Dr. Reddy's Laboratories Limited (RDY) Q4 2011 Earnings Report, Transcript and Summary

Kallam Reddy - Managing Director, Chief Operating Officer, Executive Director, Member of the Management Council, Chairman of Management Committee, Member of Shareholders Grievance Committee, Member of Investment Committee and Member of Strategy Committee Umang Vohra - Chief Financial Officer, Chief Compliance Officer, Senior Vice President and Member of the Management Council Kedar Upadhye - Director G. Prasad - Executive Vice Chairman, Chief Executive Officer, Member of Management Council, Chairman of Investment Committee, Member of Strategy Committee, Member of Shareholders Grievance Committee and Member of Management Committee

Krishnendu Saha Bino Pathiparampil - IIFL Research Jorge Mauro Sonal Gupta - UBS Investment Bank Nitin Agarwal Ranjit Kapadia Krishna Kiran Nitin Agarwal - IDFC Securities Ltd. Rahul Sharma Chirag Talati Sameer Baisiwala - Morgan Stanley Prakash Agarwal - RBS Research Saion Mukherjee - Nomura Securities Co. Ltd. Kesvinder Singh Suri Girish Bakhru - HSBC Hitesh Mahida - Marwadi Shares Anubhav Aggarwal - Crédit Suisse AG Unknown Analyst - Abhay Shanbhag - Deutsche Bank AG Nimish Mehta

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Ltd. Q4 FY '11 Earnings Conference Call. [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. Thank you, and over to you, sir.

Thank you, Melissa. Good morning and good evening to all the participants, and welcome to Dr. Reddy's earnings conference call for the fourth quarter and full year ended March 31, 2011. 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 the 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 G. V. Prasad, our Chief Executive Officer; Satish Reddy, our Chief Operating Officer; and Umang Vohra, our Chief Financial Officer. 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 would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and webcast. I would now like to turn the call over to Umang Vohra.

Thank you, Kedar. Good morning and good evening to everyone. I welcome you all on this call today. I will discuss the key financial highlights. And for the purpose of these financial highlights, all the figures referred to in this session are translated to U.S. dollars at a convenience rate of Rs. 44.54 per U.S. dollar. The financial highlights of our performance are as follows: Consolidated revenues for the full year 2011 at USD $1.68 billion and represent the year-on-year growth of 6%. Revenues for the fourth quarter are at $453 million and represent the year-on-year growth of 23% and a sequential quarter growth of 6%. Revenues from our Global Generics business stand at $1.2 billion for the year, representing a year-on-year growth of 10%. Revenues from the Pharmaceutical Services & Active Ingredients segment, which we will refer to during this call PSAI, at $441 million for the year, represent a decline of 4% over the previous year. Gross profit margin for the year is at 54% versus 52% in the previous year. This improvement is due to a favorable mix of high-margin products launched in the U.S. Gross margins for the Global Generics segment is at 65% versus 60% in the previous year in line with higher contribution from our U.S. business. In the PSAI segment, gross margin is at 26% versus 33% in the previous year, largely due to price erosion of the portfolio of existing products and a de-growth in our CPS business segment. SG&A expenses, including amortization for the year, are at $532 million, an increase by 5% over the previous year. This increase is largely attributed to legal expenses in the U.S., OTC-related marketing spend in Russia and CIS and new field force related expenditure in India. We are also seeing a benefit of lower salaries and employee-related spend, both the restructuring in betapharm that we carried out last year. In our quarter 3 earnings call, we had mentioned about certain onetime expenses in that quarter. Correspondingly, SG&A expenses for the fourth quarter are at $138 million and represents a sequential decline of $6 million from the previous quarter, which is quarter 3. R&D at $114 million for the year is at 7% of sales versus 5% of sales in the previous year. R&D for the quarter at $33 million is sequentially higher by $4 million over the previous quarter. This increase is on account of planned scale up of R&D activities during the fourth quarter. Cumulatively, absolute R&D expenditures has increased by 33% this year. During this quarter, we had some accounting and nonoperating benefits, which we have excluded when reporting our adjusted facts, and I shall cover that later. In terms of what we have excluded, we have excluded the profit from the sale of land, which resulted in a profit of approximately $7 million. In addition, as part of the purchase price allocation accounting under IFRS for the acquisition of Gemstone, the GSK penicillin facility, we recorded an amount of $1.6 million towards negative goodwill, which has been classified as other income. Adjusted EBITDA is at $369 million for the year which is 22% of sales. Adjusted EBITDA for this quarter is at $106 million and register a growth of 34% over previous year. The annual effective tax rate for the year is at 11%. As we have been communicating throughout the year, this decline in tax reflects the benefit of higher weighted deduction on R&D expenditure granted in the Union Budget of 2010. Adjusted profit after tax for the year at $242 million is 14% of sales and grew by 17%. Adjusted profit after tax for the quarter is at $69 million and represents an increase of 57% over the previous year. Key balance sheet highlights are as follows: Our operating working capital increased by $206 million from the previous year. The increase in inventories is largely on account of anticipation of new launches in the next 3 to 6 months. We have also been increasing the proportion of fee shipments to optimize on the freight cost, and this has caused an increase in transit cost. Increase in receivables is also related to the last base effect of the current quarter sales both in emerging markets, as well as the U.S. Capital expenditure for the year is at $198 million. Foreign currency cash flows hedge options for the next 18 months stand at $345 million as of date, hedged largely in the range of Rs. 45 to Rs. 47 a dollar. In addition to these, we have approximately $215 million of on balance sheet hedges of receivables. Our current net debt is at $401 million and net debt to equity is at 0.39. The increase in net debt from the previous quarter is largely due to the issue of bonus debentures made in the quarter and funding for the acquisitions and collaborations of GSK's penicillin facility and Valeant's Cloderm planned acquisitions that we made in the U.S. Both these acquisitions and the collaboration, we paid approximately $60 million. With this, I'll now hand over the call to Satish.

Thank you, Umang. Hello to everybody. I will now cover the business highlights. For this section, analysis is based on performance in respective local currencies. So in fiscal 2011, we had a modest sales growth. The contribution from our emerging markets and North America helped offset the decline in Europe. Let me begin with the highlights of each of our focus markets, starting with North America Generics. The revenue for the year was $417 million, grew by 18% over the previous year. Revenues we had $131 million for the fourth quarter and registered sequential growth of 20%. This demonstrates the fifth consecutive quarter of sequential growth. During the last quarter, we launched 3 new products and we did -- the total number of new launches for the year is at 11. Market share for most of our products continue to hold steady or increase at times ahead of what the IMS trailing indicator suggests. As you're aware, in the month of January an earlier preliminary injunction on Fexo-Pseudo 24 hours strength was lifted. This allowed us to launch the product under exclusivity period, and this limited period launch contributed reasonably to our growth in the fourth quarter prior to the Fexofenadine molecule franchise switching from prescription to OTC. We are still in litigation with the innovator on the one poster [ph] in the court and also expect to monetize the value from Fexofenadine molecule family through our private label OTC business. In fact, our Fexofenadine immediate release OTC product has already been approved and launched in April, the first such launch in the market. During the year, we have filed 20 ANDAs. And cumulatively, we have 75 ANDAs pending approval with the U.S. FDA, of which 37 are Para IVs and 10 are first to files. Now moving on to India. Revenues for the year are at $257 million or 11 thousand 690 million rupees [Rs. 1,169 crs], with year-on-year growth of 15% out of which, volume growth contributed 11% and new products contributed 4%. For the quarter, revenues are at $61 million or 275.2 million rupees, representing a growth of 5% over the previous year. This includes adjustments on account of net recognition of revenues and certain pricing actions that were taken in the portfolio without which the growth would have been 10% for the quarter, for the first quarter and 16% for the full year. We're not really satisfied with these numbers, especially for the fourth quarter. However, we think Q4 performance is just an aberration and Q4 is generally weak for us, and we have also seen the amount of bonus offers being higher in this particular quarter by some of our competitors, especially on the Q2 portfolio of products. On a full year basis, our reported growth continues to be in line with the market growth of 15% as for the ORG IMS data for MAT March 2011. During the year in India, we also launched 48 products, including one biosimilar, Darbepoetin alfa. In this week, we also announced the launch of PEG Grafeel, which is a trademark for our brand of pegfilgrastim. With this, we now have 4 products in our biosimilars portfolio in India, representing approximately 5% of our India sales. Now moving on to Russia. Revenues are at $196 million, recording a year-on-year growth of 29%. Revenues for the quarter at $48 million represents 39% growth over the previous year. This momentum for full year is on the back of the contribution from new launches and volume increase of 32%, partially offset the marginal price decline. Our growth of 19% as per Pharmexpert secondary sales data for MAT March 2011 is higher than industry growth of 7.5%. Our rank in Russia currently stands at 15 and you have noticed that we have been outperforming the industry growth for the last several years. During the year, we launched 7 new products, most of which were in-license and in the OTC space. Our OTC space are approximately 25% of our oral product portfolio and continue to grow steadily in line with our strategic intent. Talking about Europe Generics, revenues at EUR 140 million declined by 13% over the previous year. The 41% growth in the rest of Europe was more than offset by the de-growth in Germany. Revenues in Germany for the year at EUR 91 million declined by 17%, largely due to the tender-based price compression. However, the measure that was taken in the previous year to restructure the betapharm organization has led to significantly improving the operational cash flows. In the recent tender which was awarded by AOK, we are quite pleased with our performance. We have won the bid in 12 products across 74 lots and most of the molecules won by us are manufactured out of India. While the prices are lower for this tender, we believe that this win will help us strengthen our market presence in Germany. We expect the tender price to start in this current quarter in June 2011. Talking about the PSAI business, revenues for PSAI business for the year have remained flat over the previous year at $431 million. For the quarter, year-on-year growth of 14% and sequential growth of 10%, largely led by new launches in the Active Ingredients business. For the year, the Active Ingredients business grew modestly on the back of some new launches that was offset by pricing pressures in existing base business. Revenues from the Pharmaceutical Services segment declined sharply due to lower customer orders during the year. This can be partly attributed to optimization of investments by some of our customers in the large pharma and biotech space. During this year, we have filed 56 DMFs globally, including 19 in North America, 7 in Europe and 30 in the rest of the world markets. With this, the cumulative filings stand at 486 globally. I'll now hand over to Prasad for his comments.

. Thank you, Satish. Once again, I thank you all for joining this call today. Fiscal 2011 was a mixed year for us. We focused on consolidating 7 of our initiatives, aimed at revenue growth and productivity of capital and resources. While we are not fully satisfied with our performance, we certainly gained traction towards realizing our strategic goals. We recorded full year revenues of about $1.68 billion and an RoCE of 17.5%. The RoCE calculation excludes onetime benefits of the profits from sale of land and negative goodwill accrued in one of our acquisitions. The pharmacy is slightly below the lower end of our guidance range due to deferral of some high-value launches in the U.S. business, sluggishness in the PSAI segment and other performance by the India business in the fourth quarter. On this backdrop, we look forward to the next 2 years, as years of significant scale for us in terms of the number of launches, units to be manufactured and sold, revenue stretched and customer facing activities in the markets. We have enlisted significant resources to face the execution challenges associated with the scale-up, and we hope to be well positioned to realize the growth. The outlook for FY '12 is positive. We expect the largest increment of growth to be contributed by our U.S. Generics business from the various high-value opportunities such as olanzapine 20 mg exclusivity; Fondaparinux launch; Fexofenadine OTC franchise; and new customer orders, orders at our Shreveport facility; and new launches from the penicillin facility that we recently acquired from GSK. We also expect continued momentum and above industry performance from our emerging market geographies. The PSAI segment's performance will largely be driven by the Active Ingredients business. The order book stated that improved considerably in the last few months of the end of business. These growth drivers give us the conviction on the strength of our fiscal FY '12 performance. And I have communicated in one of our earnings calls earlier, to some extent, our performance is contingent on regulatory approvals and litigation outcomes, which are sometimes subject to uncertainty and also to variability. In view of this, we prefer not to provide any yearly guidance. We believe we are on track to achieve our FY '13 aspiration on RoCE. On the revenue front, for FY '13, our visibility of the best case forecast, suggest a roll-up of approximately $2.7 billion. To support this growth, we have invested significantly in fixed assets and we continue to de-bottleneck our manufacturing facilities. We plan to increase annual capacity of our formulation facilities in India from 16 billion units at the end of last year to around 23 billion units by FY '13. We also have been investing in our Shreveport facility with the objective of simplifying the supply chain complexities in U.S. In our Proprietary Products segment, we see good progress in the portfolio. We recently launched our fourth biosimilar in India, PEG Grafeel, and our multi-product facility gives us the flexibility to scale up according to real-time market requirements. The current capacity and the new cell culture manufacturing facility when commissioned, later this year, will meet all our emerging market requirements through 2015. In the U.S. branded space, as you're aware, we have a portfolio of 3 small products. The recent collaboration with Valeant to market a product called Cloderm will bolster ongoing efforts to build a successful prescription branded portfolio. And this year, we have initiated the Phase III studies, one of our lead dermatology programs, for onychomycosis. And we also continue to build the data to support our CETP inhibitor, DRL 17822, and we are going to initiate a Phase II study shortly. The outcomes of our efforts in business development and enhancing activities were quite productive this year, with summary of some of the transactions as follows: In Russia and other CIS markets, we have entered into various in-licensing deals, largely for expansion of our OTC portfolio. This has helped us strengthen our market presence in the OTC business. In the dermatology space, I've mentioned earlier, our collaboration with Valeant will help us build up the franchise. In U.S., the acquisition of GSK penicillin facility filled an important gap in our portfolio in the antibacterial market to a certain extent. Earlier this year, we have purchased the stake of our partner in the South African joint venture and converted it into a wholly-owned subsidiary. South Africa is an important market for us, and we plan to increase our presence here, especially in the areas of CNS, oncology and women's health. With this, I would like to end here. And thank you all for your attention. And now we can take questions from the participants.

[Operator Instructions] We have the first question from the line of Anubhav Aggarwal from Crédit Suisse. Anubhav Aggarwal - Crédit Suisse AG: One question on Allegra D24, is there any inventory which is remaining in that channel for which you may have to take adjustment next quarter or everything has been -- when sanofi launched you have taken back remaining inventory?

Almost all of the inventory is liquidated. We do not have any significant inventory that will have any effect on the next quarter. Anubhav Aggarwal - Crédit Suisse AG: Okay. Just another question on Allegra itself, after the family has switched to OTC -- has done the OTC transition, what has been the drop in the market size for the entire family after you and Perrigo launched also?

It's too early to give you some numbers. There are no numbers out as yet, but we're tracking this and we could provide these numbers to you later. But I think they could be expected to be about 25% to 30% decline. Anubhav Aggarwal - Crédit Suisse AG: Okay, that's great. And if I just can ask one last question, your gross margin declined sequentially despite strong sales for Allegra D24 this quarter. Any particular reason there?

The mix may have played an issue. I think the Russia sales were very high for the season for Russia in quarter 3. That may have been the reason why that you're seeing a sequential decline. Anubhav Aggarwal - Crédit Suisse AG: Nothing beyond that, so it was just lower India sales and slightly weaker Russian sales. Okay.

[Operator Instructions]

[Operator Instructions] The next question is from the line of Bino Pathiparampil from IIFL Capital.

I'm just wondering if you have started recognizing any revenue from the penicillin facility in U.S..

We've done some billings in April, but bulk of our revenue was expected around September or October of this year.

Okay, so there's nothing in the reported numbers now?

Nothing in these reported numbers.

Okay. Also, can I get an update on Fonda? We have been waiting for several quarters now.

We've been -- so we are still awaiting the FDA's decision on Fondaparinux. We believe we have submitted all the data that was required and we are awaiting decision by the FDA. So there's no change in status in terms of the approval status and what we know.

Right. When was the last interaction?

I mean, this happens on a weekly basis, but nothing significant has been informed to us as of now.

Right, right, right. Okay, I'll jump back to queue.

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

Just one question, are you likely to launch the ziprasidone or Geodon under 180-days exclusivity this year?

We cannot comment on that. I'm sorry, we cannot give you product-related and futuristic comments.

Do you have the 180-day exclusivity, if that much can you confirm?

I'm sorry, we cannot confirm that too.

Okay, so I'll jump back in queue.

The next question is from the line of Hitesh Mahida from Marwadi Shares & Finance.

Congratulations for a good set of numbers. Just wanted to know historically we have grown in the higher teens as far as the domestic market is concerned. So what was the reason for such a low growth during the quarter? And I wanted to know our market share as far as Tacrolimus, Lansoprazole and Fexofenadine is concerned?

So I'll maybe explain the India-related growth. What we have seen in quarter 4 is definitely a lower growth compared to where we were 9 months. We were growing at about 18%, and this quarter has been at 5%. Without the exceptions that Satish had pointed out, we think we would have grown to about 10% and so the exceptions relate to pricing pressure and price actions taking on some of our portfolio products. Volume growth still remains for us a little -- stronger than the 5% that we have reported. It's also our understanding that this quarter has been slower for other companies as well.

Hitesh, on the question of market shares, the IMS reported market share for Tacrolimus is about 28% of the generic space, Lansoprazole is about 9%. You wanted some more products?

For Fexofenadine?

Fexofenadine is about 35%, plain Fexofenadine is about 35%.

That was a prescription product.

Yes, this is the prescription, Rx product.

The next question is from the line of Nitin Agarwal from IDFC Securities.

My question is on SG&A costs, the base that we're running with in Q4, is it like a base we should assume as a recurring base, or there are some sort of one-offs even in the base for the quarter?

I think this could be a good base to consider. You'd have to take inflation into account going forward, because salary increments, et cetera, would be necessitated in the quarter that we have right now.

Because considering the fact that our top line grew about 6%, 7%, and so the increase in SG&A seems to be little on the higher side, given the fact that we've had a lot of focus on controlling costs in this area over the last few years.

Yes, I think what's also happening is that our OTC expenditure for the Russia diversification into OTC is there, that includes the advertising on TV, et cetera. That expenditure comes a little before you begin to see commensurate revenues. And I think that is -- this year has been pretty intensive in Russia on account of that, in which we had also pointed out in quarter 3.

That and also our investments in India...

Field force.

Field force expansion which hasn't been productive yet because of the lead time, and also preparing for all the growth and launches in the next 2 years has increased our SG&A.

Okay. Secondly, on this penicillin business you've bought from GSK, what, I mean, exactly the strategic rationale behind really acquisition of the business?

So we acquired their brands and NDAs for the U.S. These are declining brands because they are already being genericized. Our plan is to launch authorized generics of all the brands that they have registrations and take a significant portion of the market share for these products as a generic, and thus increase the capacity utilization of this facility.

What is the size of the opportunity that you're going to be targeting in terms of these authorized generic launches?

I don't want to share that level of details.

The next question is from the line of Abhay Shanbhag from Deutsche Equities.

So regarding the India market price actions that you indicated, we haven't heard of any other company do it. So is it only some discounts in the market for a particular quarter? Or is that price action going to continue for a longer period of time?

No, so I think we indicated price actions not only on what we've taken, but also what some of our competitors would have taken for the products that we sell. It was a composite of both, Abhay. The second thing is we don't give any bonus offers. As a practice, we don't do that because we believe it harms the market, as well as influences the choice that patients could be compromised with. We have seen the bonus offers from other companies in this quarter have been higher.

Okay. So going forward, we would expect our growth to turn back to market levels of 15%, 18% in the near term?

That's our expectation because we were nine months at a growth rate of 18%.

Okay. Next one, on Allegra, you did indicate a 25% to 30% revenue fall to the market going to OTC. Is it entirely driven by prices, or is generally -- generally, volumes for that product with OTC?

Fexo plain, it is our understanding that Fexo plain volume should not drop. The market may compress a bit because of the pricing being a little lower. I would also add that the innovator is doing a lot on the OTC space as well, and that hopefully should benefit the generic companies.

One last thing on that $60 million you talked about on acquisitions. This was for GSK, and which was the other one?

This was for the Cloderm and the GSK.

The next question is from the line of Girish Bakhru from HSBC.

Yes, I was wondering if you can give more color on the 20 planned products in the U.S. in FY '12, if you have some idea on your qualitative limited composition products.

We can't give you any product-specific information, but I think it would be fair to assume that our filings, going forward, and from what we have been doing in the last two years, do have a mix -- a good mix of limited composition opportunities.

Right. And my second question was on the broad initiatives in the non-tender market in the German region, if we can get some sense on that if there would be potential declines of growth, where would that come from?

It'd be too early, I think, to talk about in the growth vehicles. We had just started on those, so I think once we gain some traction, we can start talking about it.

The next question is from the line of Anubhav Aggarwal from Credit Suisse. Anubhav Aggarwal - Crédit Suisse AG: So your receivable days have gone up sequentially, which geographic would they correspond to?

Largely, the U.S. Also, our API business has done particularly well in quarter four, and as a result of that, the overall base of the business has moved from about 1,800 crores to 2,000 crores in this quarter. Almost all of that would be as the reason for receivables increase. Anubhav Aggarwal - Crédit Suisse AG: Okay. And these intangibles, which have increased $50 million, all attributable to the $60 million you spent for the Clorderm and GSK penicillin?

That would be right. Anubhav Aggarwal - Crédit Suisse AG: Okay. Just last question on this, on the AOK [Allgemeine Ortskrankenkasse] contract, the incremental -- because most of the molecules in this contract were from the third contract, so the incremental price erosion, can you just give us an idea, would it be more than 20% or less than 20%?

That's too much information. We don't want to share that at this time.

The next question is from the line of Sonal Gupta from UBS Securities.

Thanks for taking my question. One was on Cloderm, what is the sort of current size of your U.S. Proprietary Products business, and what's the sales force that you have there right now?

So the current revenue is around about $11 million, $12 million. The sales force is about 40-plus people, 44, 45, and Cloderm which would add another $10 million to this.

Okay. And could you also tell me what is your sales force in India? And how much you're...

4,000 plus, Sonal.

And how much of your...

The sales force and the managerial staff included, it's about 4,000 plus.

Sales force, alone would be 4,000.

Sales force would be around 3,800.

And how much have you added this year?

We have added about 400 people in quarter three.

You should also mention that there are maybe contract also included in this.

Yes, yes, so this includes people on the contractual roles, Sonal.

Okay. And I'll get back in the queue.

The next question is a follow-up from the line of Sameer Baisiwala from Morgan Stanley.

Just wanted to be sure that I heard it correct. Our target for fiscal '13 sales has now been cut down from $3 billion to $2.7 billion?

So we are not saying that the target has been cut down. We said that our current forecast adds up to about $2.7 billion based on the projections we made internally. So we're still working towards the $3 billion.

Okay. I just wanted to -- I'm not quite sure I fully understood, why are we not giving any guidance for fiscal '12?

Well, the thing is that most of our growth is going to come from the North American region. This is subject to regulatory approvals, legal outcomes and all of that. So we're moving away from giving this kind of level of granular guidance, because it results in guessing what's going to happen on the regulatory front, and that's something we don't want to do.

Would that same not hold true for fiscal '13?

No. We are giving multi-year guidance based on certain assumptions. So the $2.7 billion is what we believe that we have good visibility in terms of our growth. But we're moving away from year-to-year guidance.

Okay. And just one final question. Umang, you want to maybe explain why receivables have gone up? But if I just do some ballpark number on a full-year change in sales, it's about 440 crores, I don't know the full-year number, and that yearly change in the receivables is 560 crores. So basically, the delta in the receivables is far more than delta in sales. So I'm not quite sure whether just fourth quarter, U.S. inventory build, U.S. sales or API sales could have led to this kind of increase in receivables, is there something more to it?

No. So let me explain that. Most of the increase that you've seen in terms of absolute sales is quarter four. So you've suddenly seen a jump from 1,800 crores to 2,000 crores between the two sequential quarters. And growth for the full year before this quarter increase was only about 3-odd percent. And after this quarter increase, it shown that the growth has gone up by 6% on a full-year basis. So even if you did our average DSO at the company level, it's about 80 to 90 days. You add that, almost all of the increase that happened in quarter four should logically be completely in receivables, that's one. Second, the late launch of Fexo-Pseudo almost entirely added to it. So API, Fexo-Pseudo, and the increases there have added to it. Also, the Russian season finished in quarter 3, and some of those receivables, they are probably still outstanding.

Okay. So which means that this should unwind in the next quarter, and going forward, because there's few of these reasons would...

That's right.

The next question is from the line of Hash Mehta [ph] from Manav Consultancy [ph].

And just wanted to check on this Fexofenadine plus Pseudoephedrine, what is the value of this product in the total sales per quarter and on the profit?

Hash [ph], we don't disclose product-specific revenue and profit numbers.

Fine, and can we expect that to continue next quarter?

[indiscernible] or the product?

The product.

The product, Okay. So as we explain, this product has converted from Rx to OTC. There is a switch which has happened for this product. And all of our inventory in U.S. has been liquidated. So we don't expect the RX version of this product to continue in subsequent quarters. But we do expect for approval of the OTC from the coming quarter.

So this exclusivity value may not come again, something like that?

Yes.

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

Actually, I have two questions. First on FY ’13 number of $2.7 billion, what would be the, let's say, the top two or three risks that you see to achieving this number, because that’s a very steep ramp up from the current levels?

So if you look at the rest, I think we have addressed whatever risks we do not control like manufacturing, the capacities, the supply chain, all of those. The risks which are not in our control like approval delays, some legal--certain legal outcomes, these are things which could affect the number.

Okay. I mean, so it feels that it's largely -- in particular, largely related to the U.S. market, will that be a...

Yes, the major growth is coming from the U.S. market and that's why, yes.

I remember that you mentioned, I think 1/3 of your revenues is from North America, so it's like $900 million is what approximately you're aiming at in North America in the next few years?

Yes.

Okay. And the second question is slightly on a longer-term basis, because -- if you can help us understand the trajectory on R&D investment, CapEx, because we have seen a very high level of CapEx than what we anticipated. So if you can take us through the thought process, how the company is preparing itself forward beyond FY '13, and anything on the M&A front that excites you at this point, even just an update of your investment trajectory over the next two to five years.

So if you look at capital investments, they're happening in multiple areas. We are building it in SEZ, which has both the API component to it, as well as a finished dosage component to it. And that's a significant investment. We are also adding capacities in some of our existing plants, and creating additional capacities for the products in production already. Then we are building a biologic facility, which will address the scale up, as well as manufacture of clinical trial batches for regulated markets. And apart from this, we are looking at small-sized acquisitions that you saw a couple of them last year. We're not looking at anything major right now. But besides that you saw, $30 million, $50 million range, things which will help us deepen our presence in key markets, is something we are looking at on an ongoing basis. Beyond that, it will be hard for me to give you more color on M&A or anything else.

So basically, this CapEx that you would be doing next two years, it will be primarily for meeting the requirements in beyond FY '13, or do meet this CapEx...

Yes. Some of them even go beyond FY '13. They go to FY '15, '16 also. So it's not only FY '13, but even for growth beyond that that's creating capacities as well as capabilities.

So will it be fair to assume like in FY '13 also, we would see a $800 million, $900 million gross kind of CapEx number?

FY '12 we'll see but FY '13, maybe not at that level.

The next question is from the line of Ranjit Kapadia from Centrum Broking.

My question is related to supply deal with GSK, if you can give some update on that. And the second is outlook for the domestic market. Obviously, so this quarter, with the quarter, there was some aberration was there. So going further, obviously, the domestic market.

So I think the worthy answer on the domestic market by just to say that it is an aberration, and we expect it to revise in the first quarter, right, so that's all the domestic market. Now as far as GSK alliance is concerned of, we have registered quite a few products through Valeant, right, on the same toward this topic, but still some of those quick wins that's what you see in the market right now. But the other one, especially when we launch -- when Glaxo launches in the larger markets like Mexico, Turkey, Brazil, in those kind of big markets. And then if you give it a year after that, that's when you'll see more substantial sales.

And are you expecting anything in this year, or next year from GSK supply? Any revenues that are expected?

Small revenue.

We have small revenues already. But all I'm saying is in terms of something meaningful addition to the revenues, I'll say, give it a little bit more time than that, maybe a year and half, two years.

And if I continue, can say that something would come in substantial?

It depends on what you call substantial. It certainly be in the tens of millions range.

Okay. And if can you give us some update on the balaglitazone, anything new to share?

There's no new information.

The next question is from the line of from Krishnendu Saha from Quantum Asset Management.

This is my question. Just one question on the R&D side, how do you see that going ahead in the sense that it's increasing, so are the R&D expenditures more for innovative and biological products, and that's one, so number two is, do you see a 10%, 15% growth in that going ahead?

So, there is an all around increase in R&D, not just Proprietary Products or biologics. There's been a significant amount of ramp up in the Global Generics itself, and there is some external R&D work that they're doing and for the Generics business, for some niche products, and then there is some element of investment in clinical development of differentiated formulations as well as NCEs. Biologics have gone up, but not that significantly.

FY '12, '13 and on, do I see a -- because you have one, turning into Phase II and Phase III and the biologics...

We are calibrating our investment into risky R&D based on the portfolio. We are backing some significant flagship assets. Other assets, we are partnering, so it's not a safe forward, and [ph] good ramp up.

Okay. I think we can expect the same kind percentage of R&D expenditure going ahead?

It vary be a point here and there, but in this magnitude.

The next question is from the line of Prakash Agarwal from RBS.

My first question is on the PSAI segment. We saw good growth for the fourth quarter, but just wanted to have a sense in terms of, is this a growth rate we could expect for next year as well, taking fourth quarter as a base?

There are two components to this, right? So one is on the API side of the business. So here again, there are current launches that take place, and as the customers becomes those large quantities. That's when you see the sales start spiking up. So it is critical to say quarter-on-quarter what would be the growth rate, and you know how you can maintain it. That's one component. The second one is the silica [ph] side of the business, which is the one which did not perform well for the last year, and that's something based on the number of new projects and the new business that we've built with customers that we're start seeing more gradual ramp up in sales, right? So we can't specifically take the Q4 as the base for that growth rate.

And the mix of API's 2/3 of the PSAI or 1/3?

More than 2/3.

Okay. And the growth was largely led than the European markets while we saw -- I mean the U.S. patron expiries are expected in the U.S. market. So is there any specific one-off that just happened in the U.S. -- in the Europe market? Or do we see an all around improvement in various markets for the API?

It's because of everything, Prakash.

Right. And next question on the tax rates, I mean you said there's been -- I mean, because of budget thing, we've got lower tax rate of 11%, but R&D would continue for next year, and do we see a similar tax rate going forward, or because of the matter, you would see higher tax rate of 15%, 16%?

So math[ph] , it would anyway mean that we'll have to pay tax as for the prescribed rate by the government. However, next year, you could see that our tax rates would be slightly higher than this, but not dramatic rate as one will see.

So 15%, 16% would be a fair guess?

Around that range would be roughly correct.

Lovely. And last question on the land sale that you did, any detail there? And do you have similar land parcels, which could result in future land sales?

We have this excess land in Mexico plant, which we sold, so we're not in the business of selling land parcels, so yes.

Okay. Lovely.

The next question is from the line of Chirag Talati from Espirito Santo.

Two questions, really, firstly, on the AOK tenders, can you let us know what percentage of, or what oral tenders did you win?

We've won over 17% of the oral tenders, Chirag. In terms of units, our wins are approximately 17% of the total molecules.

Okay, great. And secondly, on the penicillin front, can you confirm that the current agreement does not force you to buy API from Glaxo, their preferred supplier? And how do you see the -- how do you see yourself being very competitive, given the current pricing scenario in penicillins in the U.S.?

Actually, Glaxo pricing for at least those ingredients is as competitive as anything out there. Having said that, certainly, APIs which are widely available, we could only substitute.

There's no contractual agreement?

No. But there is a contractual obligation for them to supply to us Fexofanadine ingredients such as...

Okay. great.

The next question is from the line of K.C. Suri from Span Capital.

In response to the earlier query regarding R&D, you mentioned something about an external R&D for generics for niche products. Can you throw some more light on what you mean by that?

We are working with other companies, which have niche capabilities in areas that we don’t have. So these transactions involve some investment, and paying for the research cost and linked to milestones in terms of outcomes. I don’t want to give you any color on the specific product opportunities, because that's sensitive information from a competition point of view.

Right, but I mean those would essentially be your products co-marketed, or their products, and you just helping them on it?

Depends on the transaction, but largely, the development house, they don't have marketing, so we will market the product, and we'll give them a portion of the revenue or royalty, or a combination of that.

Okay. And in your R&D pipeline, what percentage of your products should be launched ahead would be products which are like difficult to replicate or limited competition products? I mean, of course, you've given the number on the first two files and the Para IVs.

So it's very difficult to give an answer to your query, your question, because certain products which we think are very difficult, end up with multiple filings sometimes. So I really don't want to hazard a guess there.

The next question is from the line of Jorge Mauro from Legg Mason.

It's Jorge Mauro from Legg Mason. Just a quick question. Regarding this best case scenario, $2.7 billion by FY '13, how much of this should we assume as recurring versus one-off kind of revenues, if you could share that.

So I think since there are several launches in FY '13, as is with any particular year, you'd have to smooth it out to come to a conclusion on how much this is -- how much is recurring, so a good way to do that would be to take some kind of averages. We can't give you that product level information. Though we do think that, that target would sit and probably grow beyond FY '13.

The next question is from the line of Rahul Sharmal from Karvy Stock Broking.

Could you give us the market shares of Prevacid, Lotrel, and Accolate?

Rahul, on an off-line basis, we'll provide these numbers to you.

The next question is from the line of Bino Pathiparampil from IIFL Capital.

Just a follow-up question on Allegra D24, what is the latest timeline looking like for approval? And post approval, how will the ramp up be, will it be something similar to what we saw in Prilosec OTC?

So the answer to the second part is we hope it is a little similar to Prilosec OTC, but we do not know which way it’s going to go because it’s a little different kind of a product. I think the –- we are still awaiting, as we had indicated earlier, an approval to launch the product OTC.

All right. And the sequential growth in Q4 in the U.S. business, is it fair to assume that it is mostly Allegra D24 driven or is there...

So there are other products as well. There is an effect of Lansoprazole. There's an effect of Zafirlukast. There's a continuing growth of Tacrolimus, so there are several other products other than just the Allegra, which has led to that increase.

The next question is from the line of P. Srihari [ph] from PDC Securities [ph].

We just read an important Business Standard that Dr. Reddy’s in the race to buy Doktor Mom from JB Chemicals, would you want to comment on it?

No. We don't want to comment on this, because it's merely speculative information.

Okay. So are you looking at -- no, you said you were looking at taking over some companies or small portfolios in India, I mean, is that correct?

We didn't say that in India.

Okay. Worldwide, right?

No.

Ladies and gentlemen, we will take one last question from the line of Nitin Agrawal from IDFC Securities.

I just wanted to get some thoughts on this Rx to OTC business in terms of our experience in the – over the last few products, and how do we see our competitiveness really speaking when we look at Allegra, and probably some other products that will come down the line because earlier, we were talking about a comprehensive start – rather this Rx to OTC business being like a big component of a U.S. growth strategy going forward?

I don’t think it’s a big component, but it’s a significant component. The business is attractive from a margin's perspective. It has certain dynamics such as variations and varieties in packaging. So we do have a local packaging of contracted operation in the U.S., and that adds some supply chain complexity. The buildup of market share is slower than ethical prescription product generic. But overall, it is sticky and the business is good, and it’s not a very crowded market. Of course, the margins are slightly lower than the Prescription Generic Product business.

On Prilosec, how is that success? I mean, how is that -- really the track been on that -- I mean, how do we measure that in terms of -- what sort of market share you'll be able get in the private level market on the product?

Actually, we are comfortable with our performance there. It's quite good. I don't have the market share numbers.

So we would probably say that it's among the top three products that we have in the U.S., and we are quite comfortable with where it is. And I think the last six to seven months have -- we've really increased our sales and share.

But do you see that -- are you still growing that product, or the product has a reached a stage where it’s going to saturate out at these levels?

We are still growing it.

I would now like to hand the floor back over to the management for closing comments. Please go ahead, sir.

Thank you, all, for joining Dr. Reddy's senior management for this quarter 4 FY '11 earnings call. In case of any queries, please feel free to get in touch with the IR desk, we'll be happy to resolve those queries. Thank you, and goodbye.

Thank you, gentleman of the management. Ladies and gentlemen, on behalf of Dr. Reddy's Laboratories, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.