Dr. Reddy's Laboratories Limited (RDY) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and a very warm welcome to the Dr. Reddy's Laboratories Limited Q4 FY '17 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saunak Savla. Thank you, and over to you, sir.

Yes, hi. A very good morning, and good evening to all of you, and thank you for joining us today for the Dr. Reddy's earnings conference call for the fourth quarter and the full year ended 31st March 2017. Earlier during the day, we have released our results, and the same are also posted on our website. We are conducting the slides as part of this call, and the transcript shall be available on our website soon. Just a reminder that the discussion and analysis on 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 it cannot be rebroadcasted or attributed in press or media outlets without the company's expressed written consent. Before we proceed on to 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, if you have any additional clarifications, 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 the financial highlights. For this section, all the amounts are translated into U.S. dollars at the convenient translation rate of 64.85, which is the rate as of 31st March 2017. Consolidated revenues for the year are at INR14,081 crores or $2.17 billion and declined by 9% year on year. Consolidated revenue for the quarter are INR3,554 crores or $548 million and declined 5% year on year and 4% sequentially. This is broadly in line with what we had alluded in our last earnings conference call. This decline is primarily on account of continuing price increases, no new significant product launch in the quarter together with supply constraints impacting our North America Generics business. On the other side, the branded generics market performed better, especially the Russian operations, which had the benefit of strong ruble and stable economic outlook. Revenues from our Global Generics segment are $449 million and PSAI segments are $83 million. Consolidated gross profit margin for the quarter is 51.2%. Gross margin for Global Generics and PSAI were at 58.4% and 10%, respectively. Relative to the previous quarter, this is a sharp decline. There are a few important figures during the quarter, bringing down the gross margin by approximately 400 basis point. These are: A, impairment charge recorded at our antibiotics manufacturing facility at Bristol; B, incremental provision of inventory buildup in anticipation of new product launch that failed to materialize, for example, sumatriptan 505(b)(2); C, the failure to supply penalties incurred due to supply disruption, for example, eszopiclone; D, unprecedented level of price erosion; and E, higher levels of repair and some maintenance charges incurred in order to renew some of the manufacturing facilities. Moving on SG&A spend, including amortization for the quarter, is $169 million, a decrease of 6% year-on-year. After normalization of the Venezuela base effect, it's approximately at the same level of debt of quarter four of FY '16. So overall, we continue to explore revenues to optimize SG&A spend. R&D expense for the quarter were at $71 million, representing 12.9% revenues and is in line with management estimates. It is 13.9% for the full year. EBITDA for the quarter stands at $97 million, which is around 18% of revenue. The lower revenues and gross margins primarily impacted EBITDA margin. During the quarter, we generated around $150 million worth of cash flows from operations. Our net debt-to-equity ratio has marginally improved to 0.25 as on 31st March 2017. The effective tax rate is around 18% for the year and 2% for the quarter. The lower tax rate for the quarter is primarily due to resolution of certain tax matters pertaining to prior years. However, we anticipate the effective tax rate for FY '18 to be in the range of 23% to 25%. Key balance sheet highlights are as follows: Our operating working capital decreased by $72 million during the quarter. We will continually focus on optimizing the working capital cycle. The capital expenditure for the quarter was at $36 million, and for the full year, it was $179 million. Foreign currency cash flow ranges for the next 12 months in the form of derivatives per U.S. dollar are approximately $235 million, largely hedged around the range of INR 66.78 to INR 69.23 to the dollar. In addition, we have balance sheet areas of around $273.5 million. We also have foreign currency cash flow hedges of RUB 150 million at the rate of INR 1.137 to the ruble, maturing over next three months. With these, I now request Abhijit to take us through the key business highlights.

Thanks, Saumen. Greetings to everybody, and I extend a warm welcome to you on this earnings conference call. As you will recall, in the last earnings conference call, we had alluded to a softer fourth quarter and developed a largely -- in line with our expectations. Let me take you through some of the business highlights for each of our key markets. Please note that in this section, all references to numbers are in respective local currencies. Our North America Generic revenues for this quarter are $228 million. We closed the year at $956 million. During the year, we witnessed increased competitive intensity in a few of our high value assets. Normalizing for that, the base business has held up reasonably well in line with our expectations. The approval for high value launches continue to remain a challenge during the fiscal. The time lines for review of complex products and subsequent approvals from the agency have been getting better. We continue to work with the agency and remain optimistic about the eventual approvals. Our new launches calendar for the coming fiscal looks healthy and we expect [10 plus] launches in the current -- in the next 12 months. The current quarter also witnessed initiation of monetization of the Teva deal through our commercialization of G Vytorin, the first product from the transaction. These are limited to their market, and we expect -- we're excited about this opportunity. During the quarter, we have filed 13 ANDAs, taking the total to 26 filings in the fiscal year. This is indicative of our continuing focus on investing for long term growth and R&D productivity. Continuing on pure generics. Our Europe business is fairly stable now and well poised to deliver profitable growth on the back of new product launches and traction in new markets. Our emerging markets business is on track of gradual recovery. Russia business closed the year with 8% constant currency growth and 26% for the quarter. This is broadly in line with our expectations. We continue to focus on improving productivity and augmenting the pipeline. During the quarter, the much awaited national tender of rituximab was announced, and we secured shares, and we have commenced supplies in the current quarter. As such the performance over the other markets was in line with our expectations. We're on track to expand our geographic presence through leverage -- of our institution business portfolio and biosimilars. Commercialization of biosimilars across emerging markets has now started gaining meaningful traction. We remain optimistic of building this momentum further. India business revenues are INR571 crores and grew by 8% Y-o-Y. We closed the year at INR2,313 crores and grew by 9%. Normalized for NLEM impact, the results are in line with our expectations. We continue to focus on productivity enhancements and portfolio augmentation. PSAI business posted revenues of $80 million. The business is gaining traction in emerging markets with healthy margins. Our efforts are directed towards building a healthy order book. CPS business has done well this quarter. On Proprietary Products, we continue to grow the business, and we are witnessing improving trends for Zembrace and Sernivo. As of date, we have two pending NDAs with the agency, and one NDA recently approved that is the doxycycline in hydrochloride extended-release tablets. Further, during the quarter, we have settled the ongoing litigation on doxycycline, that is Zenavod with Galderma. Consequent to the settlement and our licensing arrangement, we received an upfront amount, and there are annual royalty performance [indiscernible]. That concludes my part. Thank you all and I would like to now open the floor for Q&A.

Thank you very much [Operator Instructions]. We'll take the first question from the line of Neha Manpuria from J. P. Morgan. Please go ahead.

So first, on the gross margins. You mentioned quite a few sort of one offs in the quarter. Could you give us anything -- I mean, some of this could be recurring, but in terms of impairment of the Bristol facility and provision for new -- how much of that -- the impact in the quarter's one off? Or is this likely to be recurring for a few quarters?

The impairment facility doesn't recur. So we were earlier carrying a value of almost $12 million for the Bristol facility. Now after this impairment, the value is around $6 million. So this is, of course, done with all anticipated future earnings. That this is only an antibiotics facility. So there have been some specific -- API supply problems also were there. So we are not getting much business out of that facility. So as for the impairment trigger, we have to take this impairment. This is really -- whenever there are such trigger for recipe, but normally, we don't expect that. In the -- what I talked about the material inventory write off provision that happened, several times it happened. But this time, the incremental one is much higher because we built up in anticipation of launch, which has not happened. So we had to take the entire write off during the quarter.

How much would this be, sir, roughly?

I will get back to you the numbers later.

No worries, sir. And, sir, on the Isotretinoin supply that could disrupt this, by when do we expect this to normalize? Would this take a couple of more quarters?

We are expecting approval from...

We have applied for a few years. As and when that gets approved, wouldn't put a date exactly, but I think your question was more on FTS incurred. I think that tapers down as it happens only after discontinuation. So that is also a one off this quarter.

Okay, got it. And my last question was on the launch. So If I remember correctly, last quarter, you'd indicated about 15 plus launches in FY '18, and we're now talking about 10 plus launches. Is this because we're expecting some delays due to the inspections that have happened recently?

This is well -- indicative. It's -- at the beginning of the year, currently, your guess is as good as mine. In April, we have been able to do 2, G Vytorin and Suboxone generic. So -- okay, let's take it 10 to 15, somewhere in between.

We don't have the right answer. We don't know what to say, either.

We'll take the next question from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Just trying to understand the filing, run rate has been pretty significant despite Duvvada, Bachupally and other all the facilities having some observations and earlier ones still stuck up. So where are these filings? From which facilities are these filings happening?

Mixed all over. So this is from some from partners, some internal, distributed amounts, various locations, we have two other solid locations, a topical location, and then you have ingestible location and several partners as well.

So, most facilities are under some U.S. FDA still having some FDA issues. So we continue to file. So what I'm trying to understand is we do expect -- do not expect any escalation in Duvvada, Bachupally and all.

Well, I mean, I won't when you say most facilities are impacted there first of all, the API facilities mostly have gone through world audits, all three of them. Duvvada is the only one where we had to sort of -- that observations will have to sort of -- we responded well, and let's see how that sort of -- but that doesn't prevent us from filing. It's our judgment, but we continue to file, yes. We also filed some ingestibles from partners well. As far as Bachupally is concerned, we mentioned that in our view, these are procedural, and we'll sort of deal with this with the necessary response and whatever interventions.

Okay. And Srikakulam, is there any update, sir?

I use probably, it's in public domain the observations, right? Only two of them are very relatively easy to answer observations, and we had three from the Miryalaguda two API sites which were impacted and the third API site had zero observation. Yes, I mean, update from Miryalaguda, we have just got a CB 30 approval, which was earlier stuck. So that's, in a way, I will take it as a positive.

No, no, sir Srikakulam.

Yes, as I've mentioned, Srikakulam an audit happened. After this, there's no update, meaning, there'll be no -- we respond, and then we will know the subsequent whenever files come up for approval, we'll know. I mean, we don't expect.

From our side, do we expect resolution within this financial year, sir?

Depends on what you're talking about resolution. Because in our view, if we start getting approval in any form, that's a resolution.

That's right, yes.

So one Miryalaguda, as I've said, we have got one earlier, CB 30, they just got approval. So that audit happened a little earlier, a little maybe...

Two months ago.

Or not even two. I think it's sort of a month before it [indiscernible].

Two months ago.

Oh, two months, whatever. So that's the only data point we have.

Okay. And lastly, sir on the amortization. Just trying to understand Vytorin was one of the products that we got from Teva's drug Actavis. So the amortization would start for these assets that we acquired and the time lines that we are looking for the other two big ones?

Yes. I don't know when we are commercializing, that will start. The specific yes, amortization that will happen, but I don't know when we'll commercialize. I'm not understanding your specific concern there. What are you trying to ask?

No, I'm just trying to understand that the assets that we purchase for $350 million, how are we actually amortizing the entire piece since the first product has already started?

There is a PPA. There is a purchase price allocation which is there, which has been already disclosed. So based on that, the amortizations will happen; the products -- specific product, whenever it is getting commercialized.

And the larger piece happens only when the large two products get amortized -- gets approved and launched?

Yes. You're absolutely right.

Thank you. We'll take the next question from the line of Anubhav Aggarwal from Crédit Suisse. Please go ahead.

One question on [indiscernible] Vytorin. When do you expect the next round of competition in this product? And currently, after the launch, what market share Dr. Reddy's have gotten?

So very fair market share for three players, currently. Next round, certainly, I don't know, so I can't comment. The only I think -- the public domain -- from Mylan's con call is -- they are impacted because of the market is in public domain. Beyond that, I have no idea.

So that -- I'm aware of Mylan. That's exactly what I was asking beyond this, but do you expect this to be as good a product for fiscal '18 and as good a product fiscal '19 as well based on your intelligence right now?

How can you predict? You wouldn't be knowing how, where, who's with enterprise with FDA and all that stuff. So far, so good. So let's continue to sell.

And on the PSAI, the margins are very weak this quarter. What happened there? Because all the gross margins impacted Saumen has talked about were largely on the Global Generics side. What happened on the PSAI side?

The CTO, [indiscernible] we supply both to the external API as well as to our internal per [indiscernible] consumption. So the -- in turnover rate, how does it get allocated. So there is real considerable moment of which happened, and that is a primary reason for the impact on the PSAI going forward. And I must -- who has been -- we have spent much higher level of repair and maintenance than normally we spend, and that we have done specifically to renew some of the city or manufacturing facilities because compared to the [indiscernible], these CTOs were our earlier plans. So we spent quite a bit on [indiscernible].

And can you also, sir, help with implied cost? Your implied cost is down like 18% in the March quarter versus your December '16 quarter. That seems such a sharp decline. There seems to be some one-offs there.

So as a company, we always believed in terms of putting much higher stake for our senior management, top management in terms of variable pay, LTI and various other things, which we put at stake. So if there have been higher profit then there would have been a higher kind of pay -- variable pay. To the extent it is not there, we suffered. So individually, we suffer, but company in terms of variable cost.

But this is a phenomenon which happens in the fourth quarter every year? Or will this...

It was triggered. No, it will all depends on the trigger. If suppose, we would have got the final factor on 505(b)(2), the result would have been different for us.

But this seems a very sharp decline, 18% sequentially.

So maybe we can discuss offline later.

So essentially, yes, during the year, you count and then you take cost at the end of the year and on the variable pay. So accordingly, you -- yes, so to that extent, it has some bit of fourth quarter impact.

Okay. Just one more clarity, not on discussion but on Duvvada and the Bachupally facility. In your corrective action plan, just some clarity if you can provide. What time do you plan to finish the remediation's from your side at least on both those plants?

No, I -- there is -- remediation as such we have mentioned last year, we had spent whatever had to be spent in terms of remediation. Now there's some observations have come in. These are more large -- to a large extent, to do with operator training, certain operations on areas which need sort of special intervention, gross and net, then which will be largely internal. I'm not sure there is a cost, there are efforts, but I think -- I don't think that there's a significant cost involved at this stage. And Bachupally, as I mentioned is our -- most procedural and less so in terms of cost to be vetted.

Sir, I was not asking much on the cost...

Anubhav, I'm sorry to interrupt, but I would request you to come back in queue for any follow up questions. [Operator Instructions] We have the next question from the line of Surya Patra from PhillipCapital. Please go ahead.

Sir, just a clarification about all these remuneration activities or resolution that we are anticipating for all these three facility, which is -- which are currently under issue? So if the resolution to happen then, it will happen at a time for all the three facility? Or it can happen separately also?

Look, specifically, we can't comment. We can only give you the data point, which I just repeated, that we had the Miryalaguda, we had Srikakulam and Duvvada. So Miryalaguda, the first one to get audited, and I've -- we got a [CB 30], which is earlier stock because of GNP and now we just got, just a few days back the approval for that. So that's the only data point that we have. Beyond that, we wouldn't [Indiscernible].

Okay. Since it is covered under one issue, so it might not be -- not necessarily a realization has to happen at a time for all? That is all?

There is a data point. And your interpretation is yours.

Yes, okay. And just one more quick query, sir, about the U.S. pricing scenario for the base business, how is it? And do you really feel that okay, there's a kind of forced stabilization in the pricing scenario there? And what will be the base business price erosion, if you can say, for your portfolio?

This year has been, as Saumen mentioned, has been somewhat bad. I guess, rather [Indiscernible] invisible when you don't have launches. Overall, and the impact-wise. But overall, this year has been particularly bad. But these things will vary quarter to quarter, company to company. At average, annualized, we still feel that we'll be in the range of high single digit, very low double digit type of a thing but can vary from quarter to quarter. Yes, we have taken most of our erosions here this year. Not able to see very large one coming through immediately, but you'll never know.

My point was that post this election phase in the U.S. and post the major of the controlled channel consolidation happening in the recent past, so are we still seeing at this current moment some issue of a pricing, price correction or increased competition in the [indiscernible]?

Elections or anything, this is all about the consolidation of the content which have happened, and we spoke about it. I mean, the channel got consolidated. The impacts are showing now. A price increase or price adjustments are not there at all. So overall, I think all that has -- I don't think dynamics specifically have changed.

We'll take the next question from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Abhijit, is it possible for you to give a broad color for fiscal '18 on the top line and on the EBITDA margin?

No, I mean...

We do not give financial guidance, Sameer. You are aware of that.

Yes, fair enough. Not looking for guidance. I think just general color. Is it going to be...

So with general color, I don't know what you mean by general color. But overall, I told you 10-plus launches in U.S., and it's well known that it depends on which launches and what launches one, we just sets one. And it's laid out well. Let's see how the rest of it plays out. U.S. will continue to be dominant and most unpredictable in many ways because, depending on launches, depending on approvals, depending on resolution, et cetera, and all those things, we'll be -- most of the other markets, I think we expect clearly northward sort of results. Emerging markets, the currencies have stabilized. We have put in significant effort in increasing footprint. Biologics, more and more traction. So expect very healthy growth there. India, well known, maybe 10%, 12% range type of a thing. Europe is broadly in control. We'll grow this year. It has been flattish last year to this year, but of this current year, we grow significantly but again, small pipe. PSAI also we'd expect to do certainly better, much better than the last financial year. But a lot would still depend on how [indiscernible] plays out.

Yes, that's very helpful. I mean, the second question on the 10 to 15 launches that you expect, how many are going to be successful given specifically also on the thoughts on Copaxone and NuvaRing?

Okay. I'll go to the second one. First one, I wouldn't know. I wouldn't be able to answer how many would be sort of meaningful. But yes, Copaxone, as we've mentioned, we sent in our 20 mg response. The DNFS once we had spent in quite a few months back, I think December probably or something of the sort. So we have received a TAD, of which is, give or take, six months from now. So we'll wait for -- hopefully, I ask, in between and maybe a CR, I don't know. But as we mentioned, I still sort of feel that we have done a reasonably thorough job, and let's see how that plays out. NuvaRing, I think on the IP side, I think it's becoming less-and-less critical because in any case, it's somewhat clear and then anyway, that specific of IP gets over by -- until next year. Meanwhile now, addresses how we -- so that -- there's a CR, which are planning to respond in what, about few weeks from now. And then let's see how that sort of progresses.

Thank you. We have the next question from the line of Vishal Manchanda from Nirmal Bang. Please go ahead.

So in the initial commentary you had said on a licensing of Zenavod. So could you -- I couldn't hear that clearly. So if you could give more color on that?

Could you repeat the question again? Licensing of?

Zenavod -- it has been filed from Promius Pharma.

Zenavod.

Okay. So what is the specific question again? What do you want to know?

Is there a settlement that you have entered into?

Yes, there is a settlement that we entered. You're talking about the income recognition from the Galderma deal?

Yes. And when is the launch scheduled and..?

Can you -- Anil, can you take this?

Yes, I'll take the second part.

Yes, and Saumen, you can talk about the income recognized. So this was a settlement followed by a licensing. And that was done with Galderma. So the launch is upon Galderma. And the intent they have expressed is to launch it at the earliest possible. We do not have a specific date.

So in terms of -- we have received some upfront cash settlement, but in terms of the revenue recognition, we follow strictly their accounting standard, and accordingly, a part has been taken to future income.

And additionally -- one more. Could you like also talk about the value of the Rituxan tender you would have received for Russian market?

Well, in the market, as you know there's a lot, okay? And because it's been somewhat aggressive. It's now, in a way, there are Russian player there and us. So yes, I mean, I'll not -- let's not talk about this tender. But overall, I think for the year, high double-digit million dollars, that's it.

In case that we -- there's one more tender, in case I'm assuming that we have share there as well. So we got it.

And if you could guide on how many emerging market approvals should we look at this year for your biosimilar portfolio?

Specifically, we wouldn't comment on this, but certainly, one more reasonably large country, yes. Two more smaller ones. But these things depend on how these -- the regulatory part there proceeds. But these are certainly not as big as Russia. But there will be organic growth also in this product.

We'll take the next question from the line of Nitin Agarwal from IDFC Securities.

Now on the emerging markets, you refer to the fact that you put in significant...

One moment. Let me clarify when I mentioned about the last question on the double digit, which is I'm probably saying within 15 to 20, in that range.

Yes, go ahead.

So the emerging markets, you mentioned about some significant effort being put in for improving footprint. I mean, can you throw some light on that? Are we referring to the efforts in existing markets? Or are you talking about creating some -- opening up some new markets for the -- on the emerging markets side?

Both are done. There are certain markets where we are present. So that is done internally or at certain markets where we are not present, we're alliance partner. So and biosimilar opportunities that we disclose [Indiscernible].

So the emerging market story is now largely -- is being driven through the biosimilar route in terms of any expanding emerging market presence that sees our process?

Well, that's one major growth driver. The second is we are building an institution business in various countries. We have opened up in Brazil and Colombia, and we -- Colombia already, we had launched few products last year. This year, we'll see more and more launches and traction and growth on that. Brazil won is the interesting for us. We are getting the institution business with the first launches just starting as we speak. And in the year, probably three to five launches this year. And those would be the major ones. And then a few North American markets, few Asian markets through partnership, etcetera. So overall, we're trying to build an institution business with global footprint and so largely led by oncology products.

And these will be pretty much the products that you already commercialized in the U.S. or Europe, I guess.

Largely [Indiscernible] And that process will continue as we keep pricing, we will continue to leverage and see how we can -- and the only thing is that several markets are building their footprint, and it's important that we build the footprint so that we are able to get to the institutions ourselves.

And lastly, of the 10 to 15 products that you talked about launching that are currently in the U.S., are any of them kind of contingent on the resolutions on the Houston facilities?

We wouldn't be providing all the details and subsequent questions from where and what. So I think let's just leave it at that. Let's take 10 plus, and I was supposed to commit 10 to 15. So wherever you want to sort of take that, Nitin. So let's just leave it at that.

Thank you. We'll take the next question from the line of Aishwarya Agarwal from Reliance Mutual Fund. Please go ahead.

Can you please help us with this varied key areas repeat observations? So I just want to understand, how serious this repeat observations are, and I mean, what you expect from it? I mean, will we be able to overcome with whatever processes you're supposed to do? Or will it get escalated?

So I think well, the observations are in public domain right now. And you'll have to make -- if I take your call by consulting people. But we'll give you some broad view that currently, the interpretation by the agency on repeat is not specific, but let's say, something is called out and it falls in that category and later in that category, you have observation, which is maybe a different observation. But it still said it's considered as a repeat observation. I mean, this is again, with the changing trend on that setting we're seeing this happening repeatedly. For Duvvada, which is probably, as I had mentioned, well, we had spending a lot [indiscernible] large comprehensive response. The first repeat observation is on the investigation quality. Now every quarter, we have -- and that particular observation is probably half of the whole observation we have in terms of the number of [indiscernible]. And in investigation quality, there will -- every quarter, we have -- or not probably there are various incidents we continue to investigate and continue to make report. So naturally, there is scope for improvement, and we are putting all efforts. But there is indeed, as a broad category, it can come up even in the future. I mean, in similar areas, and not to say that we're putting all our efforts. We're trying to make it as broad umbrella effort to sort of remediate in our facilities. But as a whole category, sometimes this may come up.

Hello?

Yes?

Yes, yes, okay. Sir, my next question is have you filed a Copaxone formulation?

Yes. I just mentioned that we have committed, and it was filed, and we've got a TAD. The TAD is, give or take, six months from now.

We'll take the next question from the line of Manoj Garg from Bank of America.

I would like, you already read a couple of time in this call regarding your [EM] strategies, both on the biosimilar side as well as on the injector business. I just want to have a broader sense, that three to five years down the line, how big this opportunity could be for us, from both the segments in the emerging market?

Fairly significant. So I wouldn't put a figure to it but it's one of the core strategic thrust areas, we will put in first money -- resources behind this. And we're doing it, building that systematically, yes, three to five years. The question is good and valid question. I think fairly significant. Beyond that, I wouldn't go any further.

And if we can get some sense in terms of like the oral side of the opportunity for rituximab, within those emerging market, where either you have filed or you are waiting for the approval. How significant that could be if you want to put some numbers out there?

Finally, [indiscernible] not to characterize to given any kind of financial guidance which is against our policy. But to give the color and the reports which we are putting in to build in our future business growth.

Sure. And this question is for Anil. Like if you look for our proprietary business, I think last year, we had an EBITDA loss of around $80 million, $90 million. So given the kind of ramp up, which we are seeing plus more approvals, which we are anticipating over the next few years, how do you see the P&L of your pro business moving maybe two, three years down the line?

Yes. So right now, we have a fairly rich pipeline of assets in late-stage clinical development, many of them are high-value assets. With the launch of these assets and the number of NDAs that we expect to file over the next few years, we anticipate to start seeing positive revenues within the next three to four years.

And in terms of getting the breakeven for this business, like from $80 million to $85 million kind of EBITDA loss, when do you see the breakeven?

You wanted to mean the positive cash flow. Revenue remains positive today.

It is a positive cash flow.

So that's what I meant, that we will start seeing positive cash flows over the next three to four years.

And just on India, Abhijit, you like, you spoke about the 9% to 10% annual growth for the domestic market. Does it mean that probably we will be largely in line with the market growth or because I think in the past you alluded that we have done a lot of cost correction in the domestic market, and going forward, we expect probably -- even to accelerate our domestic growth higher than the industry growth. So is it because of GST, you're a little conservative? Or like you feel that they're maybe some two, three is kind of things that growth will be in the range of 9% to 10%?

You're right. Actually, there's so much one is hearing, reading, seeing these days and uncertainties are all around GST and various other things. So I'm just putting out our figures because -- I mean, look, I won't go beyond that at the moment. But yes, I mean, they could be a little bit higher if everything goes well.

Thank you. We'll take the next question from the line of Abhishek Sharma from India Infoline. Please go ahead.

Sir, did I hear you correctly, you said you received the CRL [indiscernible]?

When we received or when we...?

Have we received?

We are actually responding, in fact, in a couple of weeks, within a couple of weeks. Yes, we are -- we received, and we are responding to the complete response letter in a -- within a couple of weeks, yes.

And what is the nature of observation, sir? Does it relate to manufacturing or...?

Like normal CRL, there are quite -- these are job device combinations. So there are questions on from all sections, and we had to do a lot of work, and we are responding. And let's see -- there could be a few more questions. But let's see how that goes.

As of the other question is on Aloxi. Is there any further visibility on when you would be able to launch it now or...?

So you'd probably have seen there are some interesting developments on the litigation side, driven by another company. And we'll be watching this closely on -- this is not the 505(b)(2), but on the 505 G side. Let's see how that unfolds. So as far as the (b)(2) is concerned, we have appealed. But it all depends on, as I said, on the other side, on how that unfolds. So what's next? Give or take, let's say, 60 to 80 days.

Your approach would remain 505(b)(2), right? And -- but all the -- yes?

Yes, we have both options. Yes.

Thank you. We'll take the next question from the line of Kartik Mehta from Deutsche Bank. Please go ahead.

Yes, just on your inspection which happened in Duvvada. Could you quantify if all the products which are manufactured from there have been effectively transferred to some other side in the event that we receive any occular there?

You're talking of the existing commercialized product?

Yes.

Yes, the -- I think we mentioned the $2 million ingestibles have a core side and a partner side as well. But yes, so that probably answers and there is one more order in solid, which we don't have a partner there. But I mean, we stay positive about the -- I really sincerely hope that it doesn't go this -- the direction you said -- you mentioned.

Yes. So again, just to maybe stick on the re-inspection. In your consolidation with your -- with your advisers, do you feel that as per the global cap, all three plants would -- the receive in the IR are the same demeanor? You just mentioned about [CD30]. But then, in your view, can the other two plants remain on the warning letter and any one of the other be under...

Yes. So you've seen the observation is in public domain, right? And you can make your interpretation on this. And the data point which we gave is from one plant, we have all received that [CB 30]. So based on that, you sort of have your interpretation. And you're probably, I'm sure, seeing the observations from those three plants, right?

Yes, sir. The reason I asked is because I'm not able to make an observation because all the three plants were given 1 warning letter which is why it was addressed to you.

So that I don't -- you see that's why I can't answer the question in specifics but I can only give you a data point. I can give you a data point and a data point is from one side you've got a [CB 30] approval, which was a first one of it. And let's see how the rest of it unfolds.

And the second one is, is that change in expectations due to the recent Claros 1 web cycle?

What is it? Can you repeat?

Which is the competition in the U.S. intensifying?

Yes. Yes, okay. So you're talking -- the most recent consolidation you're talking about, right?

That's right.

So I think the -- this is not new anymore for anyone. So I think we'll deal with the way we dealt with the previous one. So as I said, that I think -- whatever erosion the market has seen in that range will continue. And we will deal with that documentation the way we have dealt it in the past.

We have the next question from the line of Saion Mukherjee from Nomura Securities. Please go ahead.

So one question on the proprietary product side. If you can, you noticed anyone at Zembrace, how are they doing and, what kind of -- you guided for $30 million to $50 million earlier as peak potential, when do you see that coming through for these products? And if you can update us on the filings that are on the prop side that you've done this year. How many are pending approval? And what kind of launch calendar that you're looking for FY '18 and '19?

Sure. So let me start with how the business is doing. Both Zembrace and Sernivo have significantly picked up since the last time we spoke, which was the last quarter. With Zembrace, prescriptions in Q4 increased by roughly around 33% over Q3, reaching more than 500 prescriptions per week by the end of FY '17, and that's what we were targeting, and we are on target, serving as a launch pad for FY '18. Number of prescribers have grown nearly 50%, which is all good indicators of how the product is being taken by the market. Similarly, on Sernivo, we have more than 850 prescriptions per week, which is quite healthy. And that's how we ended FY '17 and a 40% volume increase over Q3's highest week. So these are some indicators for you to explain that these two products are now positioned for further growth through FY '18. The base business has also been doing steadily. So your question was around the peak sales and when we will get there. So as I had mentioned to you, in FY '17, we were facing, there was some delay in terms of getting managed care off insurance coverage. As of now, we have 75% coverage with insurance plans. There is still room to grow, but we believe that that will happen. Peak sales, we expect in the next three years or so for both products. The other part of your question was around key launches. So we have two pending NDAs for FY '18. One of them is Xeglyze, which is contingent upon clearance of one of our facilities and the other is a steroid product for dermatology-- it's a topical product for dermatology and that is expected to be approved the PDUFA date is later in the year. And there are several other NDAs that we expect in FY '19. So we are not commenting on it at this time.

Sir, can you throw some light on the XenoPort asset, I mean, how that is progressing in any time line that you have visibility on in terms of filing?

So this will be further off in terms of the time lines from the immediate listing. This has to go through its development. So maybe we can take that at a later stage.

Due to time constraints, we will take the last question from the line of Rahul Sharma from KARVY Stock Broking.

Just wondered, the clarity on what could be the sustainable gross margins going ahead for the company?

Again, you are speaking of financial guidance. So as last time, also I said, normally, the way we manage our business it's supposed to have not plus 50% of the gross margins but for the last couple of years, 55% is the right -- was there, maybe in few quarters, we got even higher. But this quarter has been specifically lower for the reasons I have explained. So it could be within this range, take a few hundred basis points, plus or minus the 55%, could be a normal effect.

Plus or minus 55% is in hundred [indiscernible] there.

It could be 100, 200, it depends on -- you cannot be so accurate and -- I am just stating, we refrain from giving any financial guidance for the basis there could be a lot of uncertainties. You cannot be absolutely certain about the pricing conditions, the contracts that we put and all the flow. So all these things affects -- in terms of your margin, but yes, normal expectations, if you wanted to model some kind of a financial modeling. I am saying is here and there, a few hundred basis points, but 55 could be our normal.

If you would add up all those one-offs which were there, then what could be a gross margin for the quarter?

I said this would have -- I mean, this has declined by 400 basis points. So if we had to add 51.2 plus 400 basis point, it would have been around 55 point something.

And another thing was, how has been the -- a price erosion in the existing portfolio on Y-o-Y basis and on Q-on-Q? In the U.S. markets?

So we had already told you that this year, particularly in FY '17, it has been tedious. But it will vary also from company-to-company depending on portfolio launches and everything. But we have seen FY '17 over FY '16 is a bit unprecedented because we have never seen earlier on gross level going beyond the high single-digits for this year, it has been in the double digits. And this quarter specifically, it's been higher. But going forward, the expectation is that it may not be that level of erosion in the [indiscernible]

Thank you very much. Due to time constraints, that was the last question. I now hand the conference over to Mr. Saunak Savla for closing comments.

Yes, hi. Thank you for joining the call. And in case if you have any additional clarifications questions, please feel free to reach out to the IR team. Thank you all.

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