Dr. Reddy's Laboratories Limited (RDY) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and a very warm welcome to the Dr. Reddy's Q3 FY '17 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'm now glad to hand the conference over to Mr. Saunak Savla. Thank you, and over to you, sir.

A very good morning, and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings call for the third 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 the IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising Mr. Saumen Chakraborty, our CFO; Abhijit Mukherjee, our COO; and Mr. Anil Namboodiripad, who is the head of our Proprietary Products business and the Investor Relations team. Please note that today's call is a 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 on the call, I would like to remind everyone that the safe harbor language contained in today's press release also pertains to the conference call and the webcast. After the end of the call, in case if 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 Mr. Saumen Chakraborty, our CFO.

Thank you, Saunak. Greetings, to everyone. Let me begin with key financial highlights. For this section, all the amounts are translated into U.S. dollar at the convenient translation rate of INR 67.92, which is the rate as of 30th December 2016. Consolidated revenues for the quarter are INR 3,706 crores or $546 million and grew 3% sequentially. The performance has been mixed across the markets, while revenue contribution from Europe and emerging market have registered sequential growth that some of our North America Generics business and Proprietary Products have largely driven flat. On a year-on-year basis, overall revenues declined by 7%, revenue from our Global Generics segment of $451 million and PSAI segment of $80 million. Consolidated gross profit margin for the quarter is 59.1%. Gross margin for Global Generics and PSAI were at 64.1% and 28.3%, respectively. Sequentially, there is a market improvement in the gross margin profile of the business. SG&A spend, including amortization, for the quarter is $167 million, a decrease by 6% year-on-year. After normalization of the Venezuela base effect and the settlement charge paid to Novartis with respect to zoledronic acid. There is a marginal increase, which is largely attributable to normal salary increments, headcount and other costs. Sequentially, also after adjusting for the NPPA charge that we took last quarter, there is no major variance. We continue to explore revenue to optimize this spending. R&D expense for the quarter were at $73 million, representing 13.4% to revenues and is in line with management estimate. As discussed earlier, we have initiated further development activities on the recently in-licensed in-process R&D asset from XenoPort and Eisai as well as the acquired ANDA filings from Teva, which has incrementally added to the R&D expense. EBITDA for the quarter stands at $129 million, which is 23.7% of the revenue, so better gross margin profile. And controlled SG&A and R&D spending, it is the improvement in the EBITDA margin. During the quarter, we generated $77 million of cash flow from operations. Our net debt-to-equity ratio is 0.31 as on 31st December 2016. Effective tax rate for the quarter is 20.6%. Key balance sheet highlights are as follows: Our operating working capital increased by $59 during this quarter due to the new product inventory buildup and increasing receivables in few geographies. We would continually focus on optimizing the working capital cycle. Capital expenditure for the quarter was at $44 million. The foreign currency cash flow ranges for the next 6 months in the form of derivatives and loans per U.S. dollar are approximately $135 million, largely hedged around the range of INR 67.6 to INR 70.4 to the dollar. In addition, we have balance sheet hedges up $251 million. We also have foreign currency cash flow hedge of RUB 300 million at the rate of INR 1.08 to the ruble and EUR 1.5 million, largely hedged around INR 75 to INR 82.05 to the euro, maturing over the next 3 months. With this, I now request Abhijit to take us through the key business highlights.

Thank you, Saumen. Greetings to everybody, and welcome on the earnings conference call. Overall, there have been a marginal growth in topline on a sequential basis. We continue to face headwinds in the U.S. business, delaying approvals of our major launches coupled with erosion of the base business have been a call of concern. On a positive note, currencies across emerging market geographies have stabilized with crude. The business continues to grow on the back of stable macroeconomy and institution business launches. Let me take you to each business to discuss the performance and some key themes. Reference to financial numbers will be in respective local currencies. Our North America revenues are at $246 million. While we continue to face incremental competitive pressure, we have managed to hold on to our market shares across critical product set at an overall level. During the quarter, we have launched 5 relatively small products, most of them being partnered assets. The fourth quarter, however, is unlikely to benefit from any sizable launch. This, coupled with sequential buying pattern and continued competitive pressure, will likely result in a softer Q4. Additionally, we are facing a temporary supply disruption of one of our [indiscernible] assets due to technical reasons, which is manufactured at the partner sites. We have already initiated corrective measures to get the product back into the market soon. This will have some financial impact for the quarter also. Some major launches anticipated in this fiscal year are likely to get deferred to next final -- the next fiscal. The review of the complex products and subsequent approvals by the agency are moving slower than our expectations. We continue to work with the agency to expedite our approval. Based on the current visibility, the launch momentum is expected to pickup in the coming year. Overall, we are likely to see 15-plus launches coming through next year. With this traction, we hope to be back to our historical trend of business. We have substantially ramped up our R&D productivity, we have filed 9 ANDAs in this quarter and expect to close the year with a cumulative schedule of 25 filings. Continuing to the pure generics -- Continuing on the pure Generics business. Our Europe business saw some good launches. Overall, the business looks well-placed for profitable growth on the back of key launches and traction in institution business in the EU5 countries. On the emerging market front, we are fairly comfortable with the gradual recovery in the marketplace pursuant to the stable macroenvironment. Specific to this quarter, our business grew 23%, sequentially. Russia business grew 11%, sequentially, in constant currency. The team continues to focus on productivity enhancements and portfolio augmentation. As for Russia, the other market performance was in line with our expectation. We are on track to expand our geographic presence through leverage our foreign institution business portfolio and biosimilars. Commercialization of biosimilars across emerging markets has now started gaining meaningful traction. We remain optimistic of building on this momentum further. Domestic Formulations business revenues are INR 595 crores and grew 2% year-on-year, normalized for base alignment, demonetization impact and NLEM notification, the performance is broadly in line with the expectations. In this quarter, we commercialized 2 of the in-licensed product under strategic collaboration with Amgen. As a business, we continue to focus on productivity enhancements and portfolio augmentation. PSAI business posted revenue of $80 million, the business is gaining traction in emerging markets with healthy margins. CPS business has done well this quarter. On the quality front, as communicated earlier, our warning with the impact of price is scheduled to get reaudited during the months of February and March. A substantial remediation work has been put in from -- put in place from our sites. Our application of corrective and preventive actions or CAPAs were not just site-specific, but they were also network-wide and incorporated third-party review and assessment. We believe we have prepared ourselves well for the audit. In the process of implementing the CAPAs, we have made significant progress in enhancing our quality system and instilling the culture of quality and continuous improvement. That concludes my part. Thank you, all. And I would now like to open the floor for Q&A

[Operator Instructions] We'll take the first question from the line of Neha Manpuria from JPMorgan.

So my first question is on the gross margins. What drove the sequential improvement, particularly given the flat quarter from U.S. and the issues in India?

Of course, there will be some negative operating leverage with the level of sales. And we have been focusing on cost control measures. So in terms of the section of that in both SG&A and core items will be there. And this year, we are trying to do systematically across the organization. In the currency front, there have been definitely some benefits that we are getting. And so, for example, in the constant currency, there is a growth, and actual you will see a better realization in INR, a functional currency. And last, but not the least, our gross margin, which is weighted average completely depend on both the business mix as well as specific products which one if product has gross margin sales higher that gives us overall weighted costs margin mix.

Is it then fair to assume that since all of the items that you mentioned were pretty much sustainable that this margin can continue despite your commentary on fourth quarter being very lean?

It cannot be taken for granted. There could be some fluctuations which can happen. But our R&D will be there to protect. But anything above 55% is normally our expectation to keep in development.

Fair enough. Sir, on the U.S. business, your commentary on approvals being delayed and additional pricing pressure. First, on the pricing pressure, are we seeing incremental pricing pressure because of the McKesson Walmart deal? Or is this related to some of the products, our products in competition? And second, on the approvals, have you seen an increasing incidence of probably CRLs from the USFDA that has led to delay in approvals, which was not initially factored in?

So the first question on price erosion, I think, broadly, as expected them as being experienced by the industry, we are also feeling -- excuse me, facing the same thing. I wouldn't stress it, wouldn't be specific to any margin, but overall channel has consolidated. We had some high-value assets. There was competition coming in. And also the launches like OMEPRAZOLE-BICARB and as you've seen, more people have come in. Some of those have seen some erosion. So expected, and has happened and the channel consolidation will continue to have margin erosion. On the relative delay in approval process, yes, I think the complete response letters overall, if you have followed the industry, is getting a lot. We are having our share. We have been always targeting some of the products, which are slightly on the higher end of complexity, and hence, more clarifications required. So yes, CR letters are coming in, and we are addressing those.

Sir, one follow-up on the approval point. By how much would you say your entire approval period has gotten delayed because of the CRL? Would you say 6 to 9 months? Or do you see a longer delay in our approvals?

Asset-to-assets, case-to-case. Difficult to put 1 figure. As you know, the minor CRs from the agency is 3 months turnaround from the agency. Major CRs are much longer. So we wouldn't be able to place 1 average figure. But 1 quarter, 1.5 quarter delay is a fair assumption.

[Operator Instructions] We will take the next question from the line of Prakash Agarwal from Axis Capital.

So just trying to understand your opening comments, where you said your working capital has increased in anticipation of new launches, and you continued saying that there has been delay in some of the sizable launches which you are expecting. So could you elaborate more on this, please?

Some markets, I can, and some I can't. So broadly sizable-wise, I think, we have mentioned that we had the Imatinib launch scheduled as per the deal this quarter. So this was originally from our oncology site. But since we had FDA sort of WL, we have shifted in time and we had, in a partner sites, which we had scheduled -- we are scheduled for approval more or less, that's per -- in our view. But one of the recent audits in one of the partner sites is there are questions raised and which throws in a lot of doubt whether this would get approval on the specific date. So we are again trying to see what we can do to mitigate that, maybe bring back to our own site. But -- so that's one, and there is one more injectable, which is basically a couple of months delay beyond what we are expecting. So these 2 are the ones I can mention. The smaller ones are there, but it doesn't really matter in those cases.

The receivables have also gone up in some geographies, which will bring it under control by next quarter.

Although inventory buildup was not for U.S. but for the other markets is what I understand.

No, it include U.S., that's what we did -- just clarified. It will -- we will always prepare for a launch in anticipation, and it will also get delay to the extent inventory buildup doesn't get reduced.

Understood. And secondly, if you could just help us understand the competitive landscape of NuvaRing and sublingual Suboxone, which would be largely part of this expected in fiscal '18. Just a little bit on -- if you can help us broad level, like the kind of competition one can expect and then likely time lines?

Yes, these are complex assets, and the competition is likely to be lean, which means the value is well secured. But the time lines are, yes, I mean, these would have some questions from the agency being addressed. And as we speak, we are in the process of addressing some of those questions. So there may be some delay in these launches. Could be towards end of Q4, could be a little later. But I have to remind also that both are in litigation. In case of NuvaRing, the generics prevailed in the 2013, and hence, much clearer on that front. But on -- and also being appealed, but it's at least much clearer. Suboxone has a good position, but beyond that, we can't comment because it's in litigation. So these are the challenges, but if your question is mainly on competition, we don't -- not likely to be sort of crowded in the near future.

And timeline, you said Q4 of '18 or '17?

'18.

Well, if you're talking about fiscal '18 Q4, maybe a little delayed beyond that as well.

Prakash, I'm sorry to interrupt, but I would request you to come back in queue for any follow-up question. Thank you. We'll take the next question from the line of Anubhav Aggarwal from Crédit Suisse.

So I only just have 1 question on gross margin. Typically, we have seen in the past with injectable products talking in the U.S. is higher in the December quarter. Would you say that, that would have contributed to higher margins in this quarter, I mean, the big part of contribution of the delta in Global Generics?

I will not say that, that could be a primary reason.

Okay. And the other question -- sorry, go ahead.

In my -- the thing I had mentioned that we're seeing some traction in emerging markets, biologics supplies. So, to an extent, those things also have helped.

Okay. And one question. As you -- those are questions on SG&A. I guess, a tremendous amount of savings has been made by the company for past few quarters in SG&A. I just want to understand that. Typically, in December quarter, we have seen more promotions happening in some of the -- in Russian market, just as an example. So would you classify that some amount of savings was lower promotion because in Russia, for example, we have seen minus 5% constant currency of decline. So would you say that all of the savings in SG&A what you are showing today is not hurting revenue at all? And therefore, large part of this is sustainable? [ph]

We never focus on cost deflation. The primary consideration that it must not impact our business. So while keeping in view the business considerations, we see how we can possibly eliminate any kind of risks. And also our focus is both on indirect cost as well as on direct costs. Indirect costs, we also focus beyond procurement also on the improvement and other aspects. So this is something which we have been trying to drive very systematically across our organization with required level of incentivization, so there is much more focus.

So would you say that these seasonal promotions, which used to happen in some of the emerging markets that is continuing at the same level what it was and large part of savings we are seeing is X [ph] of that?

There are marketing expenses, which there are cases where there are more marketing expense than the previous year, which was called for. For example, like having a strong kind of payment [ph] which you have in USA, this year, brand acquisition that we have done, or what we do in Proprietary Products that way marketing and sales is an item for overall SG&A. So there have been newer requirements, which have been there. So I will not try to overemphasize shifting from one quarter to another quarter and all. Whatever we currently spends on marketing for our business, we continue to spend.

We will take the next question from the line of Manoj Garg from Bank of America Merrill Lynch.

Abhijit, in the opening remarks, you made comment that you are expecting around 15-plus kind of launches in fiscal year '18. Are you considering some of those Teva's research like NuvaRing and Suboxone in that 15-plus or they are over and above that?

Yes, a few. To be specific, about 3, 2. I mentioned, towards the end of Q4 and there is 1 earlier and there are whole host of other things. The important thing is not 15-plus or whatever number it is, whether its 20 or 15. The important is how many are meaningful. Actually, it's becoming very clear in U.S. market and since we are tracking, it's all -- important assets would be a few, which will actually internally track as well with -- to the best extent we can. So those are the important ones.

Sure. So out of those 15 that you actually said, how much could be or how many could be the meaningful launches, which we are building for the next year?

The ratio is similar for most companies. I guess, would be about 4 or 5, maybe.

Okay. And the second question is on biosimilar. When -- on the R&D day, you have outlined that we are looking around $150 million to $200 million kind of revenue from biosimilar portfolio from the emerging market. Where are we and how do we see that visibility going forward?

So good traction. Our filings are going on. And there is -- There is also a pull from the few markets, because this is, apart from the revenue, is bringing in health care cost reduction in those markets -- to a large extent, also the affordability issue is getting resolved, and my guess in many of these markets, the markets would expand as it has happened in India. So we feel very excited about this, both from our mission as well as revenue, and we are putting all our efforts. This quarter saw good traction. Q4 also would see a reasonable traction on that. Going ahead also, in fact, the only thing it's going to be a little lumpy based on -- this is not -- these are not -- basically, when something that grow, we sort of -- depending on how we do. So, it's not going to be absolutely smooth, but yes, I mean, Q3, Q4 will continue to have be in the similar zone [ph].

So may I ask one more question, if you permit?

Yes, please go ahead, quickly.

Yes. So just one on Aloxi. Any update on the litigation and any time line on that?

We are not expecting -- nothing happen so far.

We will take the next question from the line of Sameer Baisiwala from Morgan Stanley.

Now that you have made -- you moved the Eisai and XenoPort assets into the clinicals, what do you think would be your ongoing R&D spend on these? Quarterly or full year basis?

What we alluded to is that for the financial year, that is FY '17, we'll be spending around $25 million on both these assets combined. So we are sticking to that kind of guidance on the spend for this year. Overall, how much will be, I cannot give you that specifics as of now. But as in -- when we have further discussions with the agency and get more, maybe you can come back later. As of the date, $25 million remains very much with FY '17 R&D expense on these commodities.

Fiscal '18?

I cannot tell you right away.

Okay. And just on Copaxone, is it possible to update on where your 20-milligram file is?

As we've communicated, we have filed the detailed response in the 2nd week of December, and it's gone into review. There is -- and our response also will be able to go in, but that's not -- the main thing is that the DMFs' response. And the response will go in by end March or so, and 40-mg response will follow soon thereafter as well on the MSA [ph]. But the main thing, about the MS [ph] thing is in the 2nd-week of December.

Okay. So what's your expectation of approval both for 20 and 40?

That's a difficult question to answer from here. We -- as I said, we think we have done a good job. We have good analytical capability. We think we have done a good job. Beyond that, I mean, hopefully, things will focus in the right direction.

Is it part of your 2015, 15 launches?

Look, I mean, these are complex questions, right? I mean, depending on what questions agency would be asking us, but there's been huge amount of scientific man-hours, which have been put in into this.

We will take the next question from the line of Surya Patra from PhillipCapital.

So I just wanted to talk about the gross margin trend that we have seen for the PSAI business, which really surprised positively this quarter. Despite the growth of the segment is little only, the gross margin of the PSAI business improved significantly. So any specific reason? And how sustainable is that?

So I mentioned that CPS business did well this quarter, likely to be generally okay in Q4 as well. In some assets, we have done some price adjustments, et cetera. And I think -- and overall, I think, PSAI business, in general, we are trying to make it value accretive and there are specific strategic focus on this, not on the size that much, but more on -- of creating more value out of it.

Okay. But this can be a kind of a lumpy major business as well, I'm afraid so.

Yes and no. Not hugely lumpy, but yes. I mean, CPS will have some bit of -- we think Q4 is okay. But yes, I mean, it's possible Q1 will be a little lean, but a little bit here and there. I can't comments exactly about specific quarters.

Okay. Just one clarification about your initial comments. You've commented about 2 aspects. One is that launch of -- the institutional business launches are something that you said? And also about on supply issue for a partnered product that you have indicated. So was the partnered product is an injectable one?

No, no. It's not by -- and it's not partnered. It is our product, manufactured at the partner site, but midsized, midsized. So, yes.

And can you comment on the institutional business launches that you have commented in the initial call.

Which business, Sameer? I'm sorry.

Institutional.

Yes, so we are trying and putting a lot of effort into emerging markets. We opened up Columbia this year. Brazil, the quality launches will happen in fiscal '18, in a few months from now, hopefully. And we are opening up a few other markets in Chile, JER [indiscernible] Malaysia, et cetera. And the whole objective is to leverage the institutional portfolio, which we have developed, and we have good capability on that. We have good manufacturing capability. And we think we can make this business fairly global. So that's a large strategic initiative on the company. The biosimilars will be add-on to the same front end. And for the next few years, we'll try and sort of grow this business. However, this will not be quarter-on-quarter so lumpy. It will be gradual buildup, but we feel excited about it as a sustainable business in the long run.

We'll take the next question from the line of Kartik Mehta from Deutsche Bank.

On our comments on Imatinib, you mentioned that you are trying to mitigate by shifting it to some other site. Can you elaborate on this? Because if you do it now, wouldn't that take a fair amount of time? Or is it on your own site?

We are exploring all options. What I wanted to sort of flag that in the interest of being competitive transferred and well we had said before launch -- if you follow on, it was all scheduled, but this is an audit, which is to an extent[indiscernible] and often external partner sites, so which -- So we are exploring whatever options we can do to make it as quick as possible. Difficult to comment at this juncture.

And for this question, probably, we didn't understand what is there in initial time. Actually it was originally from our own site because our site got warning letter. We did the risk mitigation earlier, so this is what I've stated earlier.

So, I mean, that -- so are you expecting your plans to be reinspected and to get an approval for -- or maybe Imatinib from your site? Because if you have to mitigate to some other partner, wouldn't you assume that would take at least 2, 3 quarters or so? This is pertaining to Imatinib only.

Yes, so look, I mean, at the moment, let's focus. We have 3 audits till end March. We are focusing a lot on that. And we'll answer those questions later, yes.

So you have 3 audits in the end of March?

End of March. All these plants will get audited by end March. Yes.

We'll take the next question from the line of Fatema Pacha from ICICI Prudential.

So I have a lot of questions on the gross margin, I just wanted to know that is it fair to say that 3Q margin in terms of all the competitions that you've had [indiscernible] site, and that is practically captured in 3Q numbers. So when we will move on to have launches of Gleevec or Aloxi, the margins will build on from this level, is that how you want to look at it?

As I said, there will be new product launches. If it is from in-house, then definitely that's more to margin, but if it is partnered, it may not. But at the same time, there are continuous price erosions and other impacts, which will be there. So 59% gross margin, which we achieved in this quarter is quite a good one. There could be fluctuations. As I said earlier, in terms of our expectations of gross margins from this and weighted average across all business combined as long as it is not [indiscernible] it meets our expectations.

We will take the next question from the line of Chirag Dagli from HDFC Mutual Fund.

So these 15 products that you alluded to for FY '18, I'm assuming these are all the biggest launches that we are talking about? Or this is like the total number?

No, I said this is the total number. And I also mentioned -- someone asked that what is the meaningful part. Hesitantly, I said, like in all companies, maybe 4, maybe 5, I don't know. But -- And we will track those more -- but remind you, the more complex it gets, the more uncertain it gets, right? And that's why Q4, I have already mentioned, that we are expecting a few, now some of the delays have taken place. So overall, I think that there is still -- we look forward to next year. But we are a little concerned about the delays creeping in into the assets.

Sir, how many of these 4 to 5 are litigation or site clearance dependent, which is something which is not in your hands?

Look, I mean I wouldn't go into too much details, like there is no free lunch in this world. But at the same time, if it is very, very sort of uncertain, I wouldn't mention. But at the same time, there is reasonable level of uncertainty. So I -- look, I mean, North American business has its own challenges. What is more important is, are we -- is R&D productivity picking up? Are we still going for the right assets? The answer is yes. Are we putting in those assets and answering the deficiencies properly? The answer is yes. Beyond that, with the channel consolidation, there is no free lunch. There is a plain vanilla products not earnings, headwinds of erosion is there. And hence, it is important that we get these through. Beyond that, look, I mean, I wish I knew I had a better answer to your question.

But the 4 and 5 are not litigation dependent or site clearance dependent meaningfully...

No, as I said, I will not fully clarify those. There is -- there could be a few which are not litigation. There could be maybe 1 or 2 which are litigation oriented. So it's a mix.

Sure. And the second one, sir, in your opening comments, you mentioned that your CAPA is basically work in progress. And still, there is an inspection due. So how should we think about this because your corrective action plan should have already happened, right, before the inspection was scheduled? Or...

We didn't say it. Sorry.

Let me fully clarify. I think you got it completely wrong. I said we have put in all CAPAs in place, not just site-specific, but also networkwide, and incorporate third-party review and assessment. So I'm, again, clarifying that to the best of our capability, we have done whatever we believe we are well prepared. So I think...

Okay. Okay. And when is [indiscernible] sir?

From now to end March, all the 3 sites will get audited.

We will take the next question from the line of Abhishek Sharma from IIFL.

Sir, just 2 quick questions. Sorry for the background noise. Sir, out of the 9 filings that you did this quarter, how many of them are your own filings versus partner filings?

Of these 9 are pretty much -- let me see, yes, most of it are in-house. 8 are in-house.

Yes. All right. And, sir, just one more question. Apart from the 3 facilities, which are in the warning letter and which are getting inspected, have you got intimation of any of your other major sites, which is going to be inspected simultaneously?

No, not at the moment. I mean, our sites keep getting audited as we speak. So there is nothing at the moment to report.

We will take the next question from the line of Alok Dalal from CLSA.

Yes. Sir, just to clarify, the 15 launches for FY '18 are not linked to the affected sites, right?

Let me check. See, I don't -- I won't be able to give you all the details of -- this is overall for the year. We're talking of FY '18, right?

Yes, FY '18.

So there is enough [indiscernible] has been done. There is a -- most of it, quite a few of it, which -- and a very large portion of it is -- which is outside the site, there maybe 2. Actually 15-plus, as I said. So there maybe a few from the affected sites. But maybe there is better relativity going. So overall, you can take it as 15-plus launches, unless there are major -- very, very major delays again in the period.

And, sir, similarly if, say, the inspection does not go favorably. Are the FY '19 launches linked to these sites you've had a chance to derisk? Or it's early to say?

Any derisking in a normal course is an activity, which is, let's say, 9 months give or take, right? So FY '19 is a little far away, so that's all I can say at the moment.

Okay sure. And, sir, one last question. Proprietary Products have been stuck in a narrow range for quite a few quarters despite 2 launches that you had. So why is there no pickup in that particular category?

Anil, would you like to take this question?

Yes, I will take that question. So as we communicated in the past quarter, our focus in this fiscal year is to grow the prescriber base, as well as overall prescription volume, while we work through lifting on various insurance managed care formularies. In the second quarter, we implemented a number of strategies to achieve this objective, including refinement of messages, multiple strategic initiatives to improve patient access, et cetera. So as a result of these interventions, Sernivo prescriptions have grown by approximately 30%. So Sernivo is our dermatology product from 5,500 to 7,000. Also the prescriber base has grown to about 1,800, and more than half are repeat prescribers. These are all leading indicators through the help of the overall proprietary products business and the pieces of the 2 products that we've launched. In case of Zembrace, prescriptions have grown from roughly around 2,000 in the second quarter to about 4,500 in this past quarter, that is Q3. And the number of prescribers have also doubled. As in the case of Sernivo, about half of these are repeat prescribers. So of as I said this -- the volume growth is what we are right now measuring, because the revenue growth will follow as we get increasing coverage with our insurance. And multiple negotiations are going on with these plans. Our objective for FY '17 is to get at least 70% to 80% coverage on all commercial insurance plans by the end of the fiscal year. And so starting FY '18, we will start seeing the numbers follow these prescription trends. We are also working on other initiatives like minimizing restrictions on some of the plans, including prior authorization, et cetera.

Okay. And Anil, how is the pricing here and how many launches you expect in fiscal '18 in this space?

So fiscal '18, so we expect to have one approval in fiscal '18 in dermatology, and another approval, which is pending tentative for our pediatrics product that we in-licensed called Xeglyze. It's for treatment of head lice. So those are the 2 assets that we expect to get approved in FY '18. Xeglyze, of course, is contingent on the FDA audit of one of our sites.

We'll take the next question from the line of Chirag Talati from Kotak Securities.

Two questions. Firstly, I'm surprised, which I commend that you mention it, because I thought [indiscernible] could be manufactured in non-onco facility even develop the existing players in the market is also supplying for the non-onco. So what drove the decision to go to partnered facilities rather than you are doing the non-onco facility of your own.

In my view -- in our view, rather, this should be produced in an oncology facility. So we feel that's the right practice. And hence, we transferred it to -- accordingly.

Okay. Secondly, I'm looking at the Aloxi litigation, and I can see that -- are you withdrawing or not -- invalidation arguments. Does that -- where the risk profile? In any way, should you still have a favorable decision in the district court in the coming months?

No company would be able to answer this. It's been, I think, June was the trial. And so we are waiting on the chances and all that we can comment.

No, what I'm trying to say -- ask is that, because you've withdrawn one of your invalidation arguments, very recently in order to get an expedited decision from the court. There's still some pending issue on invalidation of one of the claims that will just be left. So what's the trade-off that you're seeing there?

So we are pursuing the noninfringement case more actively. And in any case, the invalidity -- all the reasons I can't share. But yes, I mean, we are keenly waiting for the judgment on noninfringement case.

We will take the next question from the line of Dheeresh Pathak from Goldman Sachs.

On Proprietary Products to the earlier question, I think you said you want to have 80% coverage on the recovery in FY '18. How much coverage do you have now?

Right now, our coverage is, I would say, about 50%. And there is some additional coverage, but most of it -- there is a lot. There are restrictions on that coverage. So we are working on minimizing those restrictions. So I would say we are at about half, and we intend to go to about 70% to 80%. That's our goal based on the trends that are in negotiations.

Okay. But in the base business of Proprietary Products, have you seen some degrowth, because these 2 products added and you have 50% coverage, still you're not seeing numbers. Is there in the existing $40 million, I think, which we did in FY '16, has that degrown.

That has not degrown, but there are some products that we have deprioritized in order to focus on the new launches. So there was a further -- a deliberate measure that we had taken. One of our products may not -- but you can call it a degrowth based on the deliberate removal of promotional activities and transferring them over to these 2 assets.

Okay. And last question, in the analyst event in '15 -- 2015, I think, you have guided to about $200 million to $300 million in FY '19. Now, that you are going through this journey, as understanding the market position here, I think, is that guidance can hold?

So the guidance given in 2015 was based off of certain assumptions that we made on the ever-changing dynamics of the insurance marketplace. We continue to believe in the $200 million, but the specific year is something that we are working on as to when we will get to that $200 million.

We'll take the next question from the line of Shyam Srinivasan from Goldman Sachs.

Just on the India business, I think in the opening remarks, there was a mention of 3 points. I think one was demonetization. Can you help us actually look through these 3 points? And if possible, can we have some quantification of the impacts of these 3?

Yes, so base adjustments, what I am alluding to last quarter when we do Y-o-Y, last year was pretty heavy Q3. So that is the base adjustment. The second is the demonetization. Yes, it was a little slow for 2, 3 weeks, and then slowly started picking up. And some companies got more benefit, which are chronic heavy. We are not so chronic heavy. But the normalcy have been fully restored. So again, this is not relevant anymore. And [indiscernible], about price reduction, I think this year, cumulative INR 36 crores or something? So INR 36 crores or so annual impact has come in. So some of this -- it's part of the business. Q4 back to normal. We should have normal growth.

So when you said it's satisfactory, but where do we guide on, say, even FY '18? Is growth going to come back to where historical rates have been?

Yes, give or take double-digit, somewhere between 10% to 15%.

Sure. My second question is on ---- I know this is speculative at this point in time, on the destination-based tax, especially the import of goods and services into the U.S. If they don't get tax deduction, this is obviously one of the proposals. But any early thoughts on what you think the industry can or could lobby, if such a proposal actually comes materializes? Anything early thoughts that you can share will be great.

I will refrain from sharing any early thoughts. Let it first happen, and we will let it to be asked and respond.

This is what you think, so look, I mean, the generic industry has hugely contributed from 2006 to 2015. The total impact, I'm talking about generic industry as a whole, $1.5 trillion savings in U.S. healthcare costs, okay? And I think that's what the industry should focus on and so badly, the government as well. So I think let's focus on that, what the value, generic industry brings into the healthcare costs, okay? And the rest is, how can we comment on.

We'll take the next question from the line of the Vishal Manchanda from Nirmal Bang.

I have 2. One on your Proprietary Products business. You have been developing an intranasal migraine spray. So could you share some updates on this? How is the progress happening?

Yes, one of the intranasal migraine spray is one of our flagship products for the neurology business. It is progressing well. The program is still in development. And we expect to have some important milestones in FY '18. And right now, there is no concern at all about the product.

Okay.

What about the regulatory path, specifically.

Okay, safety is -- expanded it on the safety front?

Yes. Yes, we have finished a safety study, and no observations of concern.

Okay. And should we expect the filing early 2018, currently?

I cannot comment on that. As I said, there are some important milestones that we expect to achieve in FY '18. So I cannot just comment on the filing date.

Okay. Would you be sharing the final data you actually you won the product this year?

Actually, we have some abstracts that have already been published on some of the data that we have generated. A number of publications are due in FY '18. So you will see a lot of scientific literature coming out of this, and also patents have been issued. So that's all in public domain. But overall, I must say that the data is looking appealing.

Okay. And just one clarification on sublingual and Zembrace impact. I just wanted to understand why is the volume growth not translating into the revenue growth?

Yes, as I had mentioned in previous question, the listing on managed care insurers -- in the U.S. as you know, the majority of the business comes from insurance and you have to actually get listed in the formulary, so every insurance plan. And that process takes time. So we are, right now, at about 50% coverage. So while patients maybe insured, but they are not covered, we are making the product accessible to them so that they get to experience the product and experience the outcome of that product, the positive outcome, which is hearing from the field quite a bit about the feedback has been very good. So while that is happening, we don't want to prevent patients from accessing the drug while their insurance -- while we are waiting for their insurance plan to cover our product. So that's why you see the gap between the actual revenue and the prescription. So as I said, prescription growth is important, because once you have patients who experience the drug and want to stay on the drug, we believe that once their insurance plans start covering, they will continue to stay on the drug.

Due to time constraints, we will take the last question from the line of Ranjit Kapadia from Centrum Broking.

My question relates to DMF filing. You're on 782 cumulative filings and out of which 16 have been filed during the quarter. So how many are getting affected by [indiscernible]

Yes, total 16, but one out of that is US DMF, remaining in other places.

Actually none, so, I mean, they are filed from this plant. But overall, I think, that's not a major issue, that's not a major issue.

So if there is a delay in getting the approval, will this -- what will be the impact on the sales and the profitability?

There are multiple things involved and -- I mean, it's difficult to answer this question. Why don't we do one thing? Let's sort of wait out this quarter, let's see how we do in the audits. I mean, let's focus on that. I mean, let's look at the positive aspect and see how it goes actually. So at the moment, I mean, I wouldn't be able to give you a figure on what will happen, et cetera.

And sir, can you elaborate a major remedial cost in the quarter?

Most of remedial costs we have incurred till the last quarter. So it will not be significant.

Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Saunak Savla for closing comments.

Hi. Thank you, all, for joining the call. In case you have any additional clarifications, feel free to reach out to us. Thank you.

Thank you.

Thanks to Anil for joining us.

Thank you. Ladies and gentlemen, on behalf of Dr. Reddy's Laboratories Ltd., that concludes this conference call for today. Thank you for joining us. And you may now disconnect your lines.