Earnings Labs

Dr. Reddy's Laboratories Limited (RDY)

Q4 2012 Earnings Call· Fri, May 11, 2012

$13.73

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Transcript

Operator

Operator

Ladies and gentlemen, good day, and welcome to the Q4 FY '12 Earnings Conference Call of Dr. Reddy's Laboratories Ltd. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you, sir.

Kedar Upadhye

Analyst

Good morning, and good evening to all, and thank you for joining us today for Dr. Reddy's Earnings Call for the Fourth Quarter and Full Year Ended March 31, 2012. Earlier during the day, we have released our results and the same are also posted on our website. We are conducting a live webcast of this call, and a transcript shall be available on our website soon. The discussion and analysis in this call will be based on IFRS consolidated financials. To discuss the business performance and outlook, we have today G.V. Prasad, our Chief Executive Officer; Satish Reddy, our Chief Operating Officer; Umang Vohra, our Chief Financial Officer; Abhijeet Mukherjee, President and Head of Global Generics and the Investor Relations team. 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 the webcast. After the end of the call, in case any additional clarifications are required, please feel free to get in touch with the IR team. I also wanted to inform you that a new member, Sharnat Stala [ph] had joined our investor relations team and his contact details are available on our website. Now, I would like to turn the call over to Mr. Prasad for his opening remarks.

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

Thank you, Kedar. Good morning, and good evening to all of you. I welcome you all to our quarter 4 earnings call. I am pleased to mention that we have ended fiscal 2012 by crossing the $2 billion mark in sales, of course, at our average billion-dollar rates. And we are [indiscernible] company to do so. The strong performance this year was mainly on account of the contribution by our U.S. generics business, the API business and Russia. In India, we've continued to target enhanced field cost activity, as well as improvement in the prescription share of key brands. I am confident that our India business will now grow at industry growth rates for the next year. Other emerging market performance also was healthy on the back of increased focus in South Africa and Venezuela. In addition, the Pharmaceutical Services and Active Ingredients segment performance was very encouraging. Apart from the strong recovery in sales, this segment was supported -- has supported the surge in volumes of internal requirements for our Generic segment, thereby providing competitive cost position for our various markets. I'm happy to see a few emerging themes shaping across the organization this year. The OTC franchise in U.S. and Russia CIS markets have been a success story in a quick span of time. OTC has been an important lever in risk diversification in Russia and now constitutes about 30% of sales in our portfolio in Russia. In U.S. for FY '12, the OTC business was 25% of all our U.S. sales, and helped extend [ph] our market revenues [ph]. In the Indian market, we are in the pilot phase with a couple of OTC products. And depending on the outcome of this experiment, we will expand this initiative. The second theme that has shaped up well over…

Umang Vohra

Analyst · RBS

Thank you, Gunupati. Good morning and good evening to everyone. Let me begin with the key financial highlights. Just as a reminder, all the numbers, including those of the previous year in my section are converted at the convenience translation rate of INR 50.89 to $1. Discussion in strategic section will be based on the performance in respective markets' local currency. Our consolidated revenues at the convenience rate registered a figure of $1.9 billion and a strong growth of 20% over the previous year. Revenues for the quarter, which was quarter 4, are at $522 million and grew by 32% year-on-year. Revenues from our Global Generics segment are at $361 million for the quarter and grew by 30% year-on-year, driven largely by the U.S. and Russia. Revenue from the Pharmaceutical Services and Active Ingredients segment, which we shall call PSAI, are at $847 million [ph] and recorded an impressive growth of 25% driven by new launches to all the other generic customers. In this quarter, revenue share from Teva under our partnership for distribution of olanzapine 20 mg was below $2 million. The actual generic substitution rate for olanzapine did not cross 80% during the exclusivity period on account of competitive dynamics vis-à-vis our earlier estimated rate of 90%. In view of this lower generic substitution rate and the higher stocks held by crate [ph] channels, our revenue share in the current quarter had been lower due to the accounting implications of share stock adjustment. Consolidated gross profit margin for the quarter is at 53%. Gross profit margin for Global Generics and GFCI are at 68% and 38%, respectively. SG&A expenses including amortization for the year are at $567 million. SG&A expenses for the quarter is at $142 million and shows an increase of 18% over the previous year, largely…

Kallam Satish Reddy

Analyst · Dolat Capital

Thank you, Umang. I will now cover the business highlights for each of our key markets starting with North America Generics. Revenues for the quarter are at $176 million, reflecting year-on-year growth of 36% largely driven by product success with ziprasidone, Fondaparinux and amoxicillin clavulanic acid and products from our Shreveport facility. This business was also healthy across our key product success [ph]: Lansoprazole and Omeprazole Mg OTC. We are pleased to see the improvements in the volumes of Fondaparinux leading to higher market share in the coming quarter, and we expect expanded market share in the coming quarters. Our revenues for the year are at $671 million for North America, which is a year-on-year growth of 62%, and this demonstrates the strengthened portfolio momentum and healthy market share position. We expect to continue this momentum for the next year with some very interesting product launches. During the year, we filed 17 ANDAs. And cumulatively, we have 80 ANDAs pending approval with the USFDA, out of which 41 are Para IVs and 7 are First-to-files. Moving on to India. Revenues for the quarter are at INR 320 crores or $64 million, which represents a year-on-year growth of 16%. The growth was driven by volumes across most key brands and also reflects the growth on a low base compared to the previous year. We're happy to see a gradual improvement in our performance over the year and to see them in line with our expectations. Revenues for the year stood at INR 1,293 crores or $270 million which is a growth of 11% over the previous year. Our Biosimilars portfolio grew by 33% over the previous year. During the year, we launched 23 new brands in India. We are confident that we will be able to deliver the market growth rate…

Operator

Operator

[Operator Instructions] The first question is from Anubhav Aggarwal from Crédit Suisse. Anubhav Aggarwal - Crédit Suisse AG, Research Division: Umang, just one question. Your gross margin for Global Generics segment, 58% is much lower than what was there in the, let's say, first half at 53% [ph], was all the decline driven by share stock adjustment on olanzapine? Because just with the spike we have benefited from Geodon in this quarter.

Kallam Satish Reddy

Analyst · Dolat Capital

No. So I think the way we are looking at our gross margins is that there are some adjustments which relate to us [ph], and I think that's definitely they have an effect on the gross margins. The other thing that we are seeing on gross margin is that the relative mix of the business is also different, right? So for example, India is lower in growth in the U.S. is, and in the U.S., gross margin is slightly lower than India because remember, gross margin is also planned expenses. So it makes an impact in a different way. But we are not really seeing so much of the compression in margins as I think what you're alluding to. Anubhav Aggarwal - Crédit Suisse AG, Research Division: Okay, so other than that, on the basis on margin, you're seeing that your gross margin continues the trend you're doing in the first half of this year?

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

That's right. We are largely in the same range as what our margins in the first half of the year was. Also, you might want to also take into account the fact that DEPB and other explored benefits have gone up and that's taken an impact on the margins. Other than that, we are largely in the same range. Anubhav Aggarwal - Crédit Suisse AG, Research Division: And just one clarification on the press release. On the call you mentioned that your FTFs are at 7 now. If I understand it was 10, and after that you launched olanzapine and Geodon. So where is the 1 FTF gone.

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

FTF, First-to-file. We can send that to you.

Operator

Operator

The next question is from Bhavin Shah from Dolat Capital.

Bhavin Shah - Dolat Investments Ltd., Research Division

Analyst · Dolat Capital

I just want a sense of the market share gain in Fondaparinux. And if you could give some highlight on the institution product launch, which was supposed to happen. How is that progressing?

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

So probably [indiscernible] look at the year. I think in the first half we were -- the capacity was a bit of a challenge. So all that is behind us. And we are waiting for the capacity and equity [ph] to come on stream. So right now, I think we have in place at the moment, the IMS data shows our market share about 22%, but we're mainly playing only in the retail market, which is about -- that's about 25% of the whole market. So all of our share of the retail market is nearly about 50% market share. Now going ahead, I think, yes, there'll be a [indiscernible] to the play, but these contracts are multi-year. So as and when we have an opportunity and better opportunity we would be getting more market share.

Bhavin Shah - Dolat Investments Ltd., Research Division

Analyst · Dolat Capital

Okay. And any sense from the Biosimilars of how much would that do in your business item?

Kallam Satish Reddy

Analyst · Dolat Capital

7% in Europe.

Bhavin Shah - Dolat Investments Ltd., Research Division

Analyst · Dolat Capital

7% for this fiscal?

Kallam Satish Reddy

Analyst · Dolat Capital

Yes.

Operator

Operator

The next question is from Girish Bakhru from HSBC.

Girish Bakhru - HSBC, Research Division

Analyst · HSBC

Yes, just on...

Kallam Satish Reddy

Analyst · HSBC

Hello?

Gunupati Venkateswara Prasad

Analyst · HSBC

I think we lost him. [Technical Difficulty]

Operator

Operator

The next question is from Prakash Agarwal from RBS.

Prakash Agarwal - RBS Research

Analyst · RBS

Sir, on this pipeline for North America, are you seeing interesting product launches? I mean, you'd shared the presentation, I could see in the website for December 2011. Could you give us some key products for fiscal '13?

Umang Vohra

Analyst · RBS

Prakash, we are not going to be product specific. All we're going to say is there are some products which are not in the presentation as well, but largely it’s our opinion that whatever is in the presentation, it's more or less figured out by the market. So there are some products which are not in the presentation but we're -- right now, we are not in the position to disclose them.

Prakash Agarwal - RBS Research

Analyst · RBS

Okay. And would you share market share of your top 5 products that you talked about having 10% of sales in the U.S.?

Umang Vohra

Analyst · RBS

The cost on Lansoprazole, we're now 15% market share of the total market. On Fondaparinux, it's 17%. Omeprazole is at 14% of the total market, and on Tacrolimus it's about 12%.

Prakash Agarwal - RBS Research

Analyst · RBS

And Fexo?

Umang Vohra

Analyst · RBS

Fexo is in OTC stage and there's no more -- the level market agency which captured the data.

Kallam Satish Reddy

Analyst · RBS

So, there are -- there is another EBIT share, roughly it's about in the range of about 40%.

Prakash Agarwal - RBS Research

Analyst · RBS

40% of the total Fexo OTC Market?

Gunupati Venkateswara Prasad

Analyst · RBS

Yes. And the combination we are the only player so that's smaller debt, [indiscernible]. We are only saying that.

Prakash Agarwal - RBS Research

Analyst · RBS

And is Lanso [Lansoprazole] OTC is scheduled to launch in fiscal '13?

Gunupati Venkateswara Prasad

Analyst · RBS

Yes, very soon.

Operator

Operator

The next question is from Girish Bakhru from HSBC.

Girish Bakhru - HSBC, Research Division

Analyst · HSBC

Just on the U.S. again. Earlier, you had commented that the larger cost the FY '13 target probably will be met by U.S, so if you just can give some color from 6, 70-odd-million dollars? Are we close to like touching some 900 number, what kind of number do you look for U.S. for FY '13?

Umang Vohra

Analyst · HSBC

Well, we had largely said we would be -- that we would have this 1/3 or thereabouts for the U.S. market of our total $2.7 billion, which we had directed towards. So I think that we are looking at the same number as of now. And the other 1/3 is going be from the emerging markets in other areas.

Girish Bakhru - HSBC, Research Division

Analyst · HSBC

Right. And just to carry this ahead, in terms of patient care settings [ph], where do you see that kind of effect coming into effect like FY '14? Would it be kind of a stable revenue or will it be kind of a decline there?

Gunupati Venkateswara Prasad

Analyst · HSBC

I think FY '14, the real clip begins to hit in FY '15. FY ‘14 is relatively stable, but I think FY '15 and onwards from there is when the real impact of the [indiscernible].

Girish Bakhru - HSBC, Research Division

Analyst · HSBC

Right. And second one on the Biosimilars earlier, I think on -- I mean, there was a comment about you were planning to probably see registrations of some of the emerging markets. Can you just elaborate on that?

Kallam Satish Reddy

Analyst · HSBC

So I think on the Biosimilars, we had almost 4 products which we are registering to 15 countries, right? So this visibility [ph] local partners in this country that we have some arrangements for. Get to us in a different point of time.

Girish Bakhru - HSBC, Research Division

Analyst · HSBC

Okay. And where are we in terms of tying up on the European market side? I mean, given that there has been probably first filing on the monoclonal antibodies just recently in Europe, so I mean, where are we in that...

Gunupati Venkateswara Prasad

Analyst · HSBC

We have spoken to the regulator of this. We are designing our trials for fiscal -- we haven't signed any partnership.

Operator

Operator

The next question is from Sameer Baisiwala from Morgan Stanley.

Sameer Baisiwala - Morgan Stanley, Research Division

Analyst · Morgan Stanley

This is, I think, on the terminals [ph] and the derma product. Can you be more specific, what were the reasons that you had to drop this candidate and how much money was spent on this development?

Kallam Satish Reddy

Analyst · Morgan Stanley

The total plan was to spend about $8 million or so on the clinical development. We spent about a little over half of that. The initial data does not indicate that it'll meet the endpoint on efficacy, so we decided to drop the product.

Sameer Baisiwala - Morgan Stanley, Research Division

Analyst · Morgan Stanley

And can you share some more details on the follow-up compounds candidates in the same delivery-based pipeline?

Kallam Satish Reddy

Analyst · Morgan Stanley

We have not yet shared these details. As with further benefit [ph] share with you the pipeline for the downturn [indiscernible]. So at this time, we haven't released in public yet.

Sameer Baisiwala - Morgan Stanley, Research Division

Analyst · Morgan Stanley

Okay. Well, what I'm trying to understand is, is there anything which is in the human trials or a little bit more advanced stage, or they're all pre-human right now?

Kallam Satish Reddy

Analyst · Morgan Stanley

There are some in the human trials going on in the derm space. Some of them have completed proof of concept but nothing has entered the Phase III yet. So we would keep you informed as we move assets forward.

Sameer Baisiwala - Morgan Stanley, Research Division

Analyst · Morgan Stanley

And for the pain?

Kallam Satish Reddy

Analyst · Morgan Stanley

Pain story on the pain, we have products which have completed proof of concept, not yet entered Phase III.

Sameer Baisiwala - Morgan Stanley, Research Division

Analyst · Morgan Stanley

Okay, fine. And just one final question. Can you share something about your outlook for fiscal '14 over fiscal '13? Just qualitatively, any color?

Umang Vohra

Analyst · Morgan Stanley

So the growth rate of the fiscal '12 and '13 are very high. We don't expect FY '14 to be so strong. We expect a slowdown of the growth, but we still expect to grow on FY '13.

Operator

Operator

The next question is from Ranjit Kapadia from Centrum Broking.

Ranjit Kapadia - Centrum Broking Private Limited, Research Division

Analyst · Centrum Broking

My question relates to this impairment charges which are taking off [ph] $1 billion for Germany, if you can elaborate slightly how the German market and what is the future outlook for the market?

Umang Vohra

Analyst · Centrum Broking

Ranjit, I think you mean INR 1 billion.

Ranjit Kapadia - Centrum Broking Private Limited, Research Division

Analyst · Centrum Broking

Yes, INR 1 billion. Yes.

Umang Vohra

Analyst · Centrum Broking

Yes, yes, yes. So all of you getting worried when you said $1 billion. No. So this is the charges related to certain product intangibles, which have gone into tenders and therefore, we believe that the recoverable value of these product intangibles is possibly not going be met. Because not only are tender prices low, it's also -- if you grew the tender, it's going to be difficult to recover these values. So this is tested and we found that this was not recoverable, so we've taken a non-cash charge on it.

Ranjit Kapadia - Centrum Broking Private Limited, Research Division

Analyst · Centrum Broking

And how will you see the German market shaping up?

Umang Vohra

Analyst · Centrum Broking

So I think that the tender compliance is actually very high at the moment, higher than what we thought and higher the tender compliance. It has a hit to the extent that some of the tenders are based on revenues, although the non-tender part or noncompliance part of the tender. So given that fact, I think it’s tough. The molecules are quickly being drawn into tenders faster than it used to be in the past. So it’s going to be a tough scenario in the German market but having said that, it's in the single digits percentage of the Global Generics business.

Operator

Operator

The next question is from Ugish Mondada [ph] from ICICI Securities.

Unknown Analyst

Analyst

This is Kiragya [ph]. Two question. First is on a quarter-on-quarter basis in your U.S. generic business, what would have changed outside maybe the Fondaparinux market share would've gained marginally. But otherwise, the biggest delta is only from ziprasidone? Would that be a fair way of looking at it?

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

No. I think that's not the complete story. Ziprasidone is some part of our revenues that gained good market share expansion on the Bristol products. There's been also revenue increases in other products as well.

Unknown Analyst

Analyst

On a quarter-on-quarter basis? So third quarter...

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

That's right. On a quarter-on-quarter basis, the delta that you've seen between quarter 3 and quarter 4, it probably would be less than half of that delta.

Unknown Analyst

Analyst

Okay, that helps. The other question was on the 7 First-to-files that we have. Can you indicate the brand size of it?

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

We can send you... [Audio Gap]

Operator

Operator

Next question is from Hardik Bora from Dolat Capital.

Hardik Bora

Analyst · Dolat Capital

I just want to know what is the, are there any contribution from the GSK business facility, if it's possible.

Umang Vohra

Analyst · Dolat Capital

GSK business contribution. Yes, it's not significant. Are you saying Bristol or GSK?

Hardik Bora

Analyst · Dolat Capital

GSK facility [ph].

Umang Vohra

Analyst · Dolat Capital

The Bristol facility, yes, I think there's been a ramp up in values there, and it's sub $10 million for the quarter.

Hardik Bora

Analyst · Dolat Capital

For this quarter, okay. There was -- this is according to the impairment charges that you've taken on product intangibles. I just wanted to understand what are the current intangibles that are standing on the book?

Umang Vohra

Analyst · Dolat Capital

We have a brand which is approximately EUR 40 million, and we have product revenue intangibles which is approximately another EUR 15 million to EUR 20 million at the next level. And most of these are the product level are now in groups of products and not specific products.

Hardik Bora

Analyst · Dolat Capital

Okay. Just one final question. If you can just throw some light on your [indiscernible] since the ziprasidone launch, what is the price erosion and market share that you have so far garnered in that product?

Umang Vohra

Analyst · Dolat Capital

The market share is about 24%, 24% to 27%. That's the range that we picked up. And price erosion is in excess of approximately 72%.

Operator

Operator

The next question is from Bhagwan C. [Chaudhary] from IndiaNivesh.

Bhagwan Singh Chaudhary - IndiaNivesh Securities Pvt Ltd., Research Division

Analyst

Just one question. A clarification on I saw you guys [indiscernible] on the TV and through probably in the evening that the CMUS mainly a contributor [ph] OTC product of a CMUS recommended has contributed to approximately $200 million out of this secure $100 million and USD $100 million. Is that right?

Umang Vohra

Analyst · RBS

No. [indiscernible] roughly down to $80 million and [indiscernible] around $120 million.

Bhagwan Singh Chaudhary - IndiaNivesh Securities Pvt Ltd., Research Division

Analyst

So combined, that's $200 million?

Umang Vohra

Analyst · RBS

Yes. Yes.

Operator

Operator

The next question is from Alok Dalal from BNP Paribas.

Alok Dalal - BNP Paribas, Research Division

Analyst · BNP Paribas

Any update on the important admin of psycho facility [ph]?

Kallam Satish Reddy

Analyst · BNP Paribas

There is no specific development as such, but we had an inspection by the USFDA, we believe it went well. The FDA has to submit their report on the inspection and after that, they've got [indiscernible]. Right now, there is no update as such.

Alok Dalal - BNP Paribas, Research Division

Analyst · BNP Paribas

Okay. And are there any comments on the GSK alliance? Is it going as per expectations or there is some delay here?

Kallam Satish Reddy

Analyst · BNP Paribas

There is some delay in terms of revenues, but we didn't expect any revenues in this 2, 3 years. We're a lump sum business. Some of the products are just being developed, they have to get approved no doubt. We didn't high expectations and they don't figure in our revenue in a significant way.

Alok Dalal - BNP Paribas, Research Division

Analyst · BNP Paribas

Okay. And what could be the tax rate guidance for FY '13? Is it 20%?

Umang Vohra

Analyst · BNP Paribas

Yes, approximately that number.

Alok Dalal - BNP Paribas, Research Division

Analyst · BNP Paribas

Okay. And Umang, what would be the R&D guidance?

Gunupati Venkateswara Prasad

Analyst · BNP Paribas

We're maintaining R&D at up to 7% of sales.

Operator

Operator

The next question is from Sonal Gupta from UBS.

Sonal Gupta - UBS Investment Bank, Research Division

Analyst · UBS

Just on –- sorry, I might have missed these assignments [ph]. So I just wanted to know, are you still sticking with the $2.7 billion target given how the currency, et cetera, moves? And...

Kallam Satish Reddy

Analyst · UBS

So we're not specifically giving any revenue guidance. $2.7 billion is what we think directionally is possible. This is dependent on approvals time, launching on time, so a number of different factors. So I wouldn't point you to a specific number. Broadly, we are comfortable with that growth rate that we had this year over 30%. We will be in similar growth rates. That doesn't mean $2.7 billion is a number which we are guiding you.

Sonal Gupta - UBS Investment Bank, Research Division

Analyst · UBS

Right. And just want to check up on whether you're still confident of a the 181 [ph] launch for Lipitor?

Kallam Satish Reddy

Analyst · UBS

We still don't have approval and it depends entirely on approval.

Operator

Operator

The next question is from Chirag Talati from Espirito Santo.

Chirag Talati - Espirito Santo Investment Bank, Research Division

Analyst · Espirito Santo

Firstly -- again, this is regards to your Promius Pharma in the -- had a very large portfolio. When is the earliest that we can see a candidate entering Phase III? And is it correct to kind of know that you will not be able to launch anything from your internal pipeline before 2016, 2017 now?

Kallam Satish Reddy

Analyst · Espirito Santo

Yes. I think that's a good, fair estimate. It could happen earlier. Maybe not a year earlier, but 2016 a good time to think about. We should have a Phase III asset this year, sometime this year.

Chirag Talati - Espirito Santo Investment Bank, Research Division

Analyst · Espirito Santo

Would you like to comment on what kind of candidate is it? Is it a reformulation? Or you know of what indication it is targeting?

Kallam Satish Reddy

Analyst · Espirito Santo

Dermatology and reformulation.

Chirag Talati - Espirito Santo Investment Bank, Research Division

Analyst · Espirito Santo

Okay. Fair enough -- and secondly on the penicillins portfolio, I mean, data just seem to indicate that you had a very strong pickup in market share in Q4 on the products you’ve launched. So what is the kind of revenue that you would have seen in Q4? Is it tracking your $60 million annualized guidance that you had provided at the beginning of the year?

Kallam Satish Reddy

Analyst · Espirito Santo

It's about there. Like marginally short of the $60 million, but around that range.

Chirag Talati - Espirito Santo Investment Bank, Research Division

Analyst · Espirito Santo

Okay, fair enough. So in this quarter, we would have seen a positive contribution coming from the GSK plant in terms of gross margins?

Gunupati Venkateswara Prasad

Analyst · Espirito Santo

Right.

Operator

Operator

The next question is from Abhay Shanbhag from Deutsche Bank.

Abhay Shanbhag - Deutsche Bank AG, Research Division

Analyst · Deutsche Bank

Yes, I just wanted to check up on Zyprexa. I mean, what are the issue [ph], because it was launched, it'll only -- are you sharing all the profits? So was it a [indiscernible] so it would be -- you're not allowing the generics to take market share or what was it?

Gunupati Venkateswara Prasad

Analyst · Deutsche Bank

Well if I may guess, there are a couple of factors. This is a CNS drug. CNS drugs don't completely switch. Many patients don't like to switch CNS drugs. That is one dynamic at work. There was an authorized generic which is taking care of the [ph] market share. So this market share pricing dynamic that is clear, and I think that we have done as good a job as anybody else out there.

Abhay Shanbhag - Deutsche Bank AG, Research Division

Analyst · Deutsche Bank

Okay. And are there any implications for other follow-ups -- follow-up it keeps going forward, but is it only restricted to CNS and the market share gains are much more difficult?

Gunupati Venkateswara Prasad

Analyst · Deutsche Bank

[indiscernible] very difficult to enforce on one launch and extend it to every launch. So yes, the dynamic depends on how deep the discount is from the innovator, what kind of a product [indiscernible] to be launched. So I don't want to hang that against and say this is [indiscernible].

Abhay Shanbhag - Deutsche Bank AG, Research Division

Analyst · Deutsche Bank

And so I've been also at Watson did indicate -- announced on this conference call that there could be a 96% dilution on [indiscernible]. Would that be too aggressive an assumption or too conservative of an assumption?

Gunupati Venkateswara Prasad

Analyst · Deutsche Bank

Depending on the [indiscernible].

Kallam Satish Reddy

Analyst · Deutsche Bank

It could be worse.

Umang Vohra

Analyst · Deutsche Bank

Can't comment on it, Abhay, right now. Can't comment.

Abhay Shanbhag - Deutsche Bank AG, Research Division

Analyst · Deutsche Bank

And you're saying whether your launch would happen because you said it will depend on the approval time.

Gunupati Venkateswara Prasad

Analyst · Deutsche Bank

Yes. We are ready to launch if we get approval on time.

Abhay Shanbhag - Deutsche Bank AG, Research Division

Analyst · Deutsche Bank

Okay. One last question is on Europe, this pricing environment -- I mean, do you see some sort of stability coming in Germany after 4 to 5 years, or do we see these sort of erosions continuing?

Gunupati Venkateswara Prasad

Analyst · Deutsche Bank

So there must be an end to this. It has to stop somewhere. I think, as a vertically integrated company, as we select products carefully, we will be comfortable in this game at some point. We haven't reached that point yet. We are working towards the rebuilding of product portfolio for this market, and we continue to believe that we can make a difference in this market and be a significant player.

Abhay Shanbhag - Deutsche Bank AG, Research Division

Analyst · Deutsche Bank

Okay. And Russia, will the pricing rate still be recently stable so there's no -- not much of a threat in that market?

Gunupati Venkateswara Prasad

Analyst · Deutsche Bank

Well, it looks like a typical branded market.

Abhay Shanbhag - Deutsche Bank AG, Research Division

Analyst · Deutsche Bank

Okay. And there are no talks as what happened in Germany, any reforms of whether we're taking it towards tender or towards any other form of transactional reform there?

Gunupati Venkateswara Prasad

Analyst · Deutsche Bank

No. Not yet.

Operator

Operator

The next question is from Revic Aggarwal [ph] from MP Advisors.

Unknown Analyst

Analyst

Revenue from Germany declined by 15% in local currency largely due to continued tenderization of German markets. Is that phenomenon going to affect on top line and bottom line in our coming quarter?

Umang Vohra

Analyst · RBS

So I think if we continue to decline, it could have some impact on both the lines. But it is only less than 7% of our company sales today.

Operator

Operator

The next question is from Hitesh Maida [ph] from Fortune Equity Brokers.

Unknown Analyst

Analyst

So this relates to PSAIs. You're seeing 21% growth in FY '12. So is this growth sustainable going forward or will we see a lower growth going forward? And sort of how is the -- are we seeing traction in the contract research space as well apart from the active ingredients space?

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

Well, the businesses grew at similar rates. Growth in the API business is driven by the large number of products mix here in previous years. As long as products didn't expire in the filing time, this businesses, sustainable business.

Operator

Operator

The next question is from Nitin Agarwal from IDFC Securities.

Nitin Agarwal - IDFC Securities Ltd., Research Division

Analyst · IDFC Securities

Just alluding to the remark that Umang made earlier about FY '15 probably being there of uplift as far as the U.S. generic business is concerned. If you were to take that view, take about one step sort of 1/3 of the business creating some sort of uplift situation, PSAI is 25% of our business and it's -- with the patent, mega patent sort of, of expiry phase going off. There clearly will be limited growth opportunities for the business. And Germany on the other side is 6% of business. Just nearly 55% or 60% of our business essentially, we're facing growth issues in the 2 years. So where do we see a medium-term growth projected for the business. And what's going to drive it from there from there on?

Gunupati Venkateswara Prasad

Analyst · IDFC Securities

So the universe is somewhat slowing down. But that doesn't mean there are not enough opportunities that we can still go after. And the growth rates will come down, but then we are saying that we're still targeting growth in FY '14 onwards.

Nitin Agarwal - IDFC Securities Ltd., Research Division

Analyst · IDFC Securities

So when you say that this lift situation in FY '15, this is with respect to the market...

Gunupati Venkateswara Prasad

Analyst · IDFC Securities

[indiscernible] does not mean that there are -- more like an exciting move here. There's a renewed set of opportunities and if you're clever about how you select your products and how you're going to grow the business, there's still growth possible. A rash of patent expiry, but there are other patent expiries, there are products expiring in the year. There's still an opportunity for us there.

Nitin Agarwal - IDFC Securities Ltd., Research Division

Analyst · IDFC Securities

So you don't see a situation for you. I mean, you're hitting a $1 billion sort of a mark in about 1 year or so, and that being a challenge for you to grow sustainably from there on as far as generic part of the business is concerned.

Gunupati Venkateswara Prasad

Analyst · IDFC Securities

It's a challenge and we will live up to that challenge.

Nitin Agarwal - IDFC Securities Ltd., Research Division

Analyst · IDFC Securities

And lastly, on the base of the business -- base that you hit on Q4 as of on the top line [indiscernible] EBITDA level, is it a sustainable sort of a base to run with? Or there is a lot -- compared to your seasonality, which are one-offs which are there in this number that is there for the current year -- quarter?

Gunupati Venkateswara Prasad

Analyst · IDFC Securities

There are some one offs, but I think the most [ph] one-offs on an ongoing basis. If you have enough of the critical mass of the pipeline, you will hit regular one-offs in the business. On a year-to-year basis, we should have regular annuities from these opportunities.

Operator

Operator

The next question is from Kartik Mehta from Daiwa Capital Markets.

Kartik A. Mehta - Daiwa Securities Capital Markets Co. Ltd., Research Division

Analyst · Daiwa Capital Markets

If you can update on the launch to-date or just your view on the upside for actually Fondaparinux in the EU market. And if I heard you right, you said you have 22% of the total market share or 22% of the retail market share for actually Fonda in the U.S. market?

Kallam Satish Reddy

Analyst · Daiwa Capital Markets

[indiscernible] of 22.5%, so I get to-date a view of the roving market. But having said that, how much of hospital is very significant, we have no idea.

Kartik A. Mehta - Daiwa Securities Capital Markets Co. Ltd., Research Division

Analyst · Daiwa Capital Markets

So this is 22% of the total market in the U.S.?

Kallam Satish Reddy

Analyst · Daiwa Capital Markets

This is IMS data.

Kartik A. Mehta - Daiwa Securities Capital Markets Co. Ltd., Research Division

Analyst · Daiwa Capital Markets

Okay. Yes, and on the EU, your partner there had some updates, could you throw some light on your...

Kallam Satish Reddy

Analyst · Daiwa Capital Markets

We just filed the product. It's too early to give you a date. Have to go through the R&D cycle [indiscernible] so the partner announced the filing.

Kartik A. Mehta - Daiwa Securities Capital Markets Co. Ltd., Research Division

Analyst · Daiwa Capital Markets

Okay. And on you -- and bidding with a larger quantity in the U.S. market, is there any timeline with capacity constraint would be less from what it is now?

Umang Vohra

Analyst · Daiwa Capital Markets

So I think we have, at the moment, the divestments and we had an uptick that could be for the U.S. market. We have time for the new market, and we're gearing up for that.

Kartik A. Mehta - Daiwa Securities Capital Markets Co. Ltd., Research Division

Analyst · Daiwa Capital Markets

No, I was actually mentioning to enter in the hospital part of the U.S. market.

Gunupati Venkateswara Prasad

Analyst · Daiwa Capital Markets

Kartik, we have enough...

Umang Vohra

Analyst · Daiwa Capital Markets

Lots of capacity for both, if we wish to take a part of it.

Operator

Operator

The next question is from Dinesh Partak [ph] from Goldman Sachs Asset Management.

Unknown Analyst

Analyst

What would be the gross margin in the German's end of business?

Kallam Satish Reddy

Analyst · Dolat Capital

We don't provide that level of detail, but the margin is probably one of the lowest across all our business.

Unknown Analyst

Analyst

Even those in PSAI?

Kallam Satish Reddy

Analyst · Dolat Capital

Well, I was talking about the Global Generics businesses. So we don't provide product specific, but it will be at -- more or less at par with the business you mentioned.

Unknown Analyst

Analyst

Okay. Keeping it high in the last 2 years, what will be the guidance of CapEx in FY '13?

Umang Vohra

Analyst · RBS

We're continuing to see about $150-odd million.

Unknown Analyst

Analyst

Okay. And where is the CapEx going in [indiscernible].

Umang Vohra

Analyst · RBS

I think we're actually [indiscernible] the plant that we were looking aboard for our foundation units into a Biologics plant. These are some of the bigger CapExs.

Unknown Analyst

Analyst

Final question, the U.S. OTC would be about $160 million, right?

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

[indiscernible].

Unknown Analyst

Analyst

FY '12?

Umang Vohra

Analyst · RBS

It was around $130 million.

Unknown Analyst

Analyst

$130 million. But the bigger ones here would be [indiscernible] and Allegra. Can you give a sense of how much these 2 are individually?

Gunupati Venkateswara Prasad

Analyst · Dolat Capital

We don't provide product-specific information.

Operator

Operator

The next question is from Aditya Khemka from Nomura.

Aditya Khemka - Nomura Securities Co. Ltd., Research Division

Analyst · Nomura

Can you give us some more color on the PSAI segment and the good growth that you are seeing this quarter? How do you see the segment exactly panning out in the next fiscal year and beyond that? How do you the business panning out from here at this [ph]?

Kallam Satish Reddy

Analyst · Nomura

Yes, for this year, it was on the back of good product launches and all that. So that one is pretty well. So also, the services segment also revived, right? So you could probably expect something similar next year, but I don't think specifically talk about the growth numbers, but [indiscernible] from this call.

Aditya Khemka - Nomura Securities Co. Ltd., Research Division

Analyst · Nomura

Okay. Okay, that's helpful. That's helpful. So just another question on -- so going forward, we're seeing good business, actually. And I understand that there's a little bit [ph] of cash. Do you see that there are enough inorganic opportunities in the market to which you would like to pursue or which you would like to assess going forward? And what can management tell us about that?

Gunupati Venkateswara Prasad

Analyst · Nomura

There has been no specific answer to this. We are open to acquisitions, but they have to make sense for our strategy.

Aditya Khemka - Nomura Securities Co. Ltd., Research Division

Analyst · Nomura

All right. And do you feel that -- as a part of the $2.7 billion target, any inorganic plans that you would require to do for that to achieve the target?

Gunupati Venkateswara Prasad

Analyst · Nomura

No.

Kallam Satish Reddy

Analyst · Nomura

No.

Operator

Operator

The next question is from Priti Arora from Kotak Securities.

Priti Arora - Kotak Securities Ltd., Research Division

Analyst · Kotak Securities

So I just wanted an update, have you launched Boniva tablets in Europe?

Gunupati Venkateswara Prasad

Analyst · Kotak Securities

No, not as yet.

Priti Arora - Kotak Securities Ltd., Research Division

Analyst · Kotak Securities

Any reason why you got late approval compared to the initial peers who have come in?

Gunupati Venkateswara Prasad

Analyst · Kotak Securities

We don't have any specific reason on it. And we also don't know why we got late approval. But we haven't launched it yet [ph].

Priti Arora - Kotak Securities Ltd., Research Division

Analyst · Kotak Securities

Okay. So I mean, should we expect the launch in near term or is it dependent on the litigation status?

Gunupati Venkateswara Prasad

Analyst · Kotak Securities

We can't comment on that right now.

Priti Arora - Kotak Securities Ltd., Research Division

Analyst · Kotak Securities

Okay. And just your OTC business, you mentioned $130 million. Was the number for FY '11, around $60 million?

Umang Vohra

Analyst · Kotak Securities

Yes. $60 million.

Priti Arora - Kotak Securities Ltd., Research Division

Analyst · Kotak Securities

Sorry, can I -- what did you mention?

Umang Vohra

Analyst · Kotak Securities

$60 million [ph].

Priti Arora - Kotak Securities Ltd., Research Division

Analyst · Kotak Securities

And can you just update us on the Rosiglitazone 180-day exclusivity, what's happened with that?

Kallam Satish Reddy

Analyst · Kotak Securities

There's no market left for Rosiglitazone. There's no market left. So actually, no [indiscernible]. So I mean, considering the safety and the REMS program and all these issues, I think it's not an opportunity anymore.

Priti Arora - Kotak Securities Ltd., Research Division

Analyst · Kotak Securities

Okay, okay. And can you quantify the Clopidogrel 300 MG version, how much is that market out right now?

Kallam Satish Reddy

Analyst · Kotak Securities

Priti, we can do this for you offline. I think there's a lot of indication that can be worked out based on market size and pricing. Maybe you can speak with Kedar and he'll try to help you out with that.

Operator

Operator

The next question is from Rahul Sharma from KARVY Stock Broking.

Rahul Sharma - KARVY Stock Broking Limited, Research Division

Analyst · KARVY Stock Broking

I just wanted a sense on the market share of Fexo and Tacrolimus and Omeprazole OTC.

Kallam Satish Reddy

Analyst · KARVY Stock Broking

I would really share these offline with you.

Rahul Sharma - KARVY Stock Broking Limited, Research Division

Analyst · KARVY Stock Broking

Okay. And another thing was on the [indiscernible] front, I probably did not hear it properly. It's going to be mad next year or what...

Kallam Satish Reddy

Analyst · KARVY Stock Broking

It will be -- we've guided towards about 20-odd percent next year at the consolidated level for the company.

Rahul Sharma - KARVY Stock Broking Limited, Research Division

Analyst · KARVY Stock Broking

And do you foresee further impairment in the German markets coming in next 2 years to 3 years?

Kallam Satish Reddy

Analyst · KARVY Stock Broking

I cannot comment on that. I don't know what the situation would be. I think what we are carrying on our balance sheet right now as a value close to EUR 65 million, EUR 70 million. And I think that should reasonably support the business.

Operator

Operator

The next question is from Chirag Talati from Espirito Santo.

Chirag Talati - Espirito Santo Investment Bank, Research Division

Analyst · Espirito Santo

Just a couple of questions. Firstly, what is stopping you or what is hampering your ability to sign a deal on Biosimilars for either for Europe or U.S.?

Gunupati Venkateswara Prasad

Analyst · Espirito Santo

Nothing.

Kallam Satish Reddy

Analyst · Espirito Santo

Nothing is hampering us.

Gunupati Venkateswara Prasad

Analyst · Espirito Santo

Nothing as such we are in discussions among [indiscernible].

Chirag Talati - Espirito Santo Investment Bank, Research Division

Analyst · Espirito Santo

Okay. And secondly, with the addition of -- it's 1 year now since you acquired Cloderm. Can you give a sense of how the sales have shaped up and are you satisfied with the performance? And also, if you think your current level of sales for Promius make it a sustainable entity for the next 3 years on?

Gunupati Venkateswara Prasad

Analyst · Espirito Santo

On your first question, better than expected. We see tracking [indiscernible]. $20 million plus. The business is not at a level where it is sustainable yet. We expect it to take another 2 to 3 years to obtain meaningful value [ph].

Operator

Operator

The next question is from Sonal Gupta from UBS.

Sonal Gupta - UBS Investment Bank, Research Division

Analyst · UBS

Thanks for taking the follow-up question. I mean, it's partly similar to what people have asked there. I mean, you would be generating, at least from my calculation, even taking account your CapEx at least about $200 million to $250 million of free cash flow net of dividends. So just want to understand that, what are the areas to which you would sort of look at in terms of potential opportunities? And where -- I mean, what is your strategic fit?

Umang Vohra

Analyst · UBS

Sonal, we are still a net debt company. And if we do generate that amount of cash, we will -- $200 million, we will also net debt at roughly the same level. And so therefore, I don't believe that while some of the cash can be used for finding some strategic capability fit, we are not going to probably do any big bang acquisitions or anything else with this $250 million. So it's going to largely be used for funding an operating cash flows, or for retiring some part of the debt. And then when possible and when we find a strategic fit, we'll make a capability acquisition.

Sonal Gupta - UBS Investment Bank, Research Division

Analyst · UBS

And I just want to understand what is your sort of maintenance CapEx on -- I mean, if you look, take a longer term view, what would be the average maintenance CapEx?

Gunupati Venkateswara Prasad

Analyst · UBS

There's no such thing as maintenance CapEx because we are growing aggressively in the pipeline. We are investing in creating facilities [ph]. So I think $100 million [indiscernible] in the next 3, 4 years. [indiscernible] capacity ahead of the curve. [indiscernible] We need more solid capability so [indiscernible] that expansion. So we're not creating new capacity [indiscernible].

Sonal Gupta - UBS Investment Bank, Research Division

Analyst · UBS

Okay. And just finally, I mean, you're including in your outlook roughly emerging markets including India, Russia would be worth 30% of the turnover. I mean, again, are there any plans to sort of consolidate your position in those markets? And maybe would you look at potential M&A in those markets or are you looking for really just a small acquisition?

Gunupati Venkateswara Prasad

Analyst · UBS

It's hard to be that specific on the M&A strategy, because it's not just your intention, it comes with the availability of the right fit in terms of becoming available. So we retain our strategic option, but it's hard to predict.

Operator

Operator

The next question is from Rajesh Galwani [ph] from HDFC Asset Management..

Unknown Analyst

Analyst

I just wanted to retouch on your guidance, do you still maintain the 25% RoCE guidance that you gave in the past for FY '13?

Umang Vohra

Analyst · RBS

We are maintaining that, Rajesh. We have made good progress here at 23.5% this year. We are maintaining the 25% guidance. And Prasad and Satish mentioned that we'll probably have the same level of growth that we had this year, the same level or higher. And directionally, just moving towards that rate of $2.7 billion.

Operator

Operator

Ladies and gentlemen, due to time constraints, we'll take one last question from Ravi Agrawal from Standard Chartered Securities.

Ravi Agrawal - Standard Chartered plc, Research Division

Analyst · Standard Chartered Securities

So just on income, going back to the last question, you mentioned growth rate which we expect of around 30-odd percent for this year, or I guess a number which said you'd be comfortable with. Did that -- you roughly worked with around $2.5 billion, is that the benchmark to look for, for FY '13?

Umang Vohra

Analyst · Standard Chartered Securities

We're not going to comment on specifics. As we mentioned, we're directionally moving towards the $2.7 billion mark. [indiscernible] growth rate will be offset higher than what we had this year. We're aiming towards -- potentially towards that -- the $2.7 billion.

Gunupati Venkateswara Prasad

Analyst · Standard Chartered Securities

In that range.

Umang Vohra

Analyst · Standard Chartered Securities

In that range. And we are still directionally going towards $2.7 billion.

Operator

Operator

Ladies and gentlemen, that was the last question. I would now like to hand over the conference back to Mr. Kedar Upadhye for closing comments.

Kedar Upadhye

Analyst

Thank you all for joining Dr. Reddy's senior management for our fourth quarter earnings conference. In case of any additional clarifications, please feel free to get in touch with Investor Relations team. Thank you, and goodbye.

Operator

Operator

Thank you very much. On behalf of Dr. Reddy's Laboratories Ltd., that concludes this conference call. Thanks for joining us, and you may now disconnect your lines. Thank you.