Dr. Reddy's Laboratories Limited (RDY) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratory's Q4 and Full Year FY '13 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. Thank you, and over to you, sir.

Good morning, and good evening to all of you, and thank you for joining us today for Dr. Reddy's Earnings Call for the fourth quarter and full year ended March 31, 2013. 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 Satish Reddy, our Vice Chairman and Managing Director; Saumen Chakraborty, President and Chief Financial Officer; Abhijeet Mukherjee, President and Head of Global Generics segment; and the Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or distributed 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 Investor Relations team. Now I would like to turn the call over to Saumen Chakraborty, our CFO.

Thank you, Kedar. Good evening, and good morning to everyone. Let me begin with the key financial highlights. For this section, all the figures are translated to U.S. dollars at a convenient translation rate of INR 54.52 to $1, which is the rate as on 31st of March 2013. Consolidated revenues for the year were at INR 11,627 crores. We registered year-on-year growth of 20%. Excluding the $100 million profit share from launch of generic olanzapine in previous year of FY '12, the corresponding year-on-year growth stands at an impressive 26%. Revenues for the quarter are at $613 million, with year-on-year growth of 26%. Revenues from our Global Generics segment are at $414 million and grew by 23%. This growth is largely driven by continued progress in North America and emerging market territories. Revenues from our Pharmaceutical Services and Active Ingredients segments, that is PSAI, are at $187 million with year-on-year growth of 36%. Consolidated gross profit margin for the year is at 52.1%. Corresponding values for Global Generics and PSAI segments for the year are at 59% and 32.5%, respectively. Adjusted for the non-recurring benefit from olanzapine revenues in previous years, our margins are largely stable. Consolidated gross profit margin for the quarter is at 50.4%. Corresponding values for Global Generics and PSAI segments for the quarter are at 58% and 34%, respectively. SG&A expenses, including amortization for the year, are at $616 million representing 29% of revenues. Corresponding value for the quarter stands at $160 million, representing 26% of revenues. So relative to the previous years, there is a fall of 100 bps indicating operating leverage. The overall increase in absolute terms was primarily on account of normal year-on-year salary increments, the effect of rupee depreciation and OctoPlus acquisition-related expenses. R&D costs for the year are at $141 million, representing 6.6% to consolidated revenues versus 6.1% in previous years. For the quarter, R&D costs are at $43 million, which is 7% upsell. The increase in R&D expenses during the year was as planned and is in accordance with our strategy to expand our R&D activities across the focus segments. As we have announced in the month of March, we benefited by an amount of $22.5 million from onetime settlement done with Northern Inc., which is formally MDS Inc. The settlement is toward the damages sustained by us due to their breach of the then existing Laboratory Services Agreement for bio-equivalency studies. EBITDA for the year is at $510 million, which is 24% of sales and grew by 9.5% over previous year. EBITDA for the quarter is at $170 million, which is 28% of sales and grew by 37% over the previous year. Adjusted for the year specifically given, that is olanzapine the previous year and Nordion settlement this year, our EBITDA margin has been stable. In fact, it has gone up marginally. Profit before tax for the year at $398 million is 19% of revenues. PBT for the quarter at $144 million is 23% of revenues. The tax rate for the year is 22.6%, which is similar to last year. Key balance sheet highlights are as follows: our working capital increased by $49 million over previous year and is largely in line with the change in revenue mix across the markets; capital expenditure for the year is at $123 million, out of which the key projects include our injectable facility, a [indiscernible] facility and biosimilars expansion. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $480 million, largely hedged around INR 56 to INR 59 to $1. In addition, we have balance sheet hedges of $350 million. Net debt at $267 million represents a net debt to equity ratio of 0.2. With this, I now request Satish to take us to the key business highlights.

Thank you, Saumen. Good evening, and good morning to everyone on the call today. The end of the fiscal year 2013, in the month of March, ended on a somber note with the passing of our founder and chairman, Dr. Anji Reddy. He performed lots [ph] at organizations, but Dr. Reddy has left behind a lasting legacy of innovation and achievement that will continue to inspire everyone at Dr. Reddy’s. Financially, 2013 was a peak year for Dr. Reddy's in terms of opportunities for revenue growth and margin improvement. After ending the fourth quarter with the highest ever quarterly revenues to date, we closed FY '13 at $2.23 billion, at average realized fleet across multiple currencies, which represents a growth of 20% over the previous year. For the quarter, we have seen a healthy performance across key territories, United States and emerging markets from the Global Generics segment and the oral PSAI segment. Especially India, which had concerns on growth earlier on, I'm happy to inform that over the last 6 months, we have demonstrated above-market growth in a very sustained manner. However, through the year, the Global Generics business, overall, also had its fair share of challenges in terms of adverse market dynamics with price erosions and regulatory constraints, but effective new product launches. However, we see a great opportunity for growth in the years ahead as we deliver on our strategy with complex generics in a focused manner. Let's now take you through some of the specific business highlights for each of our key markets. Please note that in this section, all references numbers are in respective local currencies at respective period average exchange rates. Starting with the North America business, revenues for the quarter are at $214 million, which represent a healthy sequential growth of 20% and year-on-year growth of 22%. In January, we launched Finasteride 1 milligram tablets with [indiscernible] marketing exclusivity. Currently, we hold around 78% of the market on this product in prescription terms. We expect the sales of Finasteride to normalize from the fourth quarter of fiscal 2014. For metropolol, we are now close to 13% of the market share. There has been similar progress for other products as well. Revenues for the year are at $738 million, which reflects the year-on-year growth of 29% if we adjust the previous year's onetime benefit of olanzapine. While we continue enhancing our portfolio and customer franchise, the headwinds of increased pricing pressure and competitive dynamics remain. Moving to India business, I'm happy to note the specific interventions that we made over the past several quarters in the areas of sales force realignment, brand promotions, et cetera, have shown the desired results. Attrition, which is one of the key lead indicators, is down significantly related to the previous year. New product introductions have also picked up in terms of productivity of launches. 24 new brands have been introduced, and our Biosimilars portfolio in India grew by 25% led by the flagship brand of Reditux. On an annual basis, in India, we have registered a 13% growth. IMS reported 13.7% growth for Dr. Reddy's as against the Indian pharmaceutical market growth of 10.2%. We shall continue our focus towards strengthening our portfolio and identifying niche opportunities. On the emerging markets front, Russia continues to be our most important market with revenues of $258 million, which is a year-on-year growth of 27%. Besides Russia, CIS and the rest of the world contributed $154 million with a year-on-year growth of 37%. Of this, Ukraine, South Africa, Venezuela and Australia have shown significant growth in financial year '13. OTC continues to be our focus along with the expansion of the prescription product portfolio. OTC now stands at 34% of the total revenue, and there is superior growth over the previous year. Expect this growth momentum to continue in the emerging markets on the back of increased serviceability to these territories, additional OTC opportunities and other new product launches. In Europe, we have transitioned our business model towards a simplified and lean structure. We're also executing plans to change our business mix to deliver threshold level profitability from the region. Our FY '13 revenues stood at EUR 110 million, which showed a decline of 12% over the previous year, which was led largely by the continuing pricing pressures in the external environment. Moving onto PSAI segment, we have been able to demonstrate strong growth for the second year in a row. Revenues for the quarter are at $188 million, reflecting a 26% year-on-year growth. Revenues for the year are at $565 million, which is a 14% year-on-year growth. One of the most important growth catalysts in this segment for this year has been the Custom Pharmaceutical Services business. For the past 2, 3 years, this business segment has been able to convert meaningful opportunities and grow a sustainable growth story. Along with the external revenue growth, the PSAI segment continues to be an important component of the vertical integration advantage by providing valuable support to our general business by making it cost-competitive. Overall, we expect continued growth in the PSAI on the back of new product launches and new contracts. Within this bygone of the financial year 2013, we believe that the financial year 2014 will present us with an interesting set of opportunities for continued growth across all our businesses. Over the past 3 years, we have invested significant management time, as well as resources in driving operational excellence across the company. As you may be aware, in our journey of high growth and rapid expansion some years ago, we faced challenges in our operations, but I'm happy to state that the enormous effort that we have put in over the past 3 years, after embarking on transformational initiatives, we have emerged not only stronger, but we are well-prepared to embrace the next phase of growth in the coming years. During fiscal 2014, our focus will continue in building a high-quality differentiated portfolio and nurturing strong customer relationships across the markets. I am hopeful that the journey to onwards will be interesting and rewarding to all our stakeholders. As you may be aware, we have moved away from giving yearly financial guidance due to the inherent variability of the product approvals and launches. While we may not get into specifics on financial targets, we remain extremely confident on delivering growth on the generics opportunity in both the branded and unbranded markets. With this, I would like -- I would now like to open the session for Q&A.

[Operator Instructions] The first question is from the line of Anant Padmanabhan from Cowen and Company.

I had a couple of questions. I realize you're not providing guidance, but consensus appears to be, for fiscal 2014, expects -- appears to be expecting about 10% to 12% revenue growth. So first, I was wondering if you could maybe qualitatively comment on that expectation.

Like I said, I mean, we're not being specific about what the guidance is. But again, if you look at the various segments in which we compete which have the potential for growth, definitely there's significant room for growth. The only reason we've -- we're not being very specific even as you suggested, express qualitatively, is also because of this whole variability that you are seeing. For example, even last year, for example, when we expected some high-value products to be launched, they got deferred and if that happens again next year, so -- it might lead to some pressures, but we don't want to comment on that. But specifically to say that, is a growth possible on a much higher base? It's clearly out there.

Okay. And then I have one bigger picture question, which is with -- among now in the U.S., I was wondering if you could talk about your broader aspirations in the U.S. market, maybe 2 to 3 years down. It looks like there's a strategy in place for growing the OTC business, oncology, injectables and dermatology. So which of these businesses is a key long-term focus for you?

Abhijeet?

So, yes, Abhijeet here. I think the focus area for U.S. would be we are picking up products which are difficult to make with less competitive pressure, complex product. And specifically in the area of injectables, I think we are investing both in R&D, as well as capability in terms of developing products and taking to the market. The front-end, development of the front-end, we already launched a few products, so that would be another key area. OTC is an area of growth, but not -- no, it wouldn't be really driving the North American growth. I think the complex generics injectables and there -- as we go along into the next 2, 3 years, that the other complex products in other -- into legally [ph] platforms could be patches, could be other delayed-release product, it could be topicals, both steroidal and un-steroidal, and some of those areas.

And is there any appetite to grow inorganically?

We are always looking for inorganic opportunities, but it has to be -- it has to have relevance, relevance to the business. And so we have specific areas in our strategy, a pathway that we have identified, that which are the relevant areas. And if there's a fit, which we're always looking around for, we should certainly go for that.

Next question is from the line of Anubhav Aggarwal from Crédit Suisse. Anubhav Aggarwal - Crédit Suisse AG, Research Division: I have 2 questions. First, on Finasteride 1 mg, is there any royalty that you're paying to the innovator? And in the opening remarks, when you said that you expect sales to normalize in 1Q '14, does it mean that most of the 180 days exclusivity sales you have already booked in this quarter?

Yes. So let me clarify that before the settlement product, but we are not disclosing as such, what is the terms of the settlement. Second thing, this is actually an out-of-pocket kind of a [indiscernible] product market. So the kind of margin you expect from Finasteride is actually at par with some of the good products that we have. So it will not be in line of like what you will, otherwise, it's from a 6-month exclusivity. Anubhav Aggarwal - Crédit Suisse AG, Research Division: And the comment the you made about sales being normalizing in 1Q '14?

Yes. So I think whenever we launch a product in the first quarter, there is always higher a sales. And it's usual to expect the second quarter to normalize to some extent. So that's what you're trying to signal here. I think the Q4 was a launch quarter for this product and Q1 is the follow-on quarter. Anubhav Aggarwal - Crédit Suisse AG, Research Division: Okay. And my second question is on the Russian market, just 2 sub-questions there. One is what percentage of your Russian sales today are under price control portfolio as of, let's say, end of March '13? And second is when do you start supplying from a facility in Russia? Today, you're shipping from India, but when do you have to buy -- laws start supplying from a facility in Russia?

So Anubhav, about 55% or 60% of our Russian products are in the B central drug list. And we don't give you a comment on our Russian facility. We do not, however...

Because this is the law, but [indiscernible] the law.

So there's no clarity at the moment that you have to produce locally. There is some discussions in progress that the government-funded products would first get into some difficulty in terms of if there is local manufacturing available, then that will be given priority. A very small portion of our business falls in that category, and in the current context, we don't foresee that -- this to be a major risk.

The next question is from the line of Ashish Thavkar from CIMB Securities.

This is Prakash from CIMB. Just wanted to have a sense on R&D expense. I mean, it's been very strong and we are able to see the ramp-up. I mean, 10 filings for the quarter, taking the total to 18 for the year. Just wanted to know your thoughts of -- should be continue to see this 18, 20 filings on an ongoing basis and -- which means that R&D expense would be around 7% going forward of sales?

Last time, also, we said that our R&D is going to go up north of 7%. We say that it will go up going forward, but at the same time we also indicated that we do not expect it to go beyond the single-digits. And in terms of the total number of filings, that is the kind of numbers we have in our yearly kind of filing plan.

But could you give a qualitative mix of the filings in terms of it would have included Para IVs, FTS or NISEs?

Yes, for the 5 verticals -- we have 5 so far. There we can give a number. We had a overall cumulative 65 pending NDAs, part of which 38 are Para IV and...

I understand that it's in the press release. For the 18 that you filed this year, if you could give the color.

Yes. So, I think, the future filings, as I just mentioned, I think would be around the complex product. They would be injectables, deliveries products and all that. So, one of the reasons that we would be seeing a slight inching up of R&D expense is some of these products need a differentiated clinical expenditure, and some of these products also partnered with various companies around the world. All capabilities, we do not have in-house. We have some capabilities. We need to plug that on with some of the capabilities in different parts of the world, but the end game is to get to the products which are of lesser competition and which is slightly inching up the R&D product for good reason.

And any comments there? Because, I mean, we see most of the India pharma companies, those who have reported so far, are doing around 15 to 20 filings. So, I mean, a filing takes around 2.5, 3 years to get approval. And by that time we see approvals coming in, do you think that NISEs could become standardized? Any comments there?

I -- we don't think so. I think NISEs -- there's always be that room for go for products which would be of lesser competitive nature. Having said so, I mean, there's always a possibility that it would see some more competition, but we are picking up products which we think are the difficult ones. There could be 1 or 2 more players, but it's certainly not going to be a globostatin [ph] or a Montelukast or products like that.

Sure. My second question, on gross margins. So, I mean, we had this 58% gross margins versus 60% in the last quarter. I understand for PSAI, you said margins are not that great but I would have assumed that the margin, sequentially, would not have declined. Any reasons, particular reasons?

Yes. So, it will depend on the product as it has market mix, and then there have been some inventory writeoffs for the drop for some delayed products.

So, you mean to say pricing pressure in the U.S. generics?

No. I didn't say the pricing pressure. I'm saying the overall margin depends on the product and market mix. If, suppose in Russia, the mix in the overall thing is lower for that FX in a particular quarter, but at the same time, as I said, there will be -- even this specific quarter, there has been some adjustment in inventory writeoff due to the dropped product and some delayed product.

So, 60% is the right number to look at going forward?

So, Prakash, our gross margin will depend on a number of factors. It's really tough to predict.

Particularly in this range.

Yes.

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

Coming to the U.S. market, you mentioned that there were a few high-value products that couldn't get approved in FY '13. Is it in the normal course, can one expect for approval of some of these in FY '14?

I mean, normal course is a very generalized term. These things are not in our control. We hope so, but having said that these are -- as I said, some of these are complex products with difficult path ways whether it's the literature or intellectual property. It's not easy to comment on exactly when that would happen. Hope that happens quickly.

Right, right, right. And the domestic market growth this quarter, per se, was a bit weak. Although for the year, it's okay. So, was there anything into that? Or was it just a fluctuation in the channel inventory or so?

I think, specifically [ph], we actually see the quarter generally been low for most companies, right? So, I will not see there is anything unusual.

Okay, right, right. And if I could just push in one more. The entire $22.5 million, is that all in Other Operating Income?

South of $22.5 million, $2 million is credited in R&D line and $20.5 million credited in Other Income line.

$2 million in R&D for the quarter?

Yes. So, this is entirely for the quarter. $22.5 million is used in the month of March, which were booked in quarter 4. So, as I said, $2 million is in R&D, $20.5 million is in Other Income line.

Okay. So, actually, your R&D expense for the quarter should be taken up by $2 million?

Yes, yes.

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

Just on the Russia CIS. If I look at Russia separately, Q-on-Q, there has been some decline and CIS has jumped from INR 70 crores to INR 95 crores. Is that a new base? Or is there some one-off in the CIS sales?

So, CIS, I think we are experiencing strong growth, especially Ukraine, which is the largest of the CIS countries. Kazakh was also doing well. So, I -- we are quite optimistic about the CIS markets. Having said that, there's also -- we are continuously on the lookout of assets in licensing and one such deal is true. Not that that's the only reason for the upswing, that's one the reasons, which has gone in, in last quarter. But, overall, we are quite optimistic in CIS markets and also the other emerging markets as well.

Right. So, this 100 can idly continue, right? We can project [ph]...

There are seasonal -- as you know, these branded, generic markets always display seasonal behavior. But if you track our earlier quarterly trends, I think we should certainly build further on that.

Right. And just on the U.S. side, any color you can give on Reclast to when do we see more product approvals from the competition and...

I'm afraid not. We can't talk about when competition is coming in. At the moment, it's a two-player market, as you know. We went in first, followed by the company, but I wouldn't be able to give you a base on who's coming in next and when.

Fine. And just lastly, on the progress with biosimilars. Where are we in terms of launching or filing in Russia or in other emerging markets?

So, again, we are progressing on our biosimilars in emerging markets. There are small markets we have launched and revenue is not so meaningful in terms of smaller markets like Myanmar, Vietnam, some of the other countries. On the medium market, I think the file is progressing.

Can you comment on Russia, specifically if it's something which is close or would it still take 1 or 1.5 years timeline?

On the regulatory front, I don't think it's fair to comment on timelines.

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

Just starting it, would Zumeta be a big contributor in this quarter, meaningful contributor for you?

Zumeta was launched in Q1, as you know, and Reclast was launched in Q2 -- sorry, Q4. Zumeta was in Q4 and Reclast in Q1. So, Zumeta, I think has become -- more players have come in, but we have formidable share. We were the -- it was a day 1 launch for us. We have very good share in the product. I think all of it not coming public domain but soon will show up in the public domain. So, it's going to be meaningful for us.

Okay, and secondly, again, coming back to the R&D question. I mean, you just announced that you're, again, setting up R&D in the U.S. I mean, I think 3 years or 4 years back, you had shut down your R&D for the U.S. So, just want to understand what's going on and does the R&D -- I mean, because previously you guided for R&D being around 7% to 8%. Is it something that we should expect? Or do you think that number -- it has risks to the upside rather than the downside?

Okay. So, the previous R&D that was shut down was to do with NC [ph] research, right? So, that has no bearing on what we're trying to do now. The current one that we're talking about is a small development lab for oral [ph] small dosage forms which we are setting up in the U.S. So, that doesn't raise the cost significantly, just in terms of infrastructure. It's part of our whole effort of globalizing R&D, because to give it the kind of horsepower that we require for delivering high-value products. That's why it's being done.

Right. And just, I mean, and when would we see the impact of the -- I mean, given that we have the OctoPlus integration also happening. So, I mean, where do you see R&D, really, speaking in terms of -- as a percentage of sales, really, figure [ph]?

So, it's difficult to comment just exactly based on this OctoPlus [indiscernible] because if you take the overall R&D expense of the company, it also includes the spend that goes on in proprietary products. And as and when you see more and more products progress towards clinical trials, you would also see an increase in that. And so, if you say in terms of absolute peak, it's difficult to predict that, right? So, it's all predicated on the events. But all we'll be able to at least tell you is that from the current level of say 7% of sales, we still expect it to be in single-digits even for the next 2, 3 years, at least. Even beyond that, yes.

Right. And just in terms of you named some delivery platforms earlier in the call. So, are you already starting filing for these products? Or these are still in development phase?

You're talking of -- overall, yes, I think there are already...

Topical, [indiscernible].

Yes. There are quite a few in development phase. A few should get ready for filing toward the end of financial year. And as we speak, some have been filed through, from our partners. There are some products which are filed from a partner, but then a partnership product would have revenue sharing and some sort of deal.

Great. And just lastly, can you just comment on the CapEx for this year?

For the year, the CapEx is $123 million, Sonal.

For FY '14, what is your expectation?

It's a range, INR 500 crores to INR 600 crores.

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

First question, I know you are for refraining from giving any financial guidance. But for some of the businesses which have shown traditionally a stable growth -- I'm referring to India, Russia, maybe PSAI. Is there anything to say that, that piece of growth will not continue? Would it be any different from what we have seen in the recent past?

I think, too, Sameer. I think, that growth momentum, we expect it to continue.

Okay. So, I think the bigger variability is coming from U.S., I guess.

I was more referring from what happens in the U.S., because that's where the big growth is, 1 or 2 products which could bleed once in a while. It tends to push everything, so we didn't want to comment on that. But if you're asking about other markets and about the PSAI business, I think the growth momentum should continue.

Okay. And given the fact that we have a lot more focus on complex generics. Is it possible to just share something qualitatively on what could be the possible rollout? Something like 1 to 2 products per annum is what we could expect going forward the next 3, 4 years?

Yes, I mean, that's a fair expectation. Having said that, there is regulatory hurdles, as you know, Sameer. But that's a fair expectation.

Okay. And is there entire accomplish [ph] and I think effort focus from the U.S.? Or do you think that could be meaningful upside from other geographies as well?

The product leverage, wherever it is applicable like -- E.U., certainly, would have some spillover effect. But, as you know, the pricing in E.U., and many of the complex for us as well, is a fraction of -- sometimes 50% of U.S. The regulatory pathway is more challenging at times. So, those are the challenges of getting value of those complex products in other geographies. But there could be some spillover even in some emerging markets as well, but the large part of it would come from U.S.

Okay. And just on the U.S. pricing environment. Just philosophy, I'm trying to understand market dynamics. Even if there is no new competitor for your base business, do you end up seeing some price decline or, in that case, the price remains stable?

So, there are 2 things happening in the U.S. market. One is, you're probably aware, that the customers are consolidating and then that has paramount impact on -- in terms of the way they approach the bidding, the selection of suppliers. They're trying to leverage scale to derive some value out of it. So all that is happening. Much of it is in public domain in terms of various retailers, what they are doing, in terms of increasing their footprint in various parts of the world, in U.S., consolidation itself. So, that's 1 factor which is causing some erosion in prices. And secondly, of course, there are new players coming in, specifically now. Our case, again, there is a lot in public domain on Lansoprazole, on Tacrolimus. So, there are players -- ziprasidone players have come in. So, while as market share gets protected, the value goes down. I think that's going to be sort of a feature of U.S. market for all quarters and for all players.

Okay. And just to understand, is the customer mix now fully digested? Or do you think there's some more pain left, wholesaler versus retailer and the customer, the shift that you have been seeing?

You mean, the consolidation of the customers?

The impact of the consolidation. If it -- if there's no more consolidation, then all your orders have been reset at a price and now this is going to be the new base to start with? Or there's more pain left.

By and large, for the year -- for the first point. The second part as you know, as people come in, it'll have its own implication. But as far as the first point is concerned, by and large for the year, you're probably aware of the large retailers, et cetera. So by and large for the year, I think it's done. But the impact would -- is not seen and it would be seen as we go into next quarters. But overall, I think, we -- there is competitive pressure, but I think we are taking it as part of the business framework in North America.

The next question is from the line of Manoj Garg from Edelweiss.

Just would like to understand about the [indiscernible] market. Like, we have a consistent rate of around 130, 135 crores, kind of quarterly run rate in [indiscernible] market. I just would like to understand how the GSK deal is ramping up and are we seeing some [indiscernible]over there?

The GSK deal is a very small percentage of the overall emerging markets revenue which we have. So, it's a very specific deal tailored for certain products in certain markets. So, it's not a very large, meaningful part of the whole revenue today. As we go along, it'll ramp-up to a certain extent, but even in 3 years it's not going to be a very significant part of the revenue.

Okay. And sticking with the -- you have indicated there were some inventory write-off during the quarter. Can you quantify that amount if possible?

No, we do not really specifically quantify. We have just indicated some of the drop in delayed product. The inventory write-offs also has an impact on the gross margin.

Okay. And the third question from my end, like, basically, if you look at the SG expenditures on a sequential basis, despite around 16% kind of growth in the top line, we have almost seen the flat SG kind of expenditures. So are we seeing that opening deliveries [ph], coming into the system and probably this is already room to sustain going forward?

We said there is 100 bps improvement in SG&A that -- in this side, of course, [indiscernible] which has been happening in a normal course in terms of the annual increase that we talked about, and also there are specifics, I also said, about the effect of rupee depreciation. That definitely has an impact on SG&A as well, apart from giving us some benefit on the revenue side. And I also spoke about one-time surplus acquisition military [ph] expense.

But despite those higher expenditure and all, we were able to contain our [indiscernible] cost. So what -- I just want to understand, is it going to be a run rate going forward?

So, of course, we expect operating leverage. But having said that, there'll be again annual increases that will be there.

And the last question for my side, sir, like what would be the tax rate for the year going forward, FY '14

We can only talk about the range. We have been normally talking about the range of north 22%, 23% kind of thing.

Next question is from the line of Nitin Agarwal from IDFC Securities.

I mean, Satish, on the India business, I guess we've done our fair bit of catch-up as far as growth is concerned over the last quarters or so. But when you look at the business, 3 to -- take a 3 to 4 years view of the business, I mean do you see that the character of the business naturally changing in terms of the growth trajectory given the fact that this is 1 big difference as far as we and some of the better -- some of the faster-growing peers in the space is really concerned, I mean based on what you're doing in domestic business?

Yes, sir, it will change. The answer is yes, right. So the question is at what rate will it really clip on all. I mean, that's something we have to wait and see because if you have seen the kind of challenges that we faced, a lot of it are only internally doing it in the past. What I was trying to indicate was that, that's been the worst from what we convert at the beginning of the year, right? So that's moving very well. Now like you said, there is competition that's growing at a faster rate, right, so we're not the only people. Although, definitely, if you've seen a couple of months, we are one of the fastest growing companies. But having said that, so to really grow much above the market growth rate, I mean to really widen the gap from the current market growth rate and then grow much above that, a series of steps have already been put in place. Some have been piloted, they're working really well. Some of it has to do with new products, some of it has to do with some realignment that we did in the field force. All of it -- I mean, for it to clear, we just have to watch maybe the next 2 quarters. But before we can really say that, even the next 3 years, which is the timeframe that you're looking at any growth significantly parts within the competition. So I would still wait for the next 2 quarters.

That's a fair point, but I mean I guess -- in some of the plans that you're talking about, is it -- practically, it's possible for us to grow it like 18%, 20% growth rates with some of the odd larger peers have been able to achieve for the last few years? Is it -- is the structure of the business is that we will not be able to hit this kind of number given the structure of our business?

Eventually, yes, of course, right. So all I'm trying -- was trying to indicate was one of the bigger reasons is obviously going to be this pricing policy being notified, right? So it's impact of the market, exactly how things are going to settle down. So that's why I'm just sounding a little bit of caution, saying that let's watch for the next 2 quarters how it settles down, right? And then really look at how much more than the market rate can we grow.

This is helpful. Secondly, on the RoW business, we've start off -- we restructured the business some time back. And we focused on a bunch of businesses. And you mentioned 4 geographies which have been doing extremely well for you. So I mean, again, when you look out next 2 to 3 years, so we're looking to consolidate these businesses, try to grow, especially on these geographies? Or are we looking to add some more geographies to this business also?

These are the geographies where we've been present all year, right? So kind of efforts that we put in all the past year or 2 and that has led to growth in these markets, right. So these are nothing new, right. So any of these markets that we talked about, South Africa, Venezuela, Australia and New Zealand. So we expect to continue the growth momentum because a lot of potential is being given to these market. So we don't expect additional markets to add to this, right? So from these markets, we feel we can grow.

So you're not looking at some of these newer markets, like Mexico and Brazil, which...

No, we're not. We're not.

And lastly, on the receivables, I know one sees there has been a steady increase in the receivables over the last receivable days the last 2 to 4 years. Is that a conscious or a strategy for the same on -- or how do we see this thing playing out for us?

If I compare last year, the DSO has not increased.

I mean if I -- at least the numbers which I have indicated, it's gone up from 58 odd days to about 87 odd days over the last 3 years.

3. 3, 4 years.

So would you like to comment?

Yes, it's a function of the business mix, Nitin. And one country where we had to align our receivable days in line with the market reality was Russia where approximately 1 more month of receivable has been invested in the market.

But around these 85 to 90 days, is it where we should expect that -- our business to stabilize now?

We do expect our -- these sort of stabilized at current levels, at least, within the next 12 to 18 months.

Okay, and then if I could squeeze in a last. On the API business, at least, how do see this playing out for us? We had this big years for 2 years when a lot of patent -- drugs went off patent. Now going forward, the number of expiries are going to reduce, so is it going to hamper the growth of this business? Obviously, we've grown at a very, very fast pace over the last 2 years.

Having the growth drivers are -- in various areas, right, for the API business, specifically. So in the past, if you look at the markets of where we were competing in and the number of customers that we used you have, there are a variety of them, right. So a lot of work has been done in terms of consolidating the customers that whom we're going to swap, so we made a choice on that. Also, in terms of the markets that we are stepping up our resources and also some of the technologies that we're investing in and also making sure that we're able to compete quite aggressive in the market, a lot of steps have been taken. So if I add all these things together, certainly, there is growth to be expected from the API business. But that's something you have to wait for things to rollout because this is also some kind of a cyclical growth in this business. You can't expect that every quarter we do the same as the previous quarter does, of course.

Next question is from the line of Ranjit Kapadia from Centrum Broking.

Most of my question relates to biosimilars. What is our strategy to enter in the regulatory market of U.S., Europe and Japan?

So this is part of the Merck Serono deal that we have done, so that's how it's going to progress into these markets.

And when can you expect a substantial amount of revenues coming from this business on the regulated market?

There's a time for that. This is too -- quite some time, 4 or 5 years at least.

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

You mentioned that like 65 ANDAs pending. Can you quantify how many you would classify as complex on limited competition on this pipeline?

Again, directionally, we are moving towards complex products in relative terms. There are numbers, Saion. I think we won't be able to give you an exact breakup of -- and firstly, the definition of complex itself is a broad definition. How do we exactly fit, this is fully complex, this is half complex and this is not complex. But directionally, we are moving in the direction of the products. We are trying to go for products of less -- assets of less competition to various means whether it's manufacturing complexity, whether it is development complexity, whether it's regulatory complexity, whether it is clinical trial requirement or it's intellectual property.

Yes, but you would be classifying when you identify these opportunities, right? I mean your expectations could be like 2-, 3-player market. I mean, don't know, is that the way you look at it given the complexities involved? I mean, how do you go about defining a particular opportunity as limited competition?

Whichever I said gives sustainable revenue in -- on a, at least, 2-year period, let's say. So that would be complex. So that would naturally come with lesser number of players. This 65 you allude to is, some of it is historical. Going ahead, the selection is largely towards products which we think hopefully would attract less players. As you progress, there are not large blockbuster targets, as we all know. So the choice would be a little more sharper towards these, but these are all assumptions. As we actually hit the finishing line, we would actually know where we are actually.

So actually, you mentioned that there have been some slippages in terms of gaining approvals on time of some of these products. And you did mention, I think, 1 or 2 such opportunities you would see going forward. So over the last 1 year in your interaction with the FDA, I mean how confident you are that these things would come through in, say in FY '14 that you would have 2 more launches which would have limited competition?

There are always expectations, there are always expectations. Again -- sorry, go ahead.

Yes, I mean is it something that you need to do in terms of doing more studies or data? Or it's just that the assessment is taking more time? I mean where is the bottleneck at this point?

In most cases, in most cases, I think we are, by and large, responding in reasonable period. I think the restructuring with GDUFA and all that is taking a little bit of our time. I think it will get -- it will be in right sort of speed soon, we hope so. But at the moment, I think it is going slow, not so much for a lot of new studies or new things, which we need to do. There are -- of course there are some questions here and there, but not too much.

Okay. So it's more administrative in nature in essence?

You would guess so.

And on biosimilars, so what's the pipeline for launch in India now? So what's the pipeline and what's the sequence of launch that we expect in India?

We don't discuss product-specific issues here.

Okay. Can you -- I mean number of projects, can you disclose that, that you have currently?

I mean, there are about, say 5 or 6, which -- specifically, we won't be able to say which ones. And when do we expect to launch, that we won't be able to comment.

Okay, sure. And finally, can you share the cash flow hedge loss or gain number for the quarter?

Saion, this quarter, we booked about INR 28 crores of the hedge loss. Last quarter we booked about INR 55 crores. So because of the increase in the net delivered rate, [indiscernible] coming down quarter-on-quarter.

So next quarter, you expect it to reverse?

We won't comment on that. That could depend on the...

So on hedge, I think you mentioned INR 56 to INR 59 or something, right?

It will depend on the selling and refund [ph] rate.

The next question is from the line of Monica Joshi from Avendus Securities.

Just one question. Directionally, where do you think is Lunesta as the case going? I believe you had a summary judgment in your favor. So how do you, as a company, now progress on Lunesta? And do you think that this would be somewhere close to an opportunity in FY '14?

Under litigation, Monica, I think we wouldn't be able to comment on this, under litigation at the moment.

Okay, fair enough. On the other product, on metropolol, if you could share what is now your expectation, suppose 1 more player or 2 more players enter the market? Just hypothetically, how much do you see that the market could shrink further?

The market has shrunk to a reasonable level, actually, because with our entry, our 15% market share carving out did take some toll on the market itself. So another player coming in, anyone's guess. I would -- there is -- it's not -- it is a good product, but it's not absolutely super product for a few more players to come in.

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

On the PSAI side, are there any one-off or revenue -- I mean linked to sort of exclusivity related to API supplier or anything, which is sort of driving up the quarter or...

So earlier also, we have said we should not judge the PSAI performance on quarter-on-quarter basis. We should more look at yearly basis, the performance we got there, could be fluctuation from 1 quarter to another quarter.

Right. But on a whole year basis, you think -- I mean, some of the commentary that -- I mean you think there is sustainable growth of close to double digits possibly in this business?

We have been growing, and of course, there are new customers that also we are acquiring so...

The possibilities there. We're not saying no to that. It really depends on the contracts and the customers and things like that.

Right. And just one question on, again last year, you had given, I mean, a growth guidance and sort of potentially a number of 2.4, 2.5, which was -- your 2013, your FY '13 was a big year. So I mean if you look back at the guidance that you gave in FY '09 and then last year, I mean so what has really changed in terms of, I mean just have there been some product opportunities that you will not be able to capitalize? Or were there some products, which generally says much more than what we expected? I mean how would you sort of look at that? And would it be possible for you to give now -- give a 3- to 5-year view of the business for the next 3 to 5 years?

So, I mean it's difficult to quantify exactly which led to what kind of erosion, right? So for example, we clearly said that when it came to the U.S. market, which is really a substantial part of the sale, some delays in approvals. Some products where we expected lesser amount of competition, there are more of that. Actually, there were a host of factors, which led to that, right? So all -- even if now if you ask me about the 3- to 5-year business direction, what kind of growth and all that, all we can say is, at least, in the areas where it's a stable kind of a market, like Sameer had asked before, these double-digit growths are sustainable, certainly. So if you take the Indian market or you take the Russian market, in some of the emerging market where it's branded, it's pretty much possible. But when it comes to the other parts of the business, so there are these high-value products. There is dependency on factors, sometimes which are not under our control, like the regulatory issues that we face. So that's the reason why we're not able to specifically guide you to say that this is what it's going to be every year, right, while these uncertainties do exist and variability exists.

Right. And if I could take one more question. On the OTC, U.S. OTC business, you said that -- I mean it may not be a major driver of growth while there is still a growth opportunity. But just I wanted to understand, I believe the market in the U.S. on the OTC side is big. So I mean what is clearly -- and given that you have strong capability on API and manufacturing, I mean what is really the challenge for you to scale up that business? Is it relationship? Is it -- I mean I understand the margins would -- might not be as attractive as generics, but then it's probably a long-term business like, so...

Well, the issue is products. In RX business, there are a lot of products one can file and aspire to get approval. Here, there are not, as we speak, probably the next year could be the next launch. Otherwise, there are not whole lot of big OTC switches one has seen. Even the last switch of Lansoprazole was not a great success in the market, not just for us. We have good market share. So market share, customer relationship is not the issue, but there are not so many products. There's a lot of talk of future switches happening. There are statements made by a lot of companies saying that they see growth. Being an active RX player in U.S. market, I think as the switches happen, we will be better positioned. We can say that. But today, as we speak, there are not whole lot of products, which are available for revenue from the OTC. And also, just to conclude, I think this is also a cyclical business for us. Q4 was the allergy season, although it was subdued this year. But Q -- going into Q1, that part of it would be moderated.

Last question will be from the line of Sameer Baisiwala from Morgan Stanley.

Just on the GDUFA, I guess, right now the approval time by FDA is maybe any where from 35, 36 months. I think they think that they can bring it down to 12 months or whatever, 3 years or so? Is this going to be good for you, good for the industry or not so good?

Well, I think no. 12 months, I would say, is probably an aspirational figure. Let's see how it pans out. But more importantly, I think there is a great degree of rigor which is coming in. So people, the companies, which are going to use QbD and other development methods, which are much more scientific would reap benefits. We'll see whether we are in one of those. Our efforts are on, but I don't see it's a negative, really.

And when I say negative in the sense that for certain products, you have only 3 or 4 players in the market and because of FDA's resource constraint, unable to approve more people. So that kind of luxury of low competition market you may not have, if at all. And there are people in the queue, so I was coming from that point of view.

Yes. For the plain [ph] or the solids [ph], yes, but since the rigor of review was going up substantially, there would be difficult questions asked. And the development is not in right way, there would be differentiation. But whatever x months, whether 12, 14, 18 or 20, would be applicable to companies who have done the work very, very well, so there would be differentiation, I guess.

Okay. And just one question. You talked about, as I think you talk about longer-term growth being there, you -- even though you're not quantifying, but you're quite optimistic about it. Just on the margins, where we are right now, what the ballpark, 18%, 20% at operating level. Over next 3, 5 years, what could be the broad trend for the margins?

Certainly improvement on the existing base, Sameer. Again, difficult to quantify. But the way we are moving in terms of the markets, the business, the kind of products that we have chosen, there's certainly room for improvement there.

Thank you. Ladies and gentlemen, that was the last question. I would now like to hand over the floor back to Mr. Kedar Upadhye. Over to you, sir.

Thank you, all, for joining Dr. Reddy's senior management for Q4 FY '13 earnings call. In case of any additional clarifications, please feel free to get in touch with Investor Relations team. Thank you and good day.

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