shah – Quest Investment: Yeah. I would thing so, but as basics spread to U.S. now.

See obviously in Europe and I think there is the issue of also the healthcare reforms that we’ve carried out in Germany because the spend were extremely high. Akshay Shah – Quest Investment: Correct.

Right? So it is due to something which the government undertook and you are correct it is spreading to other parts of Europe in the sense that Netherlands also has this kind of a tender system and things like that. But usually generic penetration in some European markets, I think it’s steadily increasing over a period of time. Italy, Spain for example will fall into this category. Now I think the U.S. is a slightly different story from what you see in Europe. So, I don’t anticipate, at least in the immediate future that this kind of a thing can happen. Akshay Shah – Quest Investment: Okay. Okay. Thank you. That’s all I have. Thank you.

Thank you, Mr. Shah. Our next question is from the line of Chirag Talati of Espírito Santo. Please go ahead. Chirag Talati – Espírito Santo: Hi. Thanks. My questions have been answered.

Thank you. Our next question is from the line of Ranvir Singh of Brics Securities. Please go ahead. Ranvir Singh – Brics Securities: Yeah. Hi. Thanks for taking my question. Can you just give an update on Balaglitazone and other NCE product pipeline?

Yeah. On Balaglitazone, there is no notable progress that we are – that we have to report. The status is the same at the end of last quarter. We are looking for a partner. The study results of the Phase II trial that we’ve done are not, as we had mentioned earlier, not very significant in terms of claiming a differentiation for that product. But we’re still looking for a partner for the territories. On the rest of the NCE pipeline, we still have as Prasad had mentioned in his earlier transcript in the last quarter, there is a Phase III asset which the recruitment is ongoing for a Phase III trial and there are other differentiated formulations that we’re working on which are in Phase I. Both these products are in the dermatology space and there are several other concepts that are being explored. Ranvir Singh – Brics Securities: Yeah. And in the talk about fourth biosimilar product, so whether that product will be launched in India or outside India?

Launch is slated for India this quarter. Ranvir Singh – Brics Securities: Okay. Sir, another question to your revenue target, it seems to be, we need a very high growth to reach at this revenue target. So what exactly would lead to see that your stated $3 billion and overall?

So, I think there are several factors to that, one is obviously the growth in the emerging markets which is quite significant and all those initiatives whether its, the 4% of OTC in Russia or whether its the high growth that is seen in that market or whether its India, in terms of all the initiative that we have taken, so one is catalog of the growth. The being one obviously will be the United States, right. So, with the limited competition products and also some of the opportunities that we have in the next say couple of years, we feel very confident, that we could get to the target like we’ve also said in the past. So, it’s something that we are looking at the target at $3 million, but it could a little bit here and there, but obviously there is tremendous growth opportunity and we feel quite comfortable to the figure right now. Ranvir Singh – Brics Securities: Okay. Yeah. Thanks a lot. That’s it from my side.

Thank you, Mr. Singh. Our next question is from the line of Neelkanth Mishra of Credit Suisse. Please go ahead. Neelkanth Mishra – Credit Suisse: Yeah. Hi. Follow up on that $3 million question. So now that Nexium is likely to be 2014 opportunity and is it -- does it significantly impact your target for FY ‘13?

That’s why we’ve not totally taken it on granular detail... Neelkanth Mishra – Credit Suisse: Okay.

Working by product-by-product and I believe that way. Neelkanth Mishra – Credit Suisse: Okay.

We’re just looking at overall growth opportunities in each one of these, the new product launches and cumulatively and also there will be a little bit of a gap, which will obviously fill through certain business development efforts and things like that. So, I can’t specifically say that you know. Neelkanth Mishra – Credit Suisse: Okay.

On that point, yeah. Neelkanth Mishra – Credit Suisse: Okay. I was just trying to be cute. The second is on Lipitor, actually what happens if, we’ve been very curious to find out what will happen if Ranbaxy’s AIP doesn’t get resolved, because its just been announced that Mylan has also settled on Lipitor with Pfizer. You haven’t settled yet, right?

No. We have not settled on Lipitor with anyone. Neelkanth Mishra – Credit Suisse: And, yeah, but so in case, Ranbaxy’s AIP issue does not get resolved, so what happens to the exclusivity, could you throw some light on that?

I mean you can’t, that’s very fluid, your guess will be as good as ours on Lipitor. So, I think, it’s better that we, I think it’s very fluid they way things are, there are too many moving parts to that equation now. Neelkanth Mishra – Credit Suisse: Okay. Okay. Thank you.

Thank you, Mr. Mishra. Our next question is from the line of Arvind Bothra of Bank of America. Please go ahead. Arvind Bothra – Bank of America: Hi. I’m not sure if I missed it earlier, but just wanted to get little bit more color on the GSK alliance, what kind of revenue visibility do we have, when can we expect some color, how that is going to shape up?

Not, not much to report, right now, Arvind, because what’s happening is GSK, all we have said is that you know that number of dossiers filed, it’s already about close to more than 100 now. But in terms of anything meaningful to report on sales, you probably have to give it some more time because all we said in emerging markets we are in the branded space. It takes time for the brand to build up. It normally takes about a couple of years before you see the peak sales. So, I guess, you should just hang on to some more time because you really see something meaningful in terms of numbers. Arvind Bothra – Bank of America: Maybe towards end of fiscal ‘12 is when we can see some separate numbers from that front?

Hopefully, that’s why I said, it all depends on the number of launches and the kind of markets in which they get launched. So, I mean, I would still hang on probably, year-and-a-half or so at least. Arvind Bothra – Bank of America: Okay. Fair enough. Thanks so much.

Thank you, Mr. Bothra. Our next question is from the line of [Alok Barnwal] of Deutsche Bank. Please go ahead. Abhay Shanbhag – Deutsche Bank: Yeah. Hi. This is Abhay here. Just taking up on that earlier question, typically we generally see I think the first month of launch of a generic launch three to four months of sales generally dumped on to the distribution chain and sales are recorded. But in your case you say that the pickup is a bit slower. So is there any difference that you have done now as compared to what you use to do in the past?

No difference are there, I think what’s happened is that we are also seeing action whether trade is fairly full before once the generic is enters and it’s difficult to capture share on that. There is no change in any practices, I just think this is the market dynamics which is evolving. Abhay Shanbhag – Deutsche Bank: Okay. So even for future now, typically in the first one or two months we may not see too much of a revenue booking happening from all generic companies. So would that be a change, we should take it forward, going forward for all companies?

I think on 12 months basis, it should equate. Abhay Shanbhag – Deutsche Bank: Okay.

So, it depends on when you start it, but over a 12 month period, it should begin to equate out. Abhay Shanbhag – Deutsche Bank: Okay. But typically we generally see companies getting a bit more aggressive in the first few weeks, which you’re announcing is not the case now?

I want to make a distinction here Abhay. Abhay Shanbhag – Deutsche Bank: Yeah.

If you see products for which there’s already generic competition... Abhay Shanbhag – Deutsche Bank: Okay.

… time to gain market share is longer but if you are the first entrant. Abhay Shanbhag – Deutsche Bank: Yeah.

It’s relatively easier to get it. So depending on the product, this dynamic will play out. Abhay Shanbhag – Deutsche Bank: Okay. The second thing you also have on the OTC cost, you did mention that $9 million is one-time thing. Typically, the belief that we have is that if OTC marketing cost will be more recurring in nature and that can give the Rx where there is a lot of sampling, free samples and all that which is done. So, are there, can you just describe why this maybe a bit more one-time cost because it seems to be a very large amount, a large part of it seems to be on that side?

So, Abhay, what’s going to happen is this OTC is not like a new thing that we started right, so it’s not a new launch products or not like a new thing that is there. Lets see in the past the products that we took through this route was lot of activity more at the retail levels, you know so its more like products, I mean you can call it like a junction products right, so moving from prescription into OTC kind of a thing. What we are talking about now is because we see there is a huge potential for growth in this space we are more going through the classic route. Yeah, obviously advertising and those kinds of things that are being done. So, these are not done throughout the year, right. There will be campaigns carried out at different points of time. Cetrine for example is a seasonal product, right. So at the allergy season you would do this kind of a spend. So that’s why we are saying that this is not something which is going to recur every year, but this is a initiative that we have taken, you know to ramp up the OTC sales, but you should see more in terms on that light and looking at it as a completely new activity, which requires huge amounts of spends, et cetera. Abhay Shanbhag – Deutsche Bank: So, what you think is the ramp up will be all free of time, all of the advertisement has been more upfront and which is more would be seasonal in nature, so to that extend it may not recur?

That’s right.

Yeah.

And also in the beginning of the product life cycle for an OTC product advertising tends to be a lot higher and once the brand image is created it tends to dip a bit. Abhay Shanbhag – Deutsche Bank: Okay. And is this largely on the Russian side or have you started spending something on the Allegra OTC also?

No. This is all Russia. Abhay Shanbhag – Deutsche Bank: Okay. Fine. Thank you. Thank you.

Thank you, Mr. Barnwal. Our next question is from the line of Chirag Dagli of ICICI Securities. Please go ahead. Chirag Dagli – ICICI Securities: Yeah.

Rochelle?

Yeah, sir.

This would be, we will take one more question after this, so you might want to just announce that to them. And we will take this question and then another question after that.

Sure, sir. Actually the participants have already heard you in the call.

Okay. Thank you.

You’re welcome. Please go ahead, Mr. Dagli. Chirag Dagli – ICICI Securities: So, thank you for taking my questions. Just wanted to understand in detail your gross margins, they seem to be fairly robust this quarter, 55 odd percent. Is this the kind of number that you think we should model for the years coming forward given that you will have fairly good U.S. business from the niche products, et cetera?

I think, we don’t guide on margins, but in a quarter where you had a significant number of launches, margins tend to be higher. So, if you look at the historical average, it’s generally in the range of 55% to 60%. If you look at an average when we’re launching new products, it generally moves from 60% to 65%. So, depending on the new product launch activity in the quarter, I think the margins fluctuate. Chirag Dagli – ICICI Securities: Is there an element of foreign exchange on the inventory in this or?

No. Because there has not a substantial movement in foreign exchange for the quarter. Chirag Dagli – ICICI Securities: So, that would have been adverse I would imagine. So, okay, that explains. Thank you so much.

Thank you, Mr. Dagli. Our last question is from the line of Alok Dalal of MF Global. Please go ahead. Alok Dalal – MF Global: Yeah. Thanks for taking my questions. Sir, any tax guidance for FY’12?

No. We haven’t given a tax guidance as yet for FY’12. Alok Dalal – MF Global: Okay. And would you be looking at a similar CapEx spend sort of around 400 crores for FY’12 as well?

Yeah. We do expect that our CapEx spend for the next year will be similar to the current year. Alok Dalal – MF Global: Okay. And could you share what is your contribution of OTC business for U.S. sales about?

We can send that data to you. We don’t have it readily with us right now. Alok Dalal – MF Global: Okay. Thank you so much.

Thank you.

Thank you, Mr. Dalal. Ladies and gentlemen due to time constraints that was the last question. I’ll now hand the conference over to the management to add closing comments.

We thank you all for joining Dr. Reddys management on this earnings call. Request to get in touch with IR desk for any pending queries. Thank you.

Thank you members of the management team. Ladies and gentlemen, on behalf of Dr. Reddy’s laboratories that concludes this conference call. Thank you for joining us on the Chorus Call Conferencing Services and you may now disconnect your lines. Thank you.