Dr. Reddy's Laboratories Limited (RDY) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and welcome to Dr. Reddy’s Q1 FY '17 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.

A very good morning and good evening to all of you. Thank you for joining us today for Dr. Reddy’s earnings call for the first quarter of fiscal 2017. Earlier during the day, we have released our results and the same are also posted on our website. We are conducting a live webcast of this call and a transcript shall be available on our website soon. 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; Abhijit Mukherjee, our Chief Operating Officer and the Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcasted or distributed in press or media outlet without the company's expressed written consent. Before we proceed with the call, I would like to remind everyone about the safe harbor. This discussion will contain certain forward-looking statements which are based on management's current beliefs and expectations and involve a number of known and unknown risks and uncertainties that could cause our future results, performance or achievements to differ significantly from what is expressed or implied by such a forward-looking statements. For more detailed information on the risks and uncertainties associated with the company's business activities, please see the company's annual report filing Form 20-F with the U.S. SEC for the year ended March 31, 2016, and the quarterly financial statements filed in Form 6-K with U.S. SEC for the quarters ended June 30, 2015, September 30, 2015, and December 31, 2015, and our other filings with U.S. SEC. Now I would like to turn the call over to Saumen Chakraborty, our CFO.

Thank you, Kedar. Greetings to everyone. Let me begin with key financial highlights. For this section, all the amounts are translated to U.S. dollars at the convenience translation rate of INR 67.51, which is the rate as of 30 June, 2016. Consolidated revenues for the quarter are INR 3,235 crores or $479 million and declined by 14% year-on-year. Revenues from our Global Generics segment are $395 million, and PSAI segment is $70 million. Overall, the decline in revenue is largely impacted by the lower revenues from North America generics and API businesses, as well as loss of sales from Venezuela. North America Generic business witnessed increased competitive intensity in some of the key molecules, primarily Valganciclovir and azacitidine. Further, we also witnessed pricing pressure and moderation in the volumes uptake. As discussed earlier, the PSAI performance continues to be impacted by delay in this packet on account of the ongoing quality initiatives. Consolidated gross profit margin for the quarter is 56.2%, recording a year-on-year decline of around 490 bps. As discussed earlier, increased competitive intensity for our key assets in generic business impacted the decline. Gross margins for Global Generics and PSAI were at 61.3% and 24.1%, respectively. SG&A spend, including amortization for the quarter, is $192 million, an increase by 12% year-on-year. As guided in our previous call, we continue to incur expense towards ongoing quality improvement initiatives, and also sizable outlay towards launch-related activities by our Proprietary Products business with respect to Zembrace and Sernivo. Normalized for these changes and also the decreased spend base on Venezuela operations, the balance net increase in SG&A is largely attributable to normal salary incremental account increase. R&D expense for the quarter at $71 million, representing 14.8% of revenues. This spend is in line with the ongoing set of developmental activities as planned. During the coming quarter, we will initiate further development of the recently licensed IP R&D asset from XenoPort and Eisai. On Venezuela, we have not received any repatriations during the quarter to date, and hence, we continue to measure the financial statements of the Venezuelan operations at the current Dicom rate. EBITDA for the quarter stands at $59 million, which is 12.3% of the revenues. The effective tax rate for the quarter is at 26%. However, we expect the annual effective tax rate to be in the range of 21% to 22%. Key balance sheet highlights are as follows: Our operating working capital further decreased by $58 million during the quarter; capital expenditure for the quarter was at $48 million. During the quarter, we concluded our share buyback program and thereafter ended the quarter with a net debt-to-equity ratio of 0.11. Foreign currency cash flow hedges for the next 9 months in the form of derivatives and loans for U.S. dollars are approximately $228 million, largely hedged around the range of INR 66 to INR 71.1 to the dollar. In addition, we have balance sheet hedges of $191 million. We also have foreign currency cash flow hedges of RUB 825 million at the rate of INR 0.99 to the ruble; and EUR 4.5 million, largely hedged around INR 75 to INR 82.05 to the euro, maturing over next 9 months. Effective this quarter, we are presenting the consolidated financial information under IFRS and Ind AS and standalone financial information under Ind AS. You will notice that the PBT under IFRS is marginally lowered by INR 35 crores relative to that presented under Ind AS. This is primarily arising from higher depreciation and amortization expense under IFRS resulting from a differential fair value base and also the treatment of the gain arising on fair valuation of the mutual fund investments. Before I conclude, as some of you are already aware, Kedar Upadhye, after his 12-year stint with us, has decided to pursue his career outside Dr. Reddy’s. So following this, Sonop Zabla [ph], member of the Investor Relations team, will now lead the IR function. With this, I now request Abhijit to take us through the key business highlights.

Thank you, Saumen. Greetings to everybody, and welcome on this earnings conference call. Overall, the performance of the quarter has been quite muted. It's reflected the adverse impact of competitive dynamics on the U.S. business, impact of ongoing remediation activities on the API business and no contribution from Venezuela in the current quarter. Overall, this has been a challenging quarter, and every steps have been taken to get back to growth momentum. I will dwell upon in each of these business in details going ahead. We continue to focus on key priority areas of quality improvement initiatives, execution of launches and strengthening of the pipeline. Now let me take you through some of the business highlights for each of our key markets. Please note that in the section, all references to numbers are in respective local currencies. Our North America revenues are $237 million and declined 20% year-on-year. The decline captures the full quarter impact of competitive challenges in some of our key assets. Further pricing pressure, as well as moderation in volume offtake, was noticed across Rx and OTC products. Against this tide, we continued our market share position of esomeprazole. Recently, you will have noticed, we are -- our approval and launch of omeprazole and sodium bicarbonate capsules. We hope to see further improvement in approval rates and launches in this year. On the emerging market front, there has been a fair bit of stabilization in the macro situation, crude is more stable and so is the impact on majority Indian currencies. Russia business in ruble terms grew by 23% year-on-year and was stable sequentially. Teams continued their efforts in terms of optimizing the productivity and meaningful addition to the portfolio. As for IMS YTD 2016, our volumes have grown by 6.5% versus the market growth of 0.5%. Consequent to the latest approval in Russia, we are working towards pricing approvals and preparation for tender participation. As explained earlier, we did not have any revenues in Venezuela, and we will continue to actively engage with the Venezuelan government to provide affordable medicines to fulfill the needs of the people of Venezuela, but with an assurance of -- on payments. India business revenues are INR 522 crore and grew 10% year-on-year. This was primarily due to the prevalent confusion in the market consequent to frequent [indiscernible] pricing notifications that were experienced in this quarter. As for IMS, MQ period June 2016, we grew by 11.6% versus market growth of 8.8%. Team continues to focus on increasing the productivity and augmenting the portfolio. PSAI business posted revenues of $71 million and declined 21% year-on-year. This decline is primarily attributable to the delays on pricing on account of ongoing remediation activities coupled with some amount of moderation in the uptake of key customers. On the proprietary side, we have launched Zembrace and Sernivo. These brands are gradually getting the traction. On the ongoing remediation activities, we believe most of the commitments made by us to the agency have been duly addressed. And in this quarter, we wish to meet the agency to discuss the progress and request for reinspection. With this, I open the floor for Q&A.

[Operator Instructions] The first question is from the line of Neha Manpuria from JPMorgan.

The first, is it correct that all of the remediation cost is pretty much done in this quarter, are you're close to completion of the remediation? And what was that amount?

So it's pretty much done. We -- so far, we would have spent altogether around $36 million. And I think it could be a couple of million more in future.

Noted. And secondly, you also mentioned launch related-activity for the proprietary portfolio, the 2 products that you've launched. Is this -- will that be lumpy, and therefore, a lot of it was in the first quarter? As we go -- or is this recurring in nature? I understand that some of it would be recurring, but if you could give us a break up, that would be helpful.

Yes. So we have Anil Namboodiripad from Proprietary Products business in the call. I will ask him to respond to this question.

Yes. So as with any new launches with Propriety Products in the U.S., there are some upfront costs that are associated with the launch. Most of the costs are associated with market conditioning, as well as building awareness, trial and usage of the product. So we have an upfront cost associated with the launch. But going forward, once we've established the awareness trial and inculcated[ph] usage, then the costs are going to be significantly lower in coming years.

So it is fair to believe that this amount will therefore continue for a couple of -- for a few more years, then? The one related to Proprietary Products?

Part of it will continue for some more years, yes.

The next question from the line of Anubhav Aggarwal from Credit Suisse.

Question on the U.S. sales. Can you explain your comment on lower volume offtake in the U.S. this quarter? Is this particularly referring to oral solids or injectable portfolio?

So when I said see competitive challenge, there are 2 ways one deals with it. Either you match the competitive price and keep the account or you give up the account, right? So either way, you have either a price erosion or a volume erosion. And so the total financial difference, what you see, is an outcome of both. But primarily, it is due to the competitive challenges.

Okay, so that's clear. And just the clarity on the U.S. sales this quarter, is there any impact of [indiscernible] for sales book in previous quarter, an impact of lower -- higher price erosion on those sales which is flowing through in -- following this quarter? Or is there...

There is no onetime big impact.

So you mean that, like, $237 million sales, let's say, if there is no more approval, largely, the subsequent quarters' sales are going to be around -- does it more, like, becomes a base number for us?

Yes. Of course, with the new product launch, it is going to go up from here. That's what we can hope.

There is some supply [indiscernible] adverse adjustment, but not a very big one to be [indiscernible]. So...

Only thing I will -- you would like to talk about sales book?

And the other issue, which I would since you asked the question, there's also with -- we have been looking with McNeil when they had their problem for last 2 years. And there have been some contract work which we've been doing for the last few years. So that contract is getting to an end, it's tapering off. First quarter, we're still there, and then it's going to virtually tapering off from this quarter. The bottom line impact, give or take, will be in the range of about $25 million per year annualized. So just to sort of put that on record. Yes. And base business, broadly, you can take this, give or take a little bit here or there.

Sorry sir, I was -- when you mentioned with this contract, you're mentioning about the Shreveport[ph] that you do, include as part U.S. thing?

Yes.

Yes.

But Shreveport [ph] sales for us were almost, like, $50 million. So are you saying that we'll have no sales from this facility?

We have a lot of own productions from Shreveport[ph]. Several. And those will be pretty much intact. But there was a contract with McNeil over the last few years. So that is getting to an end.

Okay, sure. And sub-question based on that, with the number, you had higher market share in Nexium. And would this quarter would have captured the most the good part of the Nexium? Or this was only partly captured, and we are going to see still some benefit in Nexium in subsequent quarters?

The current market share is 15%, that is, at least I think, still an effort for a fair market share, a little bit more. There are discussions around, but whether it will succeed or not, we don't know, but active discussions around. But otherwise, based on 15%, we are pretty much close to it.

No, I think, the whole quarter was reflective of that? Or is it was part?

More or less, more or less.

We have the next question from the line of Nimish Mehta from ResearchDelta Advisors.

First question is related to the foreign exchange loss that you have booked versus Venezuela translation [indiscernible]. So if we adjust for the backlog for leverage point of line item, we see the leverage point was reduced drastically. Is that a proper observation? Or I am missing something here? And if yes, then what is the reason?

You are talking about this quarter, what we have taken in Venezuela?

This quarter. Yes, I guess it was about...

But at the Dicom rate, which was 272 in the last quarter end, has become 630 during this quarter. So that corresponding impact of that is around INR 7.5 crore. So we had, after the provision that has been taken into Q4, we had roughly around INR 15 crore in our Venezuela subsidiary. So out of which, INR 7.5 crore is now done, so balance, INR 7.5 crore will be there.

Now referring to [indiscernible] mentioned the INR 300-plus crores of impact because of translation losses due to Venezuela, which may be onetime?

So basically, if you are looking sequentially, then last quarter, Q4 FY '16, we had this Venezuela-related adjustment also in the ForEx line. So that was the quantum amount of around INR 400-plus crores. On similar lines, right now it is around INR 7.5 crores, INR 8 crores.

[indiscernible] notes to account that you mentioned. The INR 380 crores or INR 384 crores for this quarter [indiscernible].

So that would be on a standalone basis. But when we look at the consolidated financial statements, the Q4 FY '16 included around INR 430 crores of loss, which, on similar lines, is around INR 7.5 crores, INR 8 crores.

Okay. The other question related to Shreveport[ph] facility. If you can let us know, what the status of this facility? Was it in [indiscernible]? And what is the [indiscernible] validate [indiscernible].

No. So there was a lot of questions in between. We reached out to the inspector. We -- she's confirmed in writing that it is a VAI, she had exactly communicated at the end of the audit. So I don't think there is a concern, at least based on the way we have received the mail from the inspector.

You said VAI as of now, right? Is what you said.

Yes. VAI, yes.

We have the next question from the line of Manoj Garg from Healthco.

First off, let me also express my congrats to Kedar as he transitions to his new role outside of the company and thank him for all of your help over the years. I have a couple of questions. I'd like to start on North American pricing. You cite pricing pressure as a key source of weakness. Some of your competitors that have already announced in the U.S., namely Teva and Sandoz, have pointed to about mid-single-digit pricing erosion during the last quarter, which is actually a moderation from previous quarters. So one, can you -- so can you quantify your pricing pressure within your portfolio? And I would imagine that this is largely being exacerbated by the inability to launch new price-offsetting products, but maybe if you could quantify the pricing erosion.

So the erosion in pricing will be different from company to company, quarter-to-quarter depending on what gets -- what fees competitive-- sort of ingress into the market. So in this specific quarter, I mean, the full impact of Valcyte going generic was the major impact. And also, Vidaza saw some impact. Dacogen was a little earlier, but since there is some share consolidation as well. So quite a few of our important assets have seen the erosion in this quarter. Specifically in this quarter on the base business, it is in double digits for us. But having said this will vary from company to company, quarter-to-quarter.

Okay. So you're not -- so in this -- within this 16% decline in the U.S., can you break that down in price versus volume?

All right. so let me -- again, I just was explaining that when you see competitive intelligence, you see competitive -- sorry, competitive pressure, you see in most of your accounts. So you regain some, you give up some. The ones you give up is the volume reduction, ones you retain is a price erosion. So you should see, overall, the impact. And the very large part of the quarter-on-quarter price decline is due to the North American reduction, and the rest is emerging markets and India and NLEM and such and so on and so forth. But it's probably about 70%, 75% of the difference is from North American price/volume erosion.

Okay, that's helpful. And then on remediation, you said -- so your mediation efforts or the costs associated with the remediation efforts should start to decline from here on out. And I think you just alluded, too, that you received some sort of notice of a VAI. Can you just expand on that in terms of the timing of that notice? And what you expect in terms of FDA interactions or FDA inspections in the near term here?

So let me clarify, the question asked previously was regarding a specific site and has nothing to do with the 3 impacted sites. So that was an independent question on the VAI, which I answered. So let me clarify that, that was about Shreveport. Regarding the remediation, Saumen mentioned about between $35 million to $40 million is the total expense. It has more or less tapered off this quarter, and -- because we have completed most of the commitments, some of the long-term commitments will be continuing, that will be internal. So for all practical purposes, that amount which I said, between the last 3 quarters have played out.

Okay. And then I'll get back in the queue. But lastly, on the Teva-Allergan Generics portfolio that you acquired, I think 7 are pending ANDAs and 1 isn't approved. Can you provide any color here as to when we can start expecting some revenue contribution from the 7 pending ANDAs? I mean, are they -- how far along are they in the review process?

Okay. So even the one approved is settled, it's approved but settled, so it's not going into launch immediately. But on overall basis from next financial year onwards, we are hopeful of seeing a few approvals. Of the 8 attempts, 2 are very meaningful. And the rest are okay, about 5 oral solids, 1 topical, 1 drug device and 1 a film type of a product.

The next question is from the line of Chirag Talati from Kotak Securities.

First question, when do you expect the Teva deal to complete? And post-completion, should we expect an increase in amortization charge?

So it may be closing in the next couple of weeks, subject to the SEC approval. Probably it's closing in next couple of weeks. Now this will be an in-process, so it will be -- amortization will only happen once the revenue starts coming in.

Okay. Fair enough. And secondly, on the $25 million McNeil contract that you talked about. So were any revenues from McNeil contract booked in this quarter? And when does it exactly expire?

Yes. We booked something in this quarter. But it more or less start tapering off from now in the next 2 quarters. It's -- a small part of it will continue, but most of it is -- first quarter was almost, let's say, 70% of a full run rate which was booked, and then here onwards, it starts depleting.

We have our next question from the line of Sameer Baisiwala from Morgan Stanley.

Abhijit, your comment's a little confusing to me when you say that the quarter captures the full impact of the erosion in the key assets. And I say that because, to the best of my knowledge, I think Vidaza competitive thing happened only by the middle of May, so it should be maybe just 6 weeks impact. Second, Sumatriptan autoinjector would actually happen in July. So that should be the new hit that you would see in the current quarter. So maybe you're not seeing the worst of the hits. And at the same time, when you talk of the benefits of generic Nexium and you said that the quarter captures a full quarter impact of 15% market share. Again, IMS data says that you practically had negligible market share until middle of May, and it's only then that you ramped it up to double digits. So your comment seems to be quite incongruous to -- from a timing perspective.

Okay. So let me sort of deal with each one of those. So yes, about when we are saying full quarter, full quarter for couple of assets which earlier played out. Some of it is part of it, yes, so some of it is, especially imitrex, would -- still to come. And we've seen some of it. So to that extent, you're right. Some of it has played out, some more will happen. Although this month's sale seems to be a little higher than our expectation. So yes, mine was -- my comment was more general. This -- some overflow into the subsequent quarter will happen to that extent if we do what you're saying. The second point which you mentioned on -- what are the points, Sameer? Esomeprazole, yes. Esomeprazole market share and revenues are not to be limited. When you get in, you tend to -- sort of lower a little bit, that's how our customers take. But yes, it could be a little higher. But I wouldn't be able to exactly give you absolute, every breakup of every $1 million. But there wouldn't be too much of upside on that, actually.

Abhijit, the second question here is that you have loaded up the entire erosion in the U.S. to these 2 products saying competitive risk. But if I see that sequentially, your U.S. revenues are down roughly $50 million. If I annualize it, it's about $200 million. And if I'm not wrong, then both these assets, Valcyte and Vidaza, full year sales for you, I think is roughly about, give or take, $100 million each. So what you are in fact implying is that both of these products have gone 0. Or it is -- or the story is actually a lot beyond these 2.

The story is not a lot beyond these 2. Valcyte is a big hit. It used to be more like $120 million, down to, say, $40 million. But if you exactly add asset-per-asset, you'll probably get some part of it. There would be, in general, always some competitive pressure coming in the base businesses. We keep also gaining a few which sort of keep on nullifying some of these. It's possible that there are a few additional hits this quarter, which may or may not play out to the fullest extent in the subsequent quarter. So beyond this, I wouldn't be able to give you. It is a little dynamic, you know this market, it's little dynamic. So I -- so you take the big assets, those are irreversible. And I agree with you, imitrex will probably coming into a certain extent. Injectables, it happens a little slowly because the GPOs are contracted out for a longer period, especially for Vidaza and things of that sort. And hence, it will happen, but not happen the way it happens in oral solids. So between these, you'll have to work your figures out.

For the 2 R&D Phase III trials that you plan to file for XenoPort and Eisai, what do you think is going to be your, on a 12-month basis, cash burn to these -- to do these 2 trials?

Very early to make a complete estimate, but it could be anywhere between $20 million to $25 million for the year, this year.

For each asset?

No, combined.

Okay. Abhijit, with your permission, one more question. It looks like your quarter, your EBITDA has almost halved, and your profit -- net profit has almost got decimated. And really speaking here, it's the negative operating leverage which is in play, which is that you have lost sales, but your cost remains at the same level. So just a comment, do you see your $32 billion -- INR 32 billion sales going up back to $38 billion and you restore the net profits? Or b, do you think you have the flexibility in a short term of time to take your costs down so that you get back to INR 400 crore, INR 500 crore profit levels?

First would be on both sides. But in a company where it's largely innovation-based business model, to drastically cut anything would not be the right thing to do, and we don't intend to do that. While having said that, there is -- to look at hygiene -- reduction of cost, and as we now have programs on the moment as we speak with the consultants as well. And we are looking very seriously to it. Coming back to the increase in sales, broadly, the emerging markets, whatever had to play out has played out. So each of -- by quarter-on-quarter, those 2, including India, will keep increasing. The launches in both North America and U.S. will define how we sort of claw back to the full level. And if we get -- it all depends on if you are able to crack a couple big assets, then whole story turns very quickly to the other side. But we'll see how it unfolds. But yes, focus on essentially launching, getting sales back, that will be the key thing.

And which are the big assets that you have in mind?

You never fail to ask these questions. You know that I'm not going to answer those. But yes, I mean, the same thing, some launches this quarter, midsized assets. The big ones in public domain, you know. There is litigation amongst [indiscernible]. The ones not in litigation, I wouldn't be commenting on.

Next question from the line of Prakash Agarwal from Axis Capital.

Sir, just more color on the U.S. FDA remediation measures and the cost that you just spoke about. I note total cost being $36 million. And last quarter, you commented about $20 million in the 4Q. So incrementally, about $16 million has been spent, and what's the outlook for the cost and on the FDA remediation, sir.

Approximately, you are right. And your other question was in terms of status of remediation?

No, sir. How do we look forward? So this -- you said around this quarter, we'll be having...

Looking forward, it will be much lower. As I said, just a few million dollar more.

Yes. And on the U.S. FDA, so we are expecting the meeting this quarter?

Yes.

And then any broad expectations in terms of resolving and getting back our U.S. approvals and API sales back?

We can't speculate on that, so let's have the meeting, then we'll have to tell you what is outcome of the meeting.

But from a percentage perspective, remediation may have to what extent, sir?

Very high. Closer to 98%.

Almost done. And percentage, we will not give the rate there. So essentially, everything ordered and committed has been done. What -- the institutionalizational activities, which are ongoing, which will always continue, right? I mean, so you have -- we are about to send out the letter with the request for reinspection very soon.

Okay. And second question on India and RoW markets. So India, if I'm not wrong, UCB assets closed out at the end of this -- last year, around June. So would not have captured. So despite, we have done about 10%, so ex of UCB, we will be, what, flat growth? And how do we look going forward? Has any of it will hit us bad? Or if you could quantify, that would be helpful.

There was 1 month of UCB, if I recall, last year. And so it's not that good, not there. And initially, the new launch. In branded, markets we've lost channels a little bit. So there's some impact of that. So if you net of that, maybe you can take about 5 or so as the net growth. Large part impacted by NLEM, as you know, the current IMS has dropped very substantially. And on the MQP [ph] basis, we are still leading the market, as I just mentioned. So overall, I think attractiveness of the market is down, but we'll have to be selective on launches, and we will continue our journey. Yes.

So we remain confident of a double-digit growth for this year?

Well, depends on, actually, the NLEM, did we -- 3, 4 months back, did we know that the series of notifications will come in the market, more than just price impact, which is one aspect that the whole channel got destabilized. The frequent changes, asking for immediate stamping, all [indiscernible], were continuously stamping new prices, et cetera. Some litigations in place. So all that has disturbed the quarter. Beyond that, I think it's settled down. So yes, we are still hopeful, that's it. We are still hopeful. [indiscernible].

The next question is from the line of Kumar Saurabh from Motilal Oswal Securities.

I just wanted to understand, on normalized level, as in ex of remediation cost as well as any onetime hit, how should we look at the base business margin? And by then, do we expect to reach back to the normal levels of 20-percent-plus kind of margins? Is it something that only after the Teva approvals, we should go back? Or do we think that we have products in our pipeline which could take us back to the margin levels where we were?

So normally, we would be expecting north of 55% to be the margin of our base business. And in terms of the recovery, we were expecting the recovery to be in the second half. As we alluded earlier, we have reconciled with decline in performance in both Q1 and Q2.

So I wasn't mainly talking about EBITDA margins because you have a lot of gross margin levels...

EBITDA margin mainly got impacted by the lower sales. If the sales [indiscernible] grows more, that has a very significant impact on -- and maybe the margin is going up.

Yes. And as far as unit cost at absolute number also has gone up.

Yes. So that will -- remediation cost adjusted, it will be a little less. And -- but Anil has talked, from Proprietary Products, that if the initial cost of a new launch were to -- it will also get normalized.

Sure. So by when do we expect these ANDA products to deliver the margins which our base business used to deliver?

I will have to redirect this question to Anil. Would you like to take this?

Yes, yes. So again, I go back to my earlier statement, that with new launches, the initial period involves a lot of investment to build the market confidence and usage of the product. We actually expect to see a big ramp up to a lot of these investments that we are making, I think, later this year and into the following year. So we expect to have -- to see the benefits of all of this by late next fiscal.

Sure. Sure. And sir, how should we look at our U.S. sales for this year? As you said, that our India business should -- we're hoping that low double-digit kind of growth you expect in India business. What kind of growth we should expect for the U.S. business? Or the decline, rather, we should expect for the U.S. business?

Yes. So the earlier one of the questions I was answering on those, expectation on the products will decide everything. Like for everyone, expectation of the products will decide everything, as approval of the products. So can't really answer. I don't know. I mean, I can't give you the budget because on principle, we don't kind of give you guidance on all that. But we'll have to wait and watch.

We have the next question from the line of Saion Mukherjee from Nomura.

First, just on the numbers, are actually a little bit confusing, the U.S. decline. Now if you look at Valcyte, you said, like, it's going from $120 million to $40 million. So that's a quarterly drop off $20 million, which is much lower than $50 million that we have seen. I don't know, but Vidaza, we don't see Mylan or Actavis on the market yet, as per IMS. And you would have taken some Valcyte correction last quarter in sales. So that's one thing. And the second thing is, if you look at the material cost to sales under the NDDS, in fact, it has improved Q-o-Q and remained flat year-over-year. So if the impact is because of pricing, we should have seen a significant correction in the gross margins, which hasn't happened. So it's really confusing for us...

So Saion, I think that repeatedly, this question is coming up. Let me give you a little bit more details on this. So on the OTC business, one, was some seasonal correction. This was not the effects of season, number one. Number two, there was some drop in the store-brand omeprazole as well. Whether this is very permanent or not, we'll have to see. But there is some bit of these things which are adding up. Divalproex ER, we saw some significant reduction, but there's also positive news. That's why I was hesitant to give you a little bit. Divalproex ER, I can give won -- looks like we have won back some of it and it will come back. So it's a mix of some of these things. These things continue to happen in U.S. market, right? And there are also other things I'm not going to the details of. Broadly, what is more worrying is the biggest hits have got impacted. The oral solids will have -- will see immediate impact. The injectables take a little bit of a time, although it will happen. And so that's the story in a nutshell.

Okay. And in terms of new launches and particularly in the U.S. market, how should we think about it? Because that's quite critical in terms of gaining back margins, et cetera. So you have said it will be stronger in the second half. Can you just indicate how many products we should think of? And also next fiscal year, so how is the pipeline looking in terms of approval?

So I said first half, which is another few months to go. We will see a few, 1 mid-sized and a few small, hopefully, depending on how we are ready for launch. Few are partnered, some of these products are partnered. And so that's the first half story. Second half story is we have got a few bigger assets, but whether it shows up in Q3, Q4, will not -- it's not about the number of launches. Number of launches will happen. There are quite a few settlements in Q4. But they may or may not be very big, but the bigger ones is 1 or 2 clicks. Then the story changes really very rapidly. But we'll have to wait. And so it's not that the story is not just in numbers. Numbers, we will see. It's not like last year that we'll not have launches, we'll have launches, we'll keep announcing those as we go along. But what is the -- which are the assets which finally go through is going to decide the destiny.

Right. So I mean as we are referring to the big assets. So you expect something this year, next year. And what's the certainty there? Is it all dependent on litigation? Or something which can -- which you have enough visibility to say that it can happen this year?

One is in public domain, which is litigation. You know a lot of it's in litigation. Barring that the less couple are not in litigation, these are difficult assets, depends on how much time, what -- how will we look at it, et cetera. And so we'll see.

And sir, any updates on Copaxone 20-milligram, how far we have reached in North America?

Trying to fast-pace as much as possible. At least, the DMS, sort of the -- with the new process of trial back is over. The validation's starting. So the end of it, we should see in about 2, 2.5 months, 2.5 months or so. We'll try to sort of respond. The ANDA is much easier because it's just taking the batches and providing the stability. But the main thing is that we will try and respond in that time frame, more in line with what I said earlier.

So once you respond, given that there's new guidance, when you expect an approval then?

This is -- again, I mean, look at [indiscernible]. I mean, this is guidance there. You've done a lot of work. We could more or less assume that to the best of our capability, we have done a thorough job. Beyond that is the agency to sort of look into.

The next question is from the line of Prashant Nair from Citigroup.

I just needed some clarifications. When you mentioned the McNeil contract going away, you said -- you gave a $25 million number. Is that the impact on revenues -- or the likely impact on revenues or on bottom line?

It's the bottom line.

Okay. And can you give some sense on what the revenue would be from that contract which will go away?

No. We're not going into those details at the moment.

Okay. All right. And secondly, on the R&D spend now. On a full year basis, where do you see it settling as a percent of sales?

Well, it all will depend on sales. So it will be higher than the previous year because of additional R&D for XenoPort and Eisai. That absolute amount will be more or less in the same line outside these 2.

Okay. And finally, on the remediation cost. So I understand a lot of this will go away, but is there any part of this that would be recurring? Or would all of it ease off once...

When we have -- whatever the remediation cost I have been telling you, it is more in terms of the legal and professional. But if there are some increase, which happened as part of the remediation, it was there, and that is in already part of our...

Okay, yes. But the number you mentioned earlier in the call, that's for legal and professional.

That's right.

Ladies and gentlemen, due to time constraints, we'll take our last 2 questions. The next question is from the line of Nitin Agarwal from IDFC Securities.

Can you help us understand a little bit more on how the Reditux launch commercialization in Russia is going to go forward? And in general, how do you look at the biosimilar programs for us, given that there's a lot of activity seems to be happening now both in the U.S. and the European front?

So the big quant -- a big tender in this year is in November, and we are more or less getting set to participate there. And overall, we are much more cost-effective. The discussions with the health ministry and government has gone very well. They're very appreciative of the fact that we have got them savings to the health care. It's a large -- it's a big saving. So we're optimistic about the November -- participation in the November tender. And the other markets also, very actively, we are moving ahead. We have -- I've mentioned, we've launched in quite a few markets, small markets, and there is growing. But there are other emerging markets where very actively with agency, discussions are going on. I think we're seeing much more traction in the willingness to sort of let the files get in. So that's the emerging markets story. And on the regulated markets, the journey with Merck Serono continues. As I mentioned last time, this is a little far away. So as far as the revenue impact is concerned, there is -- immediately, there is nothing which needs to be factored in. But we would try to scale up as quickly as possible in emerging markets over the next, let's say, 8 to 10 quarters. We'll try to slowly start ramping up more.

Okay. And what will be our size of our biologic business right now? I mean...

He asked if you know exactly. Do you?

Around $50 million.

Yes.

And part of it right now will be coming from India?

No. In India -- and also, there are quite a few emerging markets where we are selling.

Next question is from the line of Kartik Mehta from Deutsche Bank.

Is there any update on the site transfer status of Gleevec? And if you could just maybe refresh us on some of the date or the quarter in which we should build-in the number as per the settlement?

Gleevec, the site transferred and data submitted, so it's in the process of review as we speak. There is a date given for what's called DAD [ph]. And we're hopeful that it will get through. But probably, you must have heard Novartis' conf call, which they mentioned that there will be probably a few people after the 6 months are over. So I don't know what -- your guess will be as good as mine, what that means.

Yes. But in terms of, I just wanted to understand from you, Abhijit, in terms of the date of our -- the launch, which would have been settled. We should expect that we should be in the market on that date in terms of the site transfer being successful, right?

Yes, I hope so. So far, so good. And we expect to launch in the financial year is what I said probably last time.

Ladies and gentlemen, due to paucity of time, that was the last question. I would now like to hand the floor over to Mr. Sonop Zabla [ph] for closing comments. Thank you, and over to you.

Thank you all for joining the call. And in case if you have any additional clarifications, feel free to reach out the Investor Relations team. Thank you.

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