Dr. Reddy's Laboratories Limited (RDY) Q1 2015 Earnings Report, Transcript and Summary

Kedar Upadhye - Head of Global Generics Finance & Investor Relations and Senior Director Saumen Chakraborty - President, Chief Financial Officer, Global Head of Information Technology & Business Process Excellence and Member of the Management Council Abhijit Mukherjee - Chief Operating Officer and Member of the Management Council Gunupati Venkateswara Prasad - Co-Chairman, Managing Director, Chief Executive Officer, Member of the Management Council, Member of Management Committee, Member of Shareholders' Grievance Committee, Member of Investment Committee and Member of Corporate Social Responsibility Committee

Prakash Agarwal - CIMB Research Kartik A. Mehta - ICICI Securities Ltd., Research Division Girish Bakhru - HSBC, Research Division Neha Manpuria - JP Morgan Chase & Co, Research Division Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division Sameer Baisiwala - Morgan Stanley, Research Division Sonal Gupta - UBS Investment Bank, Research Division Chirag Dagli Aditya Khemka - Ambit Capital Pvt. Ltd., Research Division Rahul Sharma - KARVY Stock Broking Limited, Research Division Ranjit Kapadia - Centrum Broking Private Limited, Research Division Nimish Mehta Hitesh Mahida - Antique Stockbroking Ltd., Research Division Nitin Agarwal - IDFC Securities Ltd., Research Division

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Q1 FY '15 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you, sir.

Very good morning and good evening to all of you, and thank you for joining us today for Dr. Reddy's earnings call for the first quarter of fiscal 2015. Earlier during the day, we have released our results and the same are also posted on our website. We are conducting a live webcast of this call and the transcript shall be available on our website soon. Just a reminder, the discussion and analysis in the call will be based on IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising Satish Reddy, our Chairman; Saumen Chakraborty, our Chief Financial Officer; Abhijit Mukherjee, our Chief Operating Officer; and Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcasted 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 Investor Relations team. Now I would like to turn the call over to Saumen Chakraborty, our CFO.

Thank you, Kedar. Greetings to everyone. Let me begin with the key financial highlights. For this section, all the amounts are translated to U.S. dollars at a convenience translation rate a INR 60.06, which is the rate as on 30th of June 2014. Consolidated revenues for the quarter were at INR 3,518 crores or $586 million. We registered year-on-year growth of 24%. Revenues from our Global Generics segment were $483 million and grew by 32% year-on-year. This growth was well diversified across the geographies. While U.S. generics got benefited by continued limited competition for the last year's launches [ph], there was sustained momentum in emerging markets territories and India formulations as well. Revenues from our PSAI segment were $92 million and declined by 6% year-on-year. Consolidated gross profit margin for the quarter was 59.3% versus 52.8% in the same quarter of the previous year. Corresponding values for Global Generics and PSAI were at 66.5% and 22.3%, respectively. As we have highlighted earlier, this margin expansion is due to improved product portfolio and a favorable currency situation compared to the same quarter last year. SG&A expenses, including amortization for the year, were at $178 million, an increase by 21% year-on-year. However, SG&A as a percentage to sales decreased by 55 basis points. The cost increase in absolute terms is largely due to depreciation of the rupee against multiple currencies, annual increment, additional manpower deployment in the past 12 months and other sales and marketing spend for events specific to this quarter. R&D expenses for the quarter were at $65 million, representing 11% revenues versus 8.5% in the corresponding quarter of the previous year, as also mentioned earlier. The increase in R&D spending during the quarter is in line with our planned scale up in R&D activities. EBITDA for the quarter stands at $148 million, which is 25% of the revenues and grew by 56% over the previous year. Tax rate for the quarter is 21.5%. Effective tax rate for the year is expected to be in the similar range. Key balance sheet highlights are as follows: Our working capital balance increased by $71 million over the previous quarter, and is largely in line with expectations. Capital expenditure for the quarter was at $36 million. Our net debt-to-equity ratio has significantly improved to 0.09. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $470 million, largely hedged around INR 59 to INR 63 to $1. In addition, we have balance sheet hedges of $460 million. With this, I now request Abhijit to take us through the key business highlights.

Thank you, Saumen. Greetings to everybody, and I extend a warm welcome to you on this earnings conference call. This has been a good start to the year with our performance both in terms of sales growth and margin expansion playing out as far as the patients. During the last 12 months, we proceeded toward building a strong injectable franchise in U.S., with key set of products being Decitabine, Azacitidine and zoledronic acid. We have demonstrated our ability to build shares in the space and has been proven to be a source of sustainable value proposition for us. Our emerging market geographies in India business also continued positively despite challenging macro environment. For the PSAI business, the challenge on the excel [ph] front continued in 2 pockets. We saw revenue stability and relatively better margin profile for API portfolio. Now let me take you through some of the business highlights for each of our key markets for this quarter. Please note that in this section, all references to numbers are in respective local currencies. Revenues from North America Generics for the quarter were at $274 million and grew by healthy 40% on Y-O-Y basis, and 12% on sequential basis. As mentioned earlier, contribution from the injectable products sustained through the quarter, as there was no noticeable competitive entry. You would have also noticed that we have increased market share for some of our key products, example, Metoprolol and Ziprasidone. Over the past 12 months period, we have improved on the generics rank by value to 8, up 3 places as per IMS. While new launches are not fully factored in as yet in our revenue numbers, the expected contribution from these launches may not completely offset the impact of possible competition we expect to see starting this quarter in some of our limited competition categories. Revenue from our India business were at INR 400 crores and recorded 15% year-on-year growth. This is our second successive quarter of growth above industry level. We continue to see healthy volume expansion in our focus brands, some of which are under $1 million. We are also seeing robust prescription growth. We have selectively increased 3/4 of some therapies to increase our depth and coverage. The team continues to look out for differentiated products to enrich portfolio mix and address existing unmet medical needs. On the emerging markets front, Russia revenues were at $70 million for quarter -- for the quarter and grew by 18% in local currency terms. We continued to perform better than the market, both in volume and value terms. OTC comprises about 37% of total revenue and registered 22% growth over previous year. As for May IMS report, we are third fastest-growing OTC company in the top 25 list, ex Russia. The emerging market territories grew by 45% Y-O-Y, majorly contributed by Venezuela. There are always headwinds surrounding various macro factors, such as currency and political situation, in these markets. However, we remain quite optimistic from the opportunity in these markets on the back of good portfolio, increased serviceability, OTC business potential and headroom to grow our Rx market shares. Our PSAI business declined by 6% on year-on-year basis due to continued subdued demand and some deferment of customer launch plans. API is looking better with improvement in gross margins and higher developmental sales. Also there is a gradual improvement in our order book over the last few quarters and its value shall be realized in the coming quarters. CPS performance fell short of expectation in this quarter. As mentioned earlier, PSAI provides major competitive strength to our generics business, especially considering increasing generics pipeline launches in the limited competition space. With this, I would like to open the session for Q&A.

[Operator Instructions] Our first question is from Prakash Agarwal of CIMB.

Just wanted to get a sense on the U.S. dollar revenues. 2 things here you mentioned on the sustained run rate on the injectable portfolio. So I mean, what's the sense on its sustainability? I mean, are we expecting some competition to build now or is there a bunching of that has happened like we saw a couple of quarters back? That's my first question.

It's been a good run from the time we launched. There are 3 or 4 products which are in limited competition space. We are hearing about one competition in one of the assets, not yet in the market, but we're hearing that should be very soon. Would it be an onslaught of number of competitors? We don't think so as yet. But like in all generic products, gradual erosion, we expect that as more people to come in.

Right. And on the other piece, in the U.S. again, you talk about market share gains and especially Toprol and Geodon, which is a function of US FDA issues with a couple of peer group. What is the comfort that we get that these are again sustainable?

As much as you have probably. We'll see how it pans out in terms of -- we don't know, we don't have honestly visibility of how others placed. Haven't heard of anything as yet. So I think, Toprol, as you know, it's not likely to see a lot, a large product. Geodon might see at some point in time, but we don't have visibility at the moment.

Is this clubbing the 2 and your earlier guidance of muted growth this year, given the strong growth you have seen this quarter, how should we expect the remaining year to pan?

I mean, muted growth will be in signal. We signal vis-à-vis, 30% type of growth, which we had seen for the full year. To that extent, we are signaling muted and I think we are -- first quarter has been great, but I think we are cautiously optimistic, but I think we'll leave it at that actually.

Our next question is from Kartik Mehta of ICICI Securities.

Just wanted to understand what is the ballpark R&D number that one should assume? It is increasing that we have almost about 11% or so what? Is there any number? That is the first one. And the second one is, is there any thought, Prasad, you would have on the recent approval of a buyer similar to -- which was received by [indiscernible] on 28th?

Let me take the first question. On a full year basis, we expect R&D to be between 10% and 11% of sales. Second question, I have not really understood completely.

I don't know first approval of buyer similar by the FDA, which was filed...

You’re talking about our filing, Kartik?

Is there any thought that you have for your investments in this? Do you feel that there is more visibility in terms of the pipeline or overall pipeline that we have here?

For Biologics, I think the journey continues. I don't -- we don't have an immediate update on this. You may be aware that we are in a deal with [indiscernible] and the journey continues. So there is no near-term expectations.

Our next question is from Girish Bakhru of HSBC.

Yes. Just first question is actually a clarification. In your press release, when you say the FTF from last quarter it has come down, one, is that the Cymbalta launch that you are referring to?

Yes, Girish, we'll come back to you. Possibly, yes, we'll come back to you.

Okay, okay. The second one was on Paricalcitol, have you launched that in the U.S.? And how interesting is this market given that there are only 3 players likely?

Yes, Paricalcitol, we've certainly launched, it is already in the market. It got some shares, but it's not a large product, as you know, Teva was already there and I think Banner and Zydus followed. So it's for the size of the product, it's not such a significant revenue stream for us.

Okay, okay. And just on Reclast, any update post the Markman hearing? Are there players waiting to launch?

Not heard anything new. Your question was on Reclast, is it?

Yes.

I've not heard anything new.

And our next question is from Neha Manpuria of JPMorgan. Neha Manpuria - JP Morgan Chase & Co, Research Division: So my first question is on the emerging market growth. Now if I look at the Russia & CIS business, given how strong Russia was, was there concern in Ukraine or CIS growth because of the ongoing geopolitical situation there?

In Ukraine we have already taken a hit this quarter. The geopolitical situation is indeed affecting the geography sales and it's a significant part of CISR part of the geography. So in Ukraine, we've already taken a hit. But Russia, we are doing quite well. We're not just doing well in totality, but I think we are doing relatively very well compared to the market, both in OTC and Rx, we have gained rank. Now, of course, there are some concerns. Ruble has weakened, vis-à-vis, last year. There's some impact of that. Interest rates have gone up to a certain extent. But for us, so far, so good, actually. Neha Manpuria - JP Morgan Chase & Co, Research Division: Fair enough. My second question is on PSAI. If I look at you've mentioned that it's improving sequentially and we should see improvement. This is in relative to the commentary that we made last year despite that we've seen some quarter-on-quarter decline in this business. Should we still assume that we'll take a few more quarters before we actually see improvement in this business? Or should we start expecting growth at least bottoming out of the revenue decline that we've been seeing in the last few quarters?

So in API, part of the PSAI business, we already see some improvements. The way one looks at factors which indicate some return of health is our seedings and lock-ins, which have started going up. Filings are healthy this quarter, so the API side, I think, we are getting better. This quarter was particularly affected by CPS. There are some deferment of sales and there are some areas where our delivery got a little delayed. So I think from second quarter will pick up. Would that lead to a situation where we are in the pink of health? Probably not. But certainly, the worst seems to be slowly behind us, getting behind us. Neha Manpuria - JP Morgan Chase & Co, Research Division: That being said, sir, should we expect margins to improve, I mean, 22% was quite a good margin, given we did 20% last year. Is there more opportunity for margin improvement as we go through the next year?

Yes, the revenue improved. That has its impact also in the margin a bit. So probably, we can expect some improvement in margin in API.

Our next question is from Surya Patra of PhillipCapital. Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division: Sir, a couple of questions. On the biosimilar front, I see though, we have been seeing a kind of steady growth in the biosimilar revenues, but penetration wise if you see geographic penetration, it is very limited as of now, still though we have launched the products long back. So whether you're seeing a kind of significant regulatory issues in getting the product approved in various markets or what is the problem?

So in biosimilars, I think the regulatory approach by the countries vary. Even in emerging markets, I think, there are various approach to regulatory approval. So we are looking at quite a few markets, but some markets have also part of the deal. We'll not be able to elaborate too much at this juncture on exactly how we are placed. But we are continuing to sort of engage with various agencies to see our approvals. Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division: So what is the timeline that you're seeing in getting an approval in an emerging market? See in fact, for maths, I'm not asking this question, okay, that is partnered with Merck and that will take its own time. But at least the product that is already been launched in the various emerging markets or India. So for those, how long that you would be seeing a kind of better penetration?

Even for the emerging markets, as we speak, quite a few markets are clubbed with the Merck deal. And we'll not go beyond that, but what we can clarify is some of the markets which we are already operating in, we are free to launch. Some we have already launched, and the big, as you've already messaged that our file in Russia has been -- was filed sometime back, and we are tracking how that's moving. It's not like a small molecules, well, it's a predictable journey, but that's probably the next important milestone in Biologics for the emerging markets. The rest of it would be country by country. There is partly covered in the deal. We will not be able to cover the meaningful ones. There could be small launches here and there. The markets where we have launched, it's $1 million product, so not... Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division: Okay. Then again regards to OctoPlus, it is now, since the acquisition it's more than a year now. So any progress or any contribution that you have gained out of the OctoPlus side in terms of -- since we have been seeing that, that is one of the key assets so far as the injectable product or the complex products are concerning developing those?

Currently, the acquisition is focused on 3 complex injectables. All are in various stages of development. All these 3 assets will need clinical trial also, clinical PK studies, which -- so far, I think the development journey is moving in the right direction. We have our internal guidelines. We are tracking it quarter-by-quarter, and we will message to the market as soon as we come closer to approval or near the time. Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division: Okay. Last question, sir. See, could you give us some update on the injectables product that is there in the pipeline? For example, they have given Propofol for that matter and also whether you have commissioned your Srikakulam injectable plant? What is the update on that?

So the oncology injectable plant was commissioned long back, it's already commercial, both on injectables, as well as the oncology oral solids. On the plain injectables plant, the commissioning has started, but then the filing will start and then approval, et cetera. On the pipeline, there are products which are already -- we're in litigation, you can get those data. But specifically, we'll not comment on the pipeline. There are quite a few products in injectables, but we filed 2 in this quarter as well. So I think we'll have to wait till the launch. Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division: Total, how many products -- injectables are there in the pipeline?

Surya, we won't comment on that now. Can you come back in the queue later, please.

Our next question is from Sameer Baisiwala of Morgan Stanley.

Sir, quick question on Copaxone? Can you update us how the file is progressing and clarify if you have filed this from your facility or from a third-party?

So firstly on the progress of the file, some interaction has started and nothing negative so far. As I mentioned last time, I think we feel good about the quality of filing. We'll just leave it to that. About specifics of the supply chain, Sameer, I think we'll not comment on. The main, as you know, this effect is largely the one by characterization of the API and that's all internal in any case.

Okay. And sir, on Nexium, is it possible to clarify, I mean your launch would be on 181st day post FTF and this is no matter when FTF launches. Would that be the correct understanding?

Yes. So again a public domain information, no one has TA so for, you must have seen. No one has tentative approval, but having said, which makes us feel okay about it, actually, that whether we would be 181, et cetera, that's a question of the approval going through. But no bad news on this front from our side as of now,[indiscernible] , without TA we can't comment further than that.

Fair enough. What I was saying sir, at the earliest, no matter when the FTF comes, it would be after 181 days thereafter?

Yes. Yes, that's true. We are fully backward-integrated. So, yes.

Okay. And one final question for my side. In your recent regulatory filings you've indicated 2 innovation based products. I read them as NDDS products which are in between Phase II and Phase III clinical trials. Possible to indicate when they would be entering into Phase III?

As we speak, I think, some of it has just going in and I think what -- we stand by what was messaged earlier, in a year's time from now, we should see a couple of filings in place.

Our next question is from Sonal Gupta of UBS.

I mean, just on going further on the API thing, I mean your U.S. API sales or PSAI sales have almost collapsed this quarter. So I mean, what's happening in specific there? And just overall, I mean looking at the decline in the API business, I mean, have you lost -- how much of this would you have attribute to loss of market share versus I mean decline in pricing, if you could give some sort of a sense on that?

Well, largely, it's not -- there is of course erosion in these B2B businesses. But I think largely, I think the new products did not click very well in the last year, which is again a factor of filings a little earlier than that. Having said that, as I just said, that I think the renewed focus from management went in for few quarters now which saw culminated into healthy DMF filings in the first quarter and we expect this to continue in the rest of the year. So that's the key part of the business. The business is governed by your seedings and lock-ins and that would only happen when you successfully file DMF ahead of others with a hook, which makes us a good partner. Having said that, certainly, this is an important part of the business in external phase [ph], but this is an area of high competitive advantage for the company and we will try to see how best we can utilize the strength to create end to end value as well.

Right. And could you give us split in terms of the PSAI, how much is custom synthesis versus API?

Sonal, usually, it is 70/30, 75/25. Quarter-to-quarter, it may vary.

75 API?

Yes.

Okay. And just broadly again on -- how are you seeing the overall pricing trends on the generic side in the U.S. and has there been any impact for you of the channel consolidation, or given that most of your large products are limited competition, you haven't seen any impact? Could you just comment on how you're seeing things?

Not we have seen. We've seen erosion in certain products wherever, in some cases, few cases we have given up, quite a few cases we have regained, but at a cost, substantial cost. But the U.S. market is also governed by practice of some price increases, some share increases and some erosions. And sum total of this 3 governs the base business and the launches add to the growth. Broadly, between these 3 factors, as I mentioned, we have been able to keep it in somewhat neutral form, neutral base.

So, I mean, you've been able to offset the price erosion with market share and price increases in some other products?

Probably, yes. Yes.

Okay. Fine. Just last question, I mean, how is IMITREX STATdose doing for you? I mean, you've launched this product, I think some time back. So where are you in terms of market share?

We locked in our market share, but this is -- the number of units, it's not really large. And what happens in such cases when you are a follow-on generic, even you've locked-in share for you -- to displace in the shelf, it takes much longer than a high-volume asset. So this is what is happening in this case. I think we are -- we'll slowly see from here on increase in IMS market share to our locked-in market share.

But could you give an indication as to where would you be in that sense?

Yes, we've -- let's say, at 50%, 60% of our locked-in shares. IMS is not fully -- if you go by the May 1, which is 5%. It's certainly more than that, much more than that actually.

The next question is from Chirag Dagli of HDFC Mutual Fund.

Sir, in your initial comment, you suggested that share optimization has not yet happened in the products launched last year. And you also mentioned that this year price erosion could actually offset some of that upside. But thereafter on the injectable side, you're mentioning only one incremental player in one of the products. So where is it that you're seeing more price erosion to offset this?

Same products, same products. I think destiny has been kind in the first quarter. That doesn't mean to say that we'll continue to see no one coming in. We should be watching this closely. As I said, one more we are hearing of. So let's see how it pans out.

But your comment was suggesting price erosion only in that product. Right, sir? Or are there other products where you're seeing substantial price erosion?

You talked about the -- the last question was on consolidation leading to price erosion. Those are mostly in oral solids.

Correct. No, no, sir, what I was trying to -- in your initial comment, you did suggest that there could be some price erosion in the business which could offset the upside from market share gains. So I was just trying understand, beyond the injectable one product, is there any other largish product where you're expecting a substantial kind of a price decline?

Yes. You know what, the larger impact would be in injectables. The other ones is a part of the business. It will always be there, a little bit here and there. But we don't expect very large impact in the others. But difficult to say. injectables is the -- would be the biggest hit, if more people come in.

Fair point, sir. And sir, second question was on the API -- on the PSAI business as a whole. This is a fairly large business and is this, this slower growth that we are witnessing over the past, say 4 quarters, probably a decline. Has this got anything to do with the base per se that we are very large and now incremental products are not there, et cetera? Is there an optimal base that you have in mind which this sort out peaks out? How should we think about growth opportunity within this piece?

So, as we speak, Kedar correct me. I think it's about 16% PSAI, 16%, 18% of the total company revenue.

Yes.

Now whether this is a large base, yes, in API space is a reasonably big space. Having said that, as I mentioned, the reason for not having grown is largely not having filed and locked in enough customers. So now, that management focus is going in and we are rectifying that. So there'll be growth. Would it be impacting overall company sort of trajectory? Probably not. Is it a competitive advantage? As I said, this is a major competitive advantage and we'll try to sort of see how we can channelize more energy to make -- derive greater value from this group.

But surely, because this is a large business now, does it mean that the opportunity is in anyway -- the growth opportunity is much lesser now? That should not be the takeaway, certainly. There are opportunities that you're seeing?

I think that we're not seeing that trend.

Our next question is from of Aditya Khemka of Ambit Capital.

Sir, one question on Copaxone then. So the approval date, it seems for your competitors, was supposed to get approval in this current year, calendar year. They were not able to get that approval. So do you guys get us and verify a CP there, they've made a strong case or made a case for clinical trials that FDA should ask for? So are we as a precautionary measure or as a preventive measure conducting clinical trials for Copaxones to see the gene expression across the entire genome or are we sticking with the gene expression on the selective genes that FDA had asked for earlier?

That's too detailed a question. To answer in more general terms, you've mentioned 2 things. You mentioned citizen's petition and you mentioned whether a full-blown clinical trial would be warranted. For both cases, we think that it's not -- may not be necessary from how the citizen's petitions have been turned down by FDA. And on clinical trial, certainly not, because so far, the engagement is moving on, as I said, and I'm sure for other companies, as well. So considering that I think those 2 are negative. Beyond that, details of gene expression, other things, we would not like to comment on.

All right, all right. And just secondly, on the -- just a bookkeeping question on your FY '14 numbers, your creditor days had fallen, I think, to much lower levels as they were in the last year. So anything targeting that lower level of creditors? Or do we expect to go back to normal levels? Or is this the new normal?

We think whatever it is there, that is fairly representative of our current programs.

Our next question is from Rahul Sharma of KARVY Stock Broking.

Sir, just wanted to -- on a q-on-q basis, we are looking at improvement in gross margins. Now what can you attribute this to? Is it due to further ramp-up in some injectables? Or can you give some clarity on that?

Margin improved because of multiple reasons. One is the business mix. Higher the percentage of Global Generics compared to PSAI, gross margin improved. Of course, the rupee versus dollar. If there is a depreciation, then also the gross margin improves. Then, of course, on the topic [ph] of products that means, if the pricing and the sustainability of pricing is high and the percentage of revenue from those products are higher, if those buckets and high building buckets building more [ph], then also gross margin improves.

Because on Q-on-Q except for PSAI which has gone down, is the sole reason that PSAI going down that has been the reason why we have the margins have increased? Or is it, you've taken some price increases in certain products or something is there which are further market share strengthening has happened?

So I think last quarter, we mentioned for institutional sales, injectables, January is a weak month. Normally, institutions buy more in December. January becomes unusually weak. So that factor was not there in this particular quarter. To a certain extent, certainly has helped. And then there other factors, which Saumen mentioned, [indiscernible] PSAI shares going down. And of course, few other things which you are mentioning as well. But broadly, injectables holding and a full quarter of full-blown sales.

Do you foresee it to be sustaining at -- you're constantly improving your gross margins. Are you seeing a much higher base because last year, you did 57.4 on -- because of these opportunities coming in. So are you seeing a higher base going ahead? Will you able to sustain these levels?

We are not giving any financial guidance. So we will not specifically comment on that. But all that you are saying that we are not spending more on R&D, we are spending quite a good amount on CapEx, but at the same time, we're improving our free cash flow, which is evident from the numbers that we have been putting out.

How many niche opportunities are you expected to launch in the current year? And what is the injectable pipeline which is there, which had been filed, sir?

Again, seriously, it gets difficult to talk about those. This particular year, as we already mentioned in the beginning and it was expectedly a little more lukewarm. The first quarter has gone better than expectations. Let's see how it sort of pans out. I mean, would the launches -- now launches sometimes, there could be 1 or 2, which could be good. But till we hit the market and till we are able to sort of see where -- how is the competition, difficult to comment on those. But overall, if you see in the midterm this year to next year type of a thing, we stay optimistic on North America.

Our next question is from Ranjit Kapadia of Centrum Broking.

My question relates to fondaparinux and Cymbalta? If you can give the latest update, what is the -- for these 2 products in the U.S. market?

Fonda is a very flat. It's changing hands as you speak, as you know, Mylan has bought the rights, which means the current AG would slowly sort of transition naturally. What that would mean, we have no idea. But we are flat. We are flat with the market share, revenues, et cetera, and probably it will be in the same direction. Your next question was on Cymbalta. Cymbalta is a story which is commoditized now, extremely commoditized, it was great run for those who came in the first wave, unfortunate for us, but -- so we have also launched along with few other people, not much yet for anyone in Cymbalta.

What are the market share in Cymbalta, if you can quantify?

No. That, we wouldn't -- as we speak, we are still continuing to try, but it's tough slope, upward slope actually. So in terms of getting any market share, with any meaningful value. Mind you we are backward integrated completely.

We have already 9 players in that market now.

Our next question is from Nimish Mehta of Delta Research.

Sir, you mentioned in the last quarter that you were expecting some niche launches either in the first quarter or the second quarter of the year. So any update on that?

I don't think we mentioned that. We didn't mention any niche launches. We've mentioned that there are a few launches we launched for products, all turned out to be multiple players paricalcitol, Eszopiclone, what else, I think we've got small.

[indiscernible]

Yes, tablet [ph] seems probably Q4 end type of a thing. Those 2 were okay, took some time for market share increase, some market turn injectables, but none of them, in terms of high impact to a certain extent [indiscernible] but the others were really penny launches.

So you don't expect any more -- no competition launches, [indiscernible] , this year. Is that correct statement?

May not be able to comment on that in specifics. So that, as I said, that this is -- we have some thoughts about that, but won't be able to share those.

I see. Okay. Okay. I missed on your Nexium clarification, you mentioned that you will be able to launch it... [Technical Difficulty] So, on this, you mentioned that you will be able to launch post the 180-day exclusivity regardless of the fact that the FTF older launches. Is that the correct understanding?

I didn't say that we will be launch on immediately after exclusivity. I said that no one has got TA, which makes us feel okay. We are backward integrated. Let's see when Ranbaxy launches, and so we would try to be in the game, yes.

Okay. Finally, on OctoPlus, again, some couple of quarters back you guided for a launch in the end of FY '15, one product from OctoPlus basket. So is that something that we continue to hold onto? Or any change...

Not end of FY '15.

So we said Nimish, probably we can file, not launch.

Yes, file.

So you can file and not launch. Okay. Fine. A last question on Russia sales outlook. I missed on, so if you can just repeat. I mean, you see that to be growing. I'm talking about Russia and CIS, I mean other countries in CIS as well?

The current going is very good. Started the quarter well as well. Having said that, everyone -- all of us are reading the tragic things which has happened in the last few weeks. And how those things would pan out, we like to watch closely but vis-a-vis competition in the market, I think, we are doing very well. So that's where we are. So far, no impact. Let's see.

Will you continue to have this kind of risk quarter growth of single-digit growth of 8%, right, for that Russia, CIS and so forth.

Nimish, Russia, we said 18% in local currency. At the region level, we have about 8%.

I see, okay, fine. So it'll continue to do well in the -- okay. Fine. Fair enough.

And to note that, in Russia, our OTC is about 37% of total business.

The next question is from Hitesh Mahida of Antique Stockbroking.

Sir, just wanted your view on the domestic market. Now government continuously bringing more and more products under the NLEM. Does that hamper our growth plans for the market, considering that this has been the second straight quarter, wherein we've posted double-digit growth?

So you are referring to the current set of products. The last set of products NLEM gets over, the impact gets over this -- actually coming month in August, probably referring to next set of products. So at the moment we would comment on, it's being debated. It's debated, it's discussed in the court of law as well. So we leave it at that. Overall impact from that is for us somewhat lower than the last one. But we would not comment on this since -- now this is a question whether this is the right way things have gone.

Okay, sir. And what would be your outlook in terms of growth for the domestic formulations business?

You mean growth?

Yes. For Dr. Reddy's?

We remain quite bullish. We've said we'll slowly sort of move up. The first few quarters last year, if you recall, we were struggling. Fourth quarter we've posted good growth, this quarter is okay. Here onwards, I think, it will be northwards of what we have posted. All indicators, typically in branded business, are looking good, whether it is mega brands, whether it is prescription growth, whether it is attrition in the front end or whether it is revenue from the launches, I think they are looking good. So we feel optimistic about this market.

Okay, sir. And sir, I just wanted to know your views on inorganic opportunities. So going ahead, will we see inorganic -- we'll see acquisitions from Dr. Reddy's to acquire technologies or to acquire skills like some of your peers?

At any point of time, we evaluate whatever opportunities comes on our way. But we have a very stringent criteria for acquisitions, so we are not going to go for any top line kind of an acquisition. Only when we find an opportunity which can give us any feel, a credit kind of feel things, then we will go forward. And whichever areas where we need to bridge the gap in terms of capability, we'll definitely focus on and do it.

Our next question is from Prakash Agarwal of CIMB.

Just wanted to get some sense on the Promius, the derma portfolio that we're developing through Promius. When should we start seeing more traction in that business in terms of revenue generation? And what's our outlook on the recent price hikes taken by a few derma players?

So as I mentioned, a year from now, we should probably see, within that period, about 2 towards the end of the period. I mentioned, 2 NDAs filed in U.S. The current price increases in derma product are largely in the space of generic products, led by a few companies. So that's a different ballgame. At the moment, we have very few products, which is -- proprietary and whatever the way proprietary products functions, it's in the same direction, nothing much to report there. But on the filing side -- so NDAs should start within a year from now and, thereafter, a year to approval, I guess.

Okay. So it's again 2 years to 3 years away basically, in terms of monetizing?

Probably.

Okay. And second one was on, any update on the IND filings that we did in the biosimilar space in the Europe? Are we adding more? Or are there plans within this year, any update you could give on that?

IND filings? IND is a proposal to proceed in the clinic. It's a plan to sort of which gets validated by FDA, so 2 of the products got approved. The development is in progress, the clinic is in progress and it takes time for those. So those would be a little later than for the regulated markets, certainly going to be later than our proprietary products that would -- should kick in earlier.

So are there plans to add in the near term?

Add further to [indiscernible]

In the portfolio, he is saying.

Yes, yes. Okay. That right now we will be commenting on, our hands are full, which -- there are quite a few assets actually. So few in the Merck deal, few outside the Merck deal, which we are anyway progressing with the filing opportunities in various markets, et cetera. But as we speak, of course, there are other products being developed but nothing to report at the moment.

Right, right. And just to follow up on this...

[Operator Instructions] We'll take our next question. It's a follow-up from Sameer Baisiwala from Morgan Stanley.

Sir, a question, do you think there should be an urgency to diversify international business out of U.S.? And any thoughts on how we are doing in Australia, South Africa and China?

International business diversification out of U.S., can you -- what's the question actually?

are you going to get into more markets? Yes.

From U.S.?

Not from U.S., he was saying other than US?

The first question wasn't very clear. Sameer, can you repeat that, you said something out of the U.S. I couldn't hear that clearly.

Yes. I'm saying that as the U.S. business keeps getting bigger, $1 billion and then -- or $1.5 billion. I know the growth could be challenging to achieve in U.S., so therefore...

You mean dependent on U.S.

Yes. Dependent.

So one more emerging market, certainly, we would be -- the organic entry should happen this financial year. But organic entry in [indiscernible] market take its some time. But for sure, 1. Could be 1 or 2, but at least 1. You asked about South Africa. Doing well, doing well, but not as good as Venezuela. Venezuela has been really, really rewarding this quarter, doubled sales. So that has been extremely profitable for us. We have taken some decision in keeping supply chain available for 6 months for this very turbulent volatile market. It paid off well in terms of sudden shortage of products in the market and branded products when they grow short, it may not be a onetime buy because patients are getting used to our brands. And by the way, we have CNS in Venezuela as well. So that has been the real star of this quarter. Other markets, usual story, we are bullish, it's growing and we will keep investing in those markets.

He wanted to know more, especially China and Russia...

China, we have a partnership. There is -- we are also out licensing one of our assets. So one asset has got into successful out licensing. It's turning out to be interesting in terms of revenue attrition. And Australia, it's a generic market. We said, I think, 2 or 3 launches in the last 3, 4 months. But it's not a big market. But all these, we are -- since we are located in the specific geographies, we are focused on the portfolio execution and all those and supply chain.

Sameer, just to add. The idea will not be to reduce the dependence on the U.S. The idea will be to look at the opportunities available in other markets, and that's what I think we keep pursuing.

[Operator Instructions] Ladies and gentleman, due to time constraint, we'll take our last question from Nitin Agarwal of IDFC Securities.

Saumen, on -- when you look at other SG&A expenses, they've been, despite the growth they have in the revenues in the last couple of years, we would normally be able to normal sort of bring them down to 24% to 25%. So is there a possibility, I mean, when you look at cost expenses, is it possible for us to optimize it beyond those levels or 24%, 25% where they're going to stay on a sustained basis?

SG&A as a percentage of sales is higher than 30%. So if it comes down to 24%, 25% means there will be a fantastic improvement for us, which could be a very difficult target to take, but we must try our best to improve the SG&A productivity as far as possible.

No. I mean excluding the...

[indiscernible] I cannot say that we will get into 25% of the sales. We have in this quarter improved the productivity by 55 basis points, so we will then likely improve our productivity, I'll just leave it there.

Okay. And if I can squeeze a last one. On the U.S. business, so you've talked about uncertainties not being too much -- not having too much clarity in the near-term, but if we take a 2- to 3-year view, what kind of -- or probably even longer view, what kind of sustainable growth can one expect in the U.S. market for us on a medium-term, long-term view.

See, we are not giving any financial guidance. But all that we can tell you is that kind of investment we are making on R&D and the kind of filings that we are doing and more so in a complex generic space. The quality of filings, even what we have done in this quarter, would suggest that -- we would say we have a very good prospect even for future years.

Mid-teens type of a thing I think should be there, a bit at least.

Mid-teens?

Yes.

Thank you. I now hand the floor back to Mr. Kedar Upadhye for closing comments.

Thank you, all, for joining Dr. Reddy's senior management for our Q1 FY '15 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.