Ladies and gentlemen, good day and welcome to the Dr. Reddy's Laboratories Limited Q1 and FY 2016 Earnings Conference Call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [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. Thank you for joining us today for Dr. Reddy's first quarter fiscal 2016 earnings call. Earlier during the day, we have released our results and the same are also posted on the website. We are conducting a live webcast of this call and a transcript shall be available on our website soon. Just a reminder, the discussion and analysis in this 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 Saumen Chakraborty, our Chief Financial Officer; and Abhijit Mukherjee, our Chief Operating Officer; along with the 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 outlets, 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 of any additional clarifications 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 convenient translation rate of INR 63.59, which is the rate as on 30th June, 2015. Consolidated revenues for the quarter are INR 3,758 crores or $591 million and grew by 7% year-on-year. The revenues from our Global Generics segment of $487 million and grew by 8% year-on-year. This year-on-year growth is after absorbing the continuing impact of the macroeconomic uncertainties and consequent currency headwinds for the emerging market region. Our U.S. business saw a sustained performance of its key products. Europe business grew on the back of recent launches. And India business continues on its growth journey. Revenues from our PSAI segment are $88 million, with flattish year-on-year performance. Consolidated gross profit margin for the quarter is 61.1% versus 59.3% in the corresponding quarter of the previous year. Corresponding values for Global Generics and PSAI were 67.6% and 23.7%, respectively. Current quarter gross profit margin reflects the positive impact of improved product portfolio and operating leverage of the manufacturing over it. SG&A spend including amortization for the quarter is $173 million and marginally grew by 3% year-on-year. Net increase in absolute terms is primarily on account of annual incrementing and other selling, marketing, professional spend for event, specifically this quarter getting offset by depreciation in emerging market currencies, especially the rural. There has been a good control on SG&A spend, which is in line with the cost control initiative that we have referred to in earlier call. R&D expenses for the quarter are $69 million, representing 11.7% of revenue versus 11% in the corresponding quarter of the previous year. As also mentioned earlier, the increase in R&D spend during the quarter is in line with our planned scale-up in R&D activity. EBITDA for the quarter stands at $156 million that is 26.5% to the revenues. Tax rate for the quarter is 21.6%. The effective tax rate for the year is expected to be in the similar range. Key balance sheet highlights are as follows: Our working capital marginally increased by $17 million over that of the previous quarter and is largely in line with our expectations. Capital expenditure for the quarter was at $40 million. Our net debt-to-equity ratio is 0.05. This is after our payout for UCB acquisition. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans for U.S. dollar are approximately $353 million, largely hedged around INR 60.7 to INR 65.1 to $1. In addition, we have balance sheet hedges of $256 million. We also have foreign currency cash flow hedges of RUB 1,440 million at the rate of INR 1.16 to RUB 1 and €4.5 million at the rate of INR 74.37 maturing over next nine months. 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 all on this earnings conference call. First quarter has started off with a descent all-round performance across U.S., India and Europe markets. In U.S., our team was able to hold on to and in some cases increased the market share across key molecules. Sustained performance of the complex portfolio over the past few quarters is indicated of the high potential associated with this class of assets. The domestic formulations business continued with its predicted growth journey in this quarter. To add, we successfully concluded our UCB integration and this will reflect as a full quarter contribution in Q2. Europe team is building up a selected portfolio of oncology [indiscernible] based assets to enhance the region's growth trajectory. Russia and some other territories in India, emerging markets continue to experience the pressure on growth due to ongoing macroeconomic uncertainties. Now, let me take you through some of the business highlights for each of our key markets for this quarter. Please note that in the section, all references to numbers are in respective local currencies. Let me start with North America Generics. Revenues are $295 million. On a high base, the business was able to deliver growth despite the absence of new launches and continuing competitive intensity. This is attributable to 2013 pricing, incremental gains in market share and supply chain robustness. Meaningful contribution from complex assets also had a positive effects on the margin profile. As per IMS MAT 2015 report, we are ranked eighth in terms of volumes which is a rank improvement over last quarter. On the OTC side, Habitrol is well integrated now and reflects full quarter benefit. As you would have noted, in early July, we launched MEMANTINE. During the course of the…

Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Aditya Khemka from Ambit Capital. Please go ahead.

Yeah, hi, thanks for the opportunity, sir. Sir, so firstly on the India growth that we saw for the quarter. So far how many days was easily consolidated during the quarter, during 1Q?

Yeah, it was just about 10 days or so. So, rather insignificant contribution to the quarter's performance, but in percentage terms could be about 1.5%.

1%.

1%.

1%, okay, that's sweet. So, which means that we are basically seeing about 18% growth in our base portfolio. Could we split this into – how much of this is due to biosimilars and how much of this is due to our chemical portfolio?

So, biosimilars it's – if you put together the two major assets, broadly this would be about not more than 5% of the total revenue, give or take.

Okay.

So, the answer to your question is, basically the organic business also has grown at similar extent.

Got it. Sir, second question is on the North American generics business. So, as you currently mentioned there is no incremental launch during the quarter and we still gained if I'm not mistaken about $25 million quarter-over-quarter in the business. So what – I understand that you mentioned this as there is some market share gain, but could you allude to which was the largest, so was Habitrol not consolidated for the full quarter in 4Q, is this first full quarter consolidation of Habitrol?

No, I think in last quarter also we had Habitrol...

Habitrol for two quarters, right?

I think Valganciclovir has done well and...

Okay.

All our injectable portfolio have continued with their momentum.

Okay. Sir, actually the reason I asked this is because our injectable portfolio has been there for some time with us, and off late we had just seen some incremental competition that [indiscernible] mean to say, Dacogen. And there has been no change in dynamics of other injectable products, at least the key injectable products. So if you don't, could we just share as to which of these products are actually moving the needle here for the quarter?

If you track the injectable business, normally what happens is versus Q4, Q1 is normally a stronger quarter. And if you again track very closely, you see our actual shares have actually increased, whatever be the reason. So, overall, I think there is robustness in injectables portfolio, which accounts for significant part of the increase. Valcyte generic has done well, and few other products [indiscernible] further consolidated. Having said that, there was erosion due to consolidation of customers and RFP which came in, so what you see is net of the erosion.

Right. And sir, my last question is on your PSAI segment. So Q-on-Q, we have seen about 23% decline. Again, I understand the business is highly volatile, but how should we sort of think about this in our models, how do we build or project this stream of cash flow – this stream of revenue for Dr. Reddy's?

You're talking about PSAI business?

That's it, sir.

So PSAI business, the new strategic intent is to ensure that the product – the profit center becomes more value at Reddy's. And hence, we are trying to see even cut down some parts of the businesses which are not yielding sufficient return. So a flat growth should be read with better margins from this business and we are putting significant efforts in that duration. And last but not the least, I think going ahead, we will try and use our presence in the PSAI business to globalize many of the assets which we have developed for the released markets, and there's potential for globalization of these assets even in sort of – in the form of formulations in certain other parts of the world. So overall, I think we're not concerned about the flattish behavior of the PSAI business, that's going – undergoing topical change. It's a major strategic advantage in terms of providing value to the generic business. And so, I think they're moving in that direction.

Sir, I'm sorry for that. I just have one confusion there. Sir, if you are sort of say calibrating the business to maximize the margins that you can extract, there will be some unused capacity, right? So, do we have a plan in place to utilize that capacity? How are you thinking about that?

About 20 DMS plus would be filed during the year, and the nature of the business is continuous removal of products and we're selecting the products correctly. So, there is a robust activity on new products front on the business. So the capacity non-utilization is not a problem, in fact we'll keep investing.

Okay, sir. I'll get back in the queue. Thank you.

Thank you. Our next question is from the line of Manoj Garg from Healthco. Please go ahead.

Hi. Good evening. Thank you for taking the questions. A few questions. First on your Memantine approval, I understand it was an older – but can you confirm first I guess which facility you'll be supplying that product out of?

Our formulation facilities serving U.S. market.

So Srikakulam?

No, no, no, formulation facility is...

For formulation facility, okay.

The question is API from this unit?

Yeah, correct.

Yeah. So it is from one of the units, it's not [indiscernible] that's your question.

Okay, it's not that. Okay. Great. And then, so have the FDA confirmed a re-inspection date for Srikakulam or is it just your assumption?

No, no, the FDA has not confirmed anything and it's, we don't even have any visibility, whether they would inspect. It's just a normally in many such cases, they comeback for a re-inspection. We have been sending updates, we had some commitments, which we have fulfilled almost pretty much everything, except of one or two long-term ones which. Otherwise, so that's our expectation as at some point this would be inspectable to gain.

Okay. And then, in this past quarter, so new product approvals with the top line growth 7%, is this what expectation should be in terms of top line growth, without product approvals?

What's your question, I mean specifically on growth.

This was a question that – I think your informal guidance for top line growth has been double-digits or low double-digits and we're seeing the top line in the current quarter growth 7%, but largely if there is no product approval. So, as then product approvals, is this really the run rate?

Yeah. I mean, so like all generic companies dependent on U.S., we are awaiting certain approvals, as we speak, and we are expecting certain approvals during the year. It's going slow like most of our peer group companies have said, there is also, you'll have to sort of capture in, that emerging markets took unprecedented hit in this quarter and we hope that as – there's clear sign of stabilization certainly in Russian market and based on our secondary and current sales in this quarter, quarter-on-quarter, there will be some recovery on that. So, considering all that, and – but on product approvals, specifically we were like all other companies, we are also waiting approvals.

Okay, great. And then last question, just more of a macro question. So given two of your competitors, especially in the U.S. market are getting together with Teva and the Allergan Generics business, do you see this as a net positive or is this a potential risk that we should be monitoring going forward? The reason I asked Saumen, as a net positive, I mean you obviously with the consolidation and with the divestments of expected files, we can see some uptick in pricing, but on the other hand, it's a more formidable competitor in terms of the distributor size?

I would probably look at it from a positive lens to some extent. These are happening at a very different scale altogether, we are in a different scale. And as you mentioned, there would be naturally some assets, which would be coming up for divesture, which can throw up some opportunities. Regarding more competition or less competition, let it play out.

Okay, thank you. Thank you very much for taking the questions.

Thank you. Our next question is from the line of Nimish Mehta from Research Delta Advisors. Participants are requested to restrict the question to only two per participant.

Yeah, hi, thanks for taking my question. Sir, first of all, I would like to understand what has led to the tremendous increase in the gross margin, which is like on a sequential basis it does more than 500 basis points. I understand the adverse currency impact is still the same as we had it in the last quarter, meaning Q4 of FY 2015. So what has changed and resulted in this high margin?

Anytime you see there is a business mix that means in favor of Global Generics. If the Global Generics [indiscernible] then automatically the weighted average gross margin for [indiscernible] . The SG&A growth which I eluded to being only 3% year-on-year, has also contributed to overall EBITDA. So in the manufacturing average cost control also helped in terms of development.

I think you're talking about price increase in which market?

Not price increase, I have not spoken about price increase.

Okay. When you're saying a sales mix, you are referring to higher sales from U.S. and...

Global Generics business segment.

Okay.

The sales is much higher than the PSAI business segment.

Understood.

Wherever the mix is good in favor of Global Generics, the overall gross margin for the organization automatically improves.

Okay. So it's – I mean a bulk of it is because of the change in mix in favor of Global Generics, right?

I would say, that is one sector, and the other factor is manufacturing over rate of reduction.

Okay. Okay. And on the SG&A side, I mean you said it was just about 3% increase, so is that something – I mean is that the level that we are looking at or how do we – I mean, what is the outlook?

To some extent, the increments and all which are given in the first quarter of the year, because of the emerging market devaluation, it got rate. So for the year, we expect to control, but because in sales and marketing, we'll have to see how much we need to spend. But I cannot give a guidance effect, as every quarter it will be only 3% or so. But definitely, the -- since we're spending more on R&D, we expect that SG&A productivity can offset the higher spend in R&D.

Understood. Finally, last one if I [indiscernible] Nexium product that you're expecting and what is the outlook there when do you think – Nexium as well as Abilify if we're targeting, it will be great if you can give the outlook there at the moment?

So, Abilify is not in the pipeline, so we're not clear. As far as Nexium is concerned, we've responded to all the queries raised, in our view rather satisfactorily. So beyond this, what else [indiscernible] .

I mean six months or eight months anything, any ballpark would be great.

Your guess is as good as mine.

Okay. Thank you.

Thank you. Our next question is from the line Prakash Agarwal from Axis Capital. Please go ahead.

Yeah. Thanks and congrats for the good set of numbers. Sir, I just wanted to understand the comment that you made that in one of the injectibles, you have gained market share which is Dacogen. And so, you also talked about that Q4 – Q1 is better than Q4. So do we understand this is some kind of bunching up that we also saw similar quarter last year, and that to normalize in the following quarters, is that a correct understanding?

Not really. I think the assets have held up. Every quarter, we are mentioning that we will see more competition coming in, it can come in anytime. In fact, it has not – there is some consolidation in not just in injectables, also in some other assets. So, look, difficult to predict, but there is no indication to say that there is just a bunch-up for this quarter.

Okay. So this run rate could continue is what I understand?

It depends on new entries. Actually, that is the invisible part. On our side, there is no bunching up at all. But if there is entry, obviously you'll get to know and naturally impact like it impacted every other player in the market.

Understood. And my second question is any update on COPAXONE, where we are, we still believe it is not coming this year and it's a next year opportunity for us?

Yes. There is some broad guidance and in the direction which we have from through our decision fees and conversations, and we are proceeding in that direction. It needs some work, which is going on at full speed at the moment. So we maintained what we told you. So it's not very near term.

Okay, sir. I have more questions, I will join back the queue.

Thank you. Our next question is from the line of Neha Manpuria from JPMorgan. Please go ahead.

Thanks for taking my question, sir. My first question is on Russia. The 22% decline, while you have mentioned that in the second quarter hopefully should improve. What went wrong in the quarter? Was it because of price increases we witnessed, market share loss or there was, you mentioned inventory adjustment, but other than that, was there any other factor that led to this?

So, let me explain very briefly, I think this question will keep coming up for the sake of everyone else. You see what happened, in a turbulent situation, all sorts of strange things come in. First of all, it reduces the capability to spend out of pockets. So, automatically, it's the first thing that impacts the people's ability to buy in addition to that to the same extent. The second thing was the retail, the chains, they jacked up the margins to sort of offset the currency issue, which had a double rami on the while as patients were not able to buy and prices further went up, and it led to steep fall in units, it's not just us but all companies, all tough companies had to bear this. And the companies which had stronger and bigger brand took bigger hits. This, in effect, acted against the retail. So, they realized it, they realized it and they reversed this because the total reduction in units couldn't compensate for the increase in price and they realized that. And as a result, the whole business started shrinking and then they have reversed and brought down the prices, which – and in the meanwhile, ruble got – came to a certain level of stability. Both combined, we saw the secondary markets again quickly, about month and a half back, which is reflecting into primary this month. So, that gives us some degree of hope. But having said that, it's in an impacted geography, it will take a few quarters to come back to full normacy.

Fair enough, sir. Okay. And second on UCB, given that we haven't seen 10 days in first quarter and a month in here. How should we – how are you seeing given terms of profitability, how much work would it require in terms of integrating it to the India business?

Excellent integration, everything has gone very smooth so far. So, July is a proof of the fact that our assumptions are holding good. So integration has gone extremely well, and it's moving in the right direction.

And profitability wise, how is this versus our existing India business?

Yeah, it's good EBITDA business, it's brought in from multinational. And there are few good demands. But what is most important is how well we are able to grow these. Since you're saying that our organized business is growing, growing at this rate, it has to sort of also grow. And I think we are quite optimistic since [indiscernible].

Sure. Thank you so much for taking my questions, sir.

Thank you. Next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Yeah, good evening. My first question is on Venezuela. Is typically the first quarter seasonally weak quarter, or what is the reason that compared versus the fourth quarter, I see in rest of the world there is serious decline of about INR 80 crore. Are you voluntarily already started reducing sale, or it's just a seasonally weak quarter?

We have told all of you earlier that we've been always celebrating sales in Venezuela, because one hand it gives tremendous opportunity for growth. But at the same time, all of you know the rest in terms of the anytime there could be enough sales devaluation. Of course, last quarter onwards we have started the process, taking the net monetary asset that is SIMADI rate. So as we did it in the Q4 about $14 million hit we took in Q1, got a funding release around INR 10 crore, which we've taken. But at the same time, there is some repatriation which is happening and we are calibrating that whatever repatriation is happening and whatever cost of good that we are transferring from India to Venezuela was calibrated in such a way that our overall exposure remains within our risk appetite.

Saumen, just you understand this better. If you did about $140 million sales in Venezuela last year, will this year based on your understanding as of now, there we already seen four months go-by, will you do more than $140 million or less than $140 million. Just to [indiscernible] I think your answer I've not understood, this – that's why I'm asking that.

It all depends on the rate of repatriation. If we get good repatriation, then we can exceed previous [indiscernible] number very easily, if opportunity exists. But if the rate is not very encouraging for us, then we'll have to keep on calibrating our exports to Venezuela.

So last time you mentioned $38 million was pending?

Let me jump in very quickly. So Venezuela, as the orders are far higher than what we're supplying to the market as Saumen mentioned, but more importantly, I think there are couple of efforts which we are putting into the market. One, I think you are aware that we are importer of petroleum and we're exporting medicines. So we're involving the both governments to see which way we can resolve the issue. And I think this is – immense amount of effort is going in that direction, number one. Second thing is being a company where our product price per such, is not extremely expensive, and we have given presentations to the ministry in Venezuela, health minister as well. We have contacted that to show that our units are growing, in spite, of the fact that other competing players, units may not be growing to that extent, taking price increases, we're not, and in this current situation which they appreciate, and this dialogue is on. So all efforts are on to see how we can improve, and convert this situation to an opportunity. But having said that, uncertainties remain.

Yes. Just one clarity. Sir, last quarter we had $38 million pending, how much is that number now?

Yeah. As on 30th June, it will be close to $50 million.

$50 million. Okay. And just question that on the- on the U.S. approvals, after November we're not seeing any approvals. So, if FDA has priority for Srikakulam facility. This is one of our let's say, six, seven, eight to applaud. Why we haven't seen approval at all from any other part?

So we have launched [indiscernible] in...

But that approval we got in 2010 or 2011 right?

So there are few assets which got impacted because of this, and I mentioned as far as Nexium is concerned, we have [indiscernible] generic data submitted answer our queries, so that exclude one. Other two, I'm not going to mention the specifics, but one is not really worth sort of transferring the value is not very big. The third one we're taking our view, what to do, beyond that, I think we're broadly in the process of de risking, having said that it's a light year of approvals. What is more important is that I think what gets approved and there are a few with it which are okay, so rather than the number of approvals.

Abhijit, my question was on approvals outside Srikakulam. My question was that we are doing deals in Srikakulam, but what about approvals outside Srikakulam? We are not seeing any approvals with the company over the last 10 months.

Yeah. The filings happened from one site, it is that earlier side we keep moving from one site to another site. So filings have happened from there. So some of those are being sort of [indiscernible], but nothing is immediately pending beyond these three, which I just mentioned.

That is helpful. Thank you very much.

Thank you. Next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Yeah. Thanks for taking my question. Sir, how many approvals or launches you're penciling in for this fiscal year in the U.S.?

Numbers, we wouldn't give because we don't know. There are quite a few. But we – how can we give you numbers, because these are dependent on; one, FDA's approvals; two, litigations; and litigations are also in public domain.

Okay. Sir, can you throw your take on Vimovo and Aloxi in particular, and whether these are opportunities and things that can be monetized this year?

Well, great opportunities both in litigation.

Okay. Okay. But is it a possibility, I mean do you have hearing timeline, when do you get the court verdict, any sense, any color you can give there?

Aloxi is the likely on the hearing, the argument would be probably in September and give or take another two months for the 505(b)(2) approach. The J anyway is already heard, probably another couple of months. But J, there are a couple of other people. So, J would mean a more competition. 505(b)(2) is around September hearing argument, and then it will be coming after.

Sir, 505(b)(2) is a non-infringing route, is that the difference here?

Yes.

And therefore you see more probability of that coming through from a litigation perspective relatively?

How can we comment on something that is in the U.S. court being litigated. Yeah, but it is in our view completely non-infringing.

Great. And, sir, one thing on gross margins. There has been a very significant improvement. I was just wondering, you talked about product mix. Is there any raw material cost benefit that you have seen on a year-over-year or quarter-over-quarter basis? Because fill up with the material cost, it's not even moved up 1% on a year-over-year basis. So, I was just wondering if there is anything on that front?

Raw material, whatever is linked to the crude oil that definitely we get from benefit. But primarily, it is a business mix and manufacturing overhead as I mentioned earlier.

And, sir, one last question on Europe. We have seen a very strong growth I think in UK and Germany. Can you give some granularity there, how sustainable it is, any specific product launches, how should we think about Europe going forward?

We had message that we have gone down on the commodity tender business in Germany, and specifically picked two therapies where – what in Germany is called [indiscernible] and we can promote. So we have picked those and we've put in some products in those, strategically moved in that direction. Looks to be a little more sustainable, not that these would last forever. But as tenders come [indiscernible] by the time they are launching new products. For example, this quarter we have already launched [indiscernible] which is doing well. So in summary, I think the worst is clearly behind, hereon we will slowly build the business.

Great. All the best. Thanks.

Thank you. Next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Hi, thanks. Good evening. Abhijit, I'm a little confused in the context of your comments on the new approvals for the year. I think to one, you said that it's going to be light year. To the other, you said you expect quite a few new approvals. If I remember, in the previous call, you had said that you expect three to four niche approvals which are not dependent with Srikakulam. So if you could just clarify on this would be great.

Yeah. So essentially Sameer, we are putting more emphasis on the type of assets we get approval on. We have spoken about gen Nexium, we wouldn't be able to give you dates. But as I said, already – transferred, data submitted, questions asked, questions answered to the best of our understanding in a satisfactory way. There are few other products. There was a question on Aloxi, which is in public domain, being litigated, depends on which direction it goes. There was a question on Vimovo, litigated, we don't know on which direction it'll go. But there are a few other – I guess which may not be mega, but reasonable, but it all depends. So if you are specifically saying numbers, just share numbers, it's going to be light. Depending on how these things go, this could be interesting. So, does it answer to a certain extent your question?

Yeah. Yeah, it does. But what you're seeing is that, either these opportunities are sort to say stuck in the – or rather litigation dependent or it's something like Nexium which is Srikakulam dependent. Now the question here is, do you not have someone – some products which could be – that can be showed off launching [indiscernible] which could drive the growth?

So, Nexium is not – I just mentioned, it's no longer Srikakulam dependent at all. And some of these products either are already derisked or in the process of being derisked. Having said that, so more specifics – I wouldn't be able to give you. But it's been seven months from the time the audit happened. And this is reasonable time for us to do whatever needed to be done.

Okay. And just on Nexium, I remember, you had given away a bridge to submission in term for tech transfer as in maybe three months or even less, rather than what companies normally do which is much longer, six months to 12 months. So you've obviously cut down a few of these studies. So, when FDA did come back to you ask you questions, those are not the requirements that FDA need anymore. Is that a fair comment?

Look, I wouldn't get into details. I think the statement what I mentioned is, we have several questions after we put in – after the [indiscernible] after taking back here, they put in, there were few questions, which I think to the best our understanding, we have answered satisfactorily. May I leave it here? Wait, this what happens you know.

Okay, okay. And just switching gears, Abhijit, can you update us on the new manufacturing blocks in Vizag, one – the second injectable block and the second is the complex oral solid that was almost ready last year. How are they progressing and when do we see the approvals flow through?

So, injectables is one site in another part of Vizag. So that investments are – have all gone in. Several products exhibit batches have been taken. Probably, the first filing is also done to the best of my – or just being done type of thing and several to follow during this financial year. But, approvals, certainly not, I mean for the plain injectable side. And on the – you asked about the oral solids?

Yes.

Oral solids I think was audited, no observations. We have got EIR, several already filed from there. One or two, interesting one as well, but when is the approval coming, not in next three months probably, but beyond that – it's possible that we might one or two – start seeing one or two – start seeing one or two.

Okay. Just with you permission, one final question from my side. And that is, on the – just a broader point on the ongoing consolidation in the U.S. market and someone asked you earlier in the call. So the question here is, with Teva and Allergan generics, much, much larger player. But what does it do at a product level? Would you be able expand the per-product market share or is it just about gaining the breadths in terms of number of products?

Just a tough there in thoughts.

Yeah, I mean most of these mega mergers, whether it is Teva, Allergan or Actavis had earlier, or Mylan, Perrigo et cetera sort of things. So, all these efforts and none of this [indiscernible] we don't know, but throw up some opportunities wherever there is overlaps. And to that extent, that is interesting for us. Beyond that, very big, I'm not sure whether there would be great deal of impact or we need to be worried about this.

Okay. Thank you so much.

Thank you. Our next question from the line of Girish Bakhru from HSBC. Please go ahead.

Yeah. Hi. Just following on the approvals question, I mean your previous clarification was very helpful. Just, I mean are you getting any – I mean target action dates on the pending ANDAs?

We have, especially post PDUFA regime and it's become more of [indiscernible] getting.

So per say, I mean 483 issue doesn't like really stop you from getting review on the other A&Ds, right?

By no means – by no means. This is pretty much one side specific issue. Of course, huge amount of organizational effort is into sort of standing for us everywhere where we have taking this is a drive to see how else we could more train, more do IT backup et cetera, et cetera, et cetera. So but this is one site.

Right. And I know you spoke on Aloxi and removal, but if you could just throw some color on Propofol that was a product, that was expected sometime in near-term. Is that also somewhere you can see an approval this year or is that something which is delayed now?

Not impossible, but I can say that it's – at the moment, we have again responded to and the litigations out of it.

The second one is on the Russia. I mean, you said that of course lot of the impact in the quarter was because of the turbulent situation. And I mean, there are lot of news regarding how the prices are actually very high for customers to even buy drugs. So is there a risk that there could be some government control increase on the pricing front? How do you read that situation really turning on the regulatory side?

I wouldn't think that pricing would be controlled that much – that doesn't seem to be the objective, but there could be protection to a certain extent to players who are producing in that country, especially the government business, what we call the DOL business. Our share of the DOL business as we speak is nothing, pretty much nothing, but we have some hospital play, where some of those may come under, but it's not very significant from our side. Going ahead, we'll also think that we need to sort of – we are committed to the geography to see whether eventually go into local manufacturing, but not big red flag immediately for us.

And when there is a discussion going for in-licensing more in that market. Is that more in the OTC side?

Whatever. It will come to our way. As you speak there are opportunities being discussed and some appropriate. So, I think we will consolidate both on OTC, as well as hospital type.

And in this whole turbulent thing or I mean basically the inventory issuers impacting both prescription in Rx OTC, right?

To us, less on OTC, more on Rx.

Okay. And just lastly a broad thought on – I mean recent pickup in biosimilars. I know it's which long indeed, but if you look at the recent data, the Remicade biosimilar is coming at discount so 70% which brand price. And I know that has helped in terms in terms of market share, but with this kind of discount, do you think there is an opportunity in these first and second generation biosimilars for companies which would be say coming quite late?

You're talking about the European play on this.

Right. Right. Right.

That may not be and absolutely full pleasured data fund, but having said that our current this year major objective would be to sort of collect the data, some more data is getting generated and go to all the emerging markets as much as we can. By the way, since last we have launched in Ukraine, I think it was last month, sorry, much before or something and doing extremely well. So we'll progress on that front first and then, we'll see how it plays out in the global side.

All right. Thank you so much.

Thank you. Next question is from the line of Surjit Pal from [indiscernible]. Please go ahead.

Thanks for taking the question. Saumen, could you please tell me was there any kind of dollar denominated expenditure in Russia, which you might have converted into local currency post this fall in currency?

No, we have not [indiscernible]

Okay. So, basically, this currency devaluation particularly the emerging market has helped to reduce your consumption of raw materials cost to that extent?

No, it will not be – that will not impact the raw material, that impact DNA to some extent.

Okay.

Our cost with whatever manpower is there in the emerging market, that cost if you whatever data being driven that you give when you finally convert the functional currency [indiscernible].

Okay. Is there any kind of development in Zopinox marketing, I think you started with partnership with Cipla, is there any kind of update on that, with Zopinox and NAMENDA. Could you please.

You're talking of NAMENDA or...

And Zopinox.

Zopinox is [indiscernible], isn't it?

Yes, yes.

So, very small asset, very, very small asset. Yes, we have a partnership, but very small asset. Not using back pull, not enough, it's pretty much nothing. On MEMANTINE, we've launched, very – we thought it will be much more commoditized than it is in the market, and so far so good.

So, it's something like say opportunity cropped up like Duloxetine. It was expected seven days, eight days cutting up and then, cropped up four days five days. Do you think similar kind of scenario is shipping up for MEMANTINE too?

Duloxetine was much bigger, certainly, it's not in that league. First of all, the asset was smaller. But, in its own small way, it's good.

Okay, okay. That's all. Thank you.

Thank you. Next question is from the line of Balaji Prasad of Barclays. Please go ahead.

Hi. Good evening, everyone, and congratulations on the results. Firstly, if I could focus a bit on the R&D, glad to hear that you received the PDUFA date, and can we understand what does it mean. So, early CY 2016, could we see a launch over here?

Yeah. We've got that for the expected line of FDA for this class of products, it's a big date. So, if everything goes well, then we can hope to launch this within next one year. And of course, since it's a brand, it will take some time to ramp up, but we are bullish on proprietary product.

Okay. On that, are there any incremental data points that you would get which you will share with us? And secondly, are you ramping up the field force or you would use the current 50 odd of sales personnel that you have at Prometheus?

For dermatology, we don't need to ramp up, but for neurology kind of product, we need to definitely hire.

Of course.

Now, as and when maybe next quarter call, if there is some specific things development happens, we'll share with you.

Yeah. I remind you, these are NDAs. And so, during the course of the year, FDA would certainly ask questions. And depending on – as all assumption everything goes picture perfect.

I understood, Abhijit. Also, I was going through my notes on the Investor Day that you had, I was not sure I got the status update on [indiscernible] they're in Phase III, how close are we to a filing?

We can't comment on those. Maybe next time, once again when we have the – but as of today, I think we can sort of open up further on those.

I understood, Abhijit. Secondly, recently there was some news item about the European Union banning 700 drugs, related to GVK Biosciences, do you have any direct or indirect exposure to any of these drugs?

We had two, insignificant in revenues. But when this started unfolding, we had already stopped and took it out of the market as a matter of precaution.

So, there is no incremental impact then?

Nothing at all.

Okay. Understood. Great. Thanks. All the best.

Thank you. We'll take two last questions. Next question is from the line of Chirag Talati from Kotak Securities. Please go ahead.

Yeah. Hi, thanks for taking my question. First question on Aloxi. Why haven't we seen at entity approval so far, either for the 5, 5B2 or the NDA, is it something to do with Srikakulam?

No, I'm not sure whether [indiscernible] not approved. And so, beyond that we would comment, it's under litigation. We just leave it at that. I gave you some tentative hearing dates, and let's see where it goes from there. So...

No, fair enough. The only reason I'm asking is that one of the other – one of the first refiller received tentative one-month to 30-month deadline value did not, so, query on that and because it's a 505(b)(2) you should be receiving the tentative within say 10 months or 12 months. So, just I wanted to see whether there's this queries or in Srikakulam API or something else?

As I said, the audit took place in November, seven-month is a reasonable time to take whatever actions needed to be taken.

Fine. Secondly, just again on this gross margins, can you help us understand the ordering and inventory patterns for your injectable products? Do you have some sort of seasonality when you do primary sales to distributors? Does it kind of go in certain quarters or it’s smoothly spread throughout the full quarter?

Smoothly spread.

Broadly smooth, except for when the calendar year earlier opens up, it is a little and actually not in the last quarter, actually the duplicate one. So, in this quarter, you need not read anything into any seasonality alone of them.

So, this should be sustainable more or less?

I said, depending on how the competition comes in, which is the biggest sort of variable here.

The only reason I'm asking again, as you know, we should have seen Q-o-Q declines in Russia and in Venezuela, and both of these I'm presuming are higher gross margin businesses than the U.S. So, why is this sharp, sharp move in gross margins on Q-o-Q basis?

All right. So actually as Arvind mentioned that, I think first of all the U.S. business is not – it's just injectables is one side. There are assets where there's – there is some consolidation of shares that we have taken place. And in Isotretinoin, I think you're doing well. There are few other assets, I'm not going to give those detail – details, but more, you see, read this from the standard. I think for quite a few quarters, we are trying to make the business sharp, focus and value accretive. Now this is a philosophy. Now slowly, it shows up in terms of better margins. And on the cost front, I think Saumen mentioned that we have been controlling the cost, not by just sort of removing, shutting down or something that's what, that's not the only objective. But there is a lot mechanization which is going on, which is leading to certain level efficiency and those sort of things. Now look, sustainable and these things – one of the major factors being so much dependent on U.S. is depending on what competition comes and what approvals we get. Now, that what can change the balance, but overall business – we are trying to make it more focused, more value accretive, not just in U.S, Europe, India; all these have contributed to some extent.

Okay. Great. Thank you.

Thank you. Our next question is from the line – last question is from the line of Prashant Nair from Citigroup. Please go ahead.

Yeah. Hi. I had a question on the PSAI gross margins. There seems to be an improvement on a sequential basis; second half last year was quite weak. So is this something lumpy related to product mix or shipment or is it now where we should assume gross margins to stabilize?

I think this would stabilize and improve slowly. There could be a little bit of variation quarter-to-quarter, but clear direction is to make it much more value accretive. And so, this is a direction which we have chosen to take and make. There's also competitive advantage and trying to see what more value you can create for internal assets as well. So I don't think this is – in fact other way round, a little bit of profit share earlier, which is on certain products which has gone down as it can be. So, the direction of the business is very clear and improving gross margin.

All right. Thank you.

Thank you. I'll now hand the floor back to Mr. Kedar Upadhye for any closing comments. Over to you, sir.

Thank you all for joining Dr. Reddy's senior management for the quarter one earnings call. In case of any additional clarifications, please feel free to reach out to Investor Relations team. Thank you and good day.

Thank you very much sir. Ladies and gentlemen, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.