Dr. Reddy's Laboratories Limited (RDY) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day. And welcome to Dr. Reddy’s Q3 FY19 Earnings Conference Call. As a reminder, all the participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you. And over to you, sir.

Thank you, 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 third quarter ended December 31, 2018. Earlier during the day, we had released our results and the same are also posted on our Web site. This call is being recorded and the transcript shall be available on our Web site soon. All the discussion and analysis of 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. Erez Israeli, our COO; Mr. Saumen Chakraborty, our CFO; Mr. Anil Namboodiripad, who heads 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 I proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today’s press release also pertains to this conference call. Now I hand over the call over to Mr. Saumen Chakraborty, our CFO. Over to you, sir.

Thank you, Amit. Greetings to everyone. I’m pleased to inform that we have been able to sustain our financial performance in this quarter. Let me take you through the key financial highlights. For this section, all the amounts I have translated into U.S. dollar at the convenient translation rate of INR69.58, which is the rate as of 31st December 2018. Consolidated revenues for the quarter at INR3,850 crores, that is $553 million and grew 1% both year-on-year and sequentially. In previous years, we had INR130 crore of out-licensing revenue in our Proprietary Products business, adjusted for which the year-on-year growth would have been 5%. Despite the pricing pressure in some of our key products in U.S., arising out of new competition, we were able to grow our revenue, which was supported by improvement in the volumes of existing products, new product launches, contribution from new markets and favorable ForEx. Consolidated gross profit margin for the quarter is 53.9%, registering a sequential decline of 110 basis points, which is majorly attributable to the price dilution in the U.S market. Gross margins of Global Generics and PSAI were at 57.6% and 30.8%, respectively. The SG&A spend for the quarter is INR1,204 crores that is $173 million with a sequential quarter decline of 3% at similar level on a year-on-year basis. We have been taking several measures on cost optimization and the same is reflected in our spend trend. The SG&A cost is 31.3% to sales for the current quarter as against 32.6% for Q2 FY9. R&D spend for the quarter is INR367 crores, that is $53 million and stands at 9.5% of the sales for the quarter. The R&D spend is lower by 21% year-on-year and by 11% on a sequential quarter basis. While certain part of the reduction relates to the productivity improvement initiatives taken by us, it is also lower due to timing gap with respect to certain development related spend. We expect that the R&D spend will increase in next quarter. However, the full spend is likely to be lower than the preceding year. We continued in our journey towards cost optimization and productivity improvement in the areas of man power, SG&A, R&D and asset utilization. In line with our objective, we have concluded the sale of the API manufacturing business unit located at Jeedimetla, Hyderabad. These measures would lead to an improvement in our cost structure and enable us to be leaner and more cost efficient organization. Other income includes gain of INR42 crores on account of sales of the API manufacturing business unit as aforementioned. The EBITDA for the quarter is INR865 that is $124 million, which is around 22.5% of the revenue. The effective tax rate of the quarter is around 16.4% and ETF for the full year is expected to be lower than our earlier estimate, maybe in the range of 15% to 17%. EPS for the quarter is INR29.21, operating working decreased by around INR946 crore, which is $136 million during the quarter. The decrease is primarily attributable to sale of trade receivables and improvement in the DSO in the U.S market. We invested INR153 crore, which is $22 million towards capital investment in this quarter. The free cash flow generated during this quarter was rupees INR1,512 crores, which is $217 million, leading to a significant improvement in our net debt equity ratio, which is 0.13 as on 31 December 2018. Foreign currency cash flow hedges for the next 12 months in the form of derivatives for U.S. dollars are approximately $300 million, largely hedged around the range of INR69.1 to INR73.5 to the dollar. In addition, we have balance sheet hedges of $352 million. We also have foreign currency cash flow hedges of RUB855 million at the rate of INR1.08 to the ruble, maturing over next 12 months. With this, I now request Erez to take through the key business highlights.

Thank you, Saumen. Greetings to all. Thank you for joining us today for this earning conference call. Let me begin with the current quarter performance highlights. I am glad to inform you that we continued with our gross momentum in this quarter, and have performed well across our businesses. Please note that all references to numbers in this section are in the respective local currencies. The North America generics revenues both stabilized and for the quarter are at 209 million with a sequential growth of 1% during the quarter. We witnessed decent improvement in the volume uptake that help us offset the product specific price decline impacting some of our key products due to new competition. Overall, we see stabilization in the trend at a broader portfolio level. This quarter was very busy in terms of new launch activities with record number of new launches in quarter over the last five years. In all, we launched 10 new products, including some very exciting limited competition products like Colesevalam, Dipyridamole, Aspirin XR, Sevelamer sachet, Sevelamer unit dose and Omeprazole OTC tabs. We are excited about the opportunity potential and contribution from these launches and gearing towards the gradual ramp up over the next few months. We will continue in this journey in the next few quarters and we’ll be fairly busy with multiple and new product launches lined up, including some exciting limited competition opportunities. As communicated earlier, we continue to work toward potential approval launch of gNuvaring in the first half of calendar 2019 and that of gCopaxone in the second half of calendar 2019. On the gSuboxone, as you are all aware that during the quarter, the Court of Appeals of the Federal Circuit issued a decision in company's favor to vacate the preliminary injunction. On December 20, 2018, as part of a standard procedure, Indivior filed a petition seeking pre-hearing of the appeal. On this, the court sought our comments to which we immediately responded. We are awaiting for the court decisions on this matter. Let me also update you on the status of two warning letters impacted sites. In October 2018, the re-inspection for the sterile, injectable plant in Duvvada was completed and the US FDA issued formed committees with eight observations. We have comprehensively responded to this observation and we just now have received certain specific questions from the agency seeking further clarification on some of our responses. With respect to the API manufacturing facility in Srikakulam, we have submitted the results of the investigation and responded to all the queries asked by the US FDA and await for re-inspection of the facility. The Europe business recorded sales of €25 million with a sequential growth of 5% on the back of improvement in supplies and new launches. During the quarter, we launched two products in Germany and four products in the UK, including fondaparinux. We will continue to launch new products in the future in this market. The emerging market business recorded sales of INR774 crores, continuing its strong performance with growth across all key markets. The overall business grew 31% year-over-year and 3% on a sequential basis. This is all round performance was outcome of; one, healthy growth in the base business; two, new product launches in existing markets; and three, contribution of the newer markets. These geographies are expected remain a major gross driver for the company over the next few years. The India business added INR674 crores with a year-on-year growth of 10% and a sequential seasonal decline of 2%. As per the IMS, we performed better than the market for the three months ending November 2018. As a result of this sustained performance, our ranking improved by one place. India is a priority market for us and we remain committed to consistently improve our performance and grow better than the overall market. The TCI business revenue are at $83 million, a year-on-year decline of 1% and a sequential decline of 5%. We believe that the changes in the API landscape has created opportunity for us and we are preparing ourselves to serve that market. On our Proprietary Products business, we recently received US FDA approval for our intranasal sumatriptan DFN-02 under the brand name TOSYMRA. We believe TOSYMRA has a favorable profile to benefit large segments of migraine patients whose episodes are not optimally controlled with the current treatment, particularly orals. Prelaunch activities are under way and we are preparing for the launch in the next few months. On the R&D front, progress on our key pattern program is on track. During this quarter, we filed three ANDAs in the U.S market and as of 31st of December 2018, we have 103 cumulative filings spending for approval within the US FDA, which include 100 ANDAs and three NDAs. The ANDA filling rate will improve further in the next quarter. For our bio similar business, we have started the Phase III trial rituximab for developed market. Our Proprietary Products business, we expect to file the NDA for DFN-15 by Q1 FY20. Development on E7777 for CTCL indication in the U.S. is on track and we expect to file the BLA by Q1 FY21. On the business development in line with the recently stated growth strategy, we have started to divest non-core assets and we will further continue to do more of this, which will help us to focus and channel our sources to our growth basis. We also look forward to inorganic growth opportunity with right return on investments. Overall, we feel quite optimistic about our six chosen spaces; U.S. Generic, India, Russia, China, API and global hospital business. We have started to make the right moves, which focus on profitable growth, shareholders returns, cost efficiency and quality. Let me share with you some quick updates on the additions to our senior leadership team. I’m pleased to announce that Marc Kikuchi has joined us as the Head of North America Generics business. Marc brings with him extensive knowledge and vast experience in the generic space. During the quarter, we also on-boarded Sandeep Khandelwal as India business head and Dmitry Sovetkin as Russia business head. These new leaders, along with our existing strong leadership team, will help people our key business processes and drive growth for the company in chosen strategic spaces, and will enable the company to explore its potential. And with that, I now open the floor for questions and answers.

Sure. Thank you very much. We will now begin the Question-and-Answer Session. [Operator Instructions] The first question is from Nitesh Jain from Axis Capital. Please go ahead.

This is Prakash. I just wanted to check on two things, one is the gross margins. So the business has grown and especially the branded generics businesses, they have grown, which is in India and Russia. So, I'm not able to understand why the gross margin is so low. Would it be due to the U.S. pressure for key products? And then what is the concentration based on the top five and top 10 products in the year? Thank you.

You got it right, and it is U.S., which is a primary contributor for this sequential decline. But it is not that flow. We have been already saying that quarter-to-quarter there would be fluctuations in the gross margin. And it is definitely within the range that we have put it. We have been able to sustain the margin despite a lot of price realizations in the past, because of lot of focus that we have been putting on productivity improvements and cost. So this is here, we have got 53.9% for the quarter. It is very much within the range that we target.

And any particular products which would be in the base?

No, it depends on you were comparing with which. Suppose you compare it the same quarter last year and last year same quarter, we had the Sevelamer launch, which was a very high value product. And then if you compare with that -- U.S. market you are saying?

Yes.

So then if you compare on that basis, definitely that would contribute to both in terms of the top line, as well as on the margin it contributes.

And are you sharing the concentration just please, top five, top 10?

Our concentration risk has come down what initially -- if you take a 40% of the revenue in USA in earlier year, suppose it would have been in just five molecules or so, now it is almost 10 molecules which contribute so 40%. So to that extent, our concentration risk has reduced.

And lastly on the net-debt, which you mentioned has significantly come down due to lower working capital also. A is what really has happened? I mean, you mentioned two things on the reduction in working capital. If you could give more color on that? And secondly, what are our thoughts on using the low leverage we have. Are we looking for something in this specialty area or more complex area in the U.S., are we open to that idea?

So first to clarify about the free cash flow in the first quarter, it was actually negative, which was compensated in the second quarter. And this quarter, we have significantly good free cash flow we generated. And there the working capital has contributed because of the decreases on 946 crores. So one of the things that we have introduced this quarter is factoring of whatever receivables that we have got in USA, some part of it we have been selling. And then otherwise there is overall improvement in the receivables all across the businesses and some improvement in payable as well. Inventory, we will have to still improve. There is scope. But as and when we launch some new products then definitely on inventory front also there is a further scope of improvement. Now, our net debt to equity ratio is very healthy now at 0.13. But you know we as a company are more prudent in terms of taking financial risk, because there always an operational risk, which is there. Now in terms of opportunities, there'll be always opportunities to expand in several of the business in our chosen spaces, which is getting in highlight. It depends on whichever comes across their respective and doing diligence if we feel something worthwhile, we will not hesitate, because this is also an area of growth, not only organic but also inorganic growth. But we are not specifically committing ourselves that it is in the specialty or any such thing.

The next question is from Neha Manpuria from JP Morgan. Please go ahead.

So if we look at the improvement in the ex-U.S. business in the last couple of quarters. Obviously, there has been an pickup in India and Russia. If you could just give some color on what specifically we are doing in this market to see this growth momentum?

While Erez can dwell it on more, but I wanted to clarify that emerging market, the growth in rest of the markets other than Russia is higher than the growth in Russia. Russia, we'll have grown by, say, 22% whereas in CIS countries and rest of the world, the growth is very close to 40%. But overall 31% as growth in emerging markets. In India of course year-on-year it is 10%.

In respective of the content of this growth, in the case of Russia, it's primarily the big brands that performed very, very well. Actually nine months right now so this is -- we have a lot of confidence in those brands and we will continue to invest in them. As for rest of the world, this is primarily hospital products. It’s a combination of penetrating with especially oncology product to some of the markets plus yield of portfolio that was submitted and now getting mature in the places like Latin America, the re-launch of Omez in Romania and some other areas. Overall, it's a great performance plus these markets are fairly profitable. So we are encouraged by this performance.

And what about India, sir?

India is growing nicely. For us, we continue to see the growth and we continue to perform well in this market. In addition to that, we had the new leadership team. I mentioned Sandeep and Marc Kikuchi also in this call in addition to other members that came. And we are both executing this year plus preparing ourselves for further growth in the next coming quarters and years.

And my second question is on the cost. While SG&A has improved partly, because of FX et cetera in the last quarter, the reduction in R&D. You mentioned that some of it is timing issue. As we you know look at more over the next two years given we are talking about making proprietary and bio-similar self sustaining. How should we look at R&D run rate?

So normally on an absolute basis, we have spending say $250 million to $300 million on R&D. But 60% of that we spend in generics, including API, remaining 40% we allocate it to -- for Proprietary Products, that is the maximum than biosimilar and a small percentage in or gain in other. And so that's how it has been traditionally. And so this year also, we planned for a similar level or absolute spend. And the way it stands today, it looks like it would be bit lower than what we initially estimated. And that definitely after seeing the kind of productivity improvement, which is happening also in IPD area, because we have not reduced the intensity of R&D in any side at all. And going forward to make Proprietary Products and biologics more self sustainable, we are looking at various options to how to do it, because we got a good pipeline in biosimilar. And if we have to take it for U.S. or Europe market, it calls for that kind of funding. So we're looking at option. So we'll get back to you as and when we finalize some options.

As related to the generics, naturally the growth that are expected in place like China, India and Russia will require some R&D resources. So as a whole, we're looking for how overall the R&D will contribute. R&D naturally is very important for us. It was and will continue to be our main growth engines. Overall, we want to contain the overall spend of R&D, primarily on efficiency, while we want to develop more products. So actually the yield that we're expecting from R&D is more products than we previously did in recent years.

And so just one follow-up question. On the -- you mentioned the filing run rate expected to pick up. Could you give some color as to what is the number that we're looking at given we want to expand our U.S. portfolio?

In Q4, itself we'll be much more than cumulatively what we have done in the three quarters for USA market. But as Erez said, there is a lot of R&D efforts are going on for various other markets, including China and many other emerging markets, and India. So overall, ask rate of R&D is much higher and he spoke about the generics area.

Thank you. The next question is from Sangeeta Purushottam from Cogito Advisors.

I just wanted to understand. What do we see as the growth drivers for the top line, as well as profitability going forward? This year, a significant part of the profit improvement is happened, because of a strong control in cost and some stabilization in the U.S operations. Now going forward into next year and the year after, how should we think about it? Do we think that the cost improvement will continue? And do we see any kind of pick up happening in the U.S market in terms of the base business or is it going to be driven primarily by the launch of the products, which are in the pipeline, the specialty generics?

On the current growth, just to add to what you said is naturally the performance in India and the emerging markets. This is major contributors to growth also this year, just to add to the two components that you mentioned. In addition to that, we had also great effort on the balance sheet. And overall, there is a big improvement in many, many fronts of the company. We are planning to continue with it. So also next year, there will be major focus on cost. We believe that there is also further room for improving productivity and we’re planning to do so. While planning to grow and getting for that in all six spaces that we mentioned, so all six spaces are gearing to grow. Exactly how much, we’re not giving guidance but this is the general expectation.

Just a follow up question. In terms of the past performance, if you could tell us -- you had mentioned that you mange to contain price erosion by a mixture of volume increase in existing business and new launches. Now, could you break that up for me? For example, have you -- can you break it up for the existing business and new business in let’s say by key geographies, such as the U.S. as to what has actually happened in the past? And how do you see this prices erosion going forward. Do you see it as having stabilized, or do you see it continuing to happen over the next 12 months, particularly in the U.S.?

So, may I know who is speaking? Because Sangeeta was speaking earlier and suddenly you came in. may I know who is speaking?

I’m her partner Andrey Purushottam.

Can you -- because you asked too many questions. So can you again break up one by one and we can response. One question at a time, and I will respond.

So I'll repeat question. I’m saying if you analyze the performance of the last 12 month. You said that you managed to keep your revenues flat by a mixture of increased volume from existing business and by new business launches. So I just wanted a break up of how that has happened? So how much of volume increase have you experienced, how much of price erosion you have experienced and how much of gain in new business have you experienced? That’s question one. And the second part is really…

Let me respond to that part before you put to the second. So it is not true -- we just said there are four factors, volume for existing products, new product launch, contributions of new market and also favorable Forex. You'll have to understand that the last year dollar to rupee was much lower than what is currently going on. So, all these factors have contributed. Now, in a marketwise, I mean in different market, the ratio will be different. U.S. market will be different, Russia will be different. For example, in Russia, apart from performing very well in some of the mega brands that we have there, we also have a new product there this year, which has also contributed significantly. Now, so far as U.S. is concerned, there has been price erosion, which is applicable for the industry. For us also, there would have been a few products on which there have been much more competition. So, consequent since will look more on those specific products. And so, the ratios are very difficult to give at a granular level like that. But, have a lot of information for the Company we provide in 6-K. And I'm happy to announce that this time, we have filed 6-K today itself. I mean, as we are speaking, we just filed 6-K. So, maybe all of you were in the call, so I may ask you to refer to the 6-K we are filing along with our result announcement today. Normally, there is some days’ gap, which used to happen in all the quarters; this quarter, we have been able to do it simultaneously. So, can you get into your second question?

Yes. How do you see the price erosion, particularly in the U.S. market panning out over the next 12 months for the industry as a whole and for you?

I wish I could predict price decrease. So, if I could do that, I would be very rich man by now. So, I can tell you what we see. We don’t see equalization anymore, this is over. When we see competition at specific product, naturally there is a price decrease. We believe that this will continue to happen. Products that we recently launched naturally will see also price erosion over time when a more competitors will come. So, this dynamic was and will continue to be in the U.S. market. And then, we need to address it, and this is what we’re planning. Because of the nature of our portfolio -- as the nature of our portfolio is promising and the base is relatively low, we believe that we can offset it with new launches, efficiencies, cost reduction and market share.

[Operator Instructions] The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Saumen, this one question is on PSAI business. We have reported gross margin of almost 31%. I mean, that's like the highest we reported in last four, five years. Is this a new normal or when does it moderate for us?

So, first, I have always maintained in the past that there will be quarterly fluctuation. When we talk about PSAI business segment, there is API and there is CPS. And between the two, obviously, we get more contribution from CPS, even though -- in terms of the gross margin, but even though the API is a larger part of the business. So, when we get very good kind of an order for CPS with a high margin, that can increase the margin. When it is in normal, that will be reduction. Similarly, at API, the kind of margin that we are having is -- it is very difficult to say that it is being at its particular level every quarter. There will be fluctuations. But, our endeavor is to get a gross margin level of 30% for PSAI business.

Okay. So, CPS orders are typically for six months or less than one year duration. So, that’s the way we should take it unless we repeat this kind of performance, this good performance may continue for another one or two quarters?

See, it always depends. We continually scout for new customers and new kind of requirements even for CPS. So, it goes on. It is like a flow. So, you cannot say a specific order which will be there for few months. It all depends on when you get and when you really deliver and what kind of improvement on margin is happening, specifically in that quarter. So, that’s why I'm saying when you -- we already talked about the sustenance of the margin. There could be some quarters where it is much better than our expectation, but some quarter which could be even higher. But target wise, it is at that level.

And one question I had on the personnel costs. Now, for the first nine months we have seen personnel cost increased by 4% year-on-year. Is this the trend you expect for full fiscal ‘19 as a whole that personnel cost increase remain around mid-single-digit?

So, first, normally, if you would have seen Dr. Reddy’s manpower cost, has been on a higher side, compared to even industry we have been on a higher side. And trend wise, it would have been always every year there would have been an increase year-to-year. In last two years, specifically, the previous financial year and in the current financial year, we have been able to contain the manpower cost very well. And there are some portions of the manpower cost which will be because we have a large number of people who are employed overseas. And if there is a -- year-on-year, if there is a -- ForEx rate goes up, while the ForEx has a favorable thing on our topline and margin, but so far as some of these costs including material and this manpower, it works for a negative way. So, on a constant currency basis, if you do really look at, we have been doing a very good containment of manpower cost on the back of the productivity improvement initiatives that we have been having.

Can we assume around a mid-single-digit kind of growth at constant currency?

You know very well that we really do not give financial guidance to that extent that you can do an exact model for yourself. We help you in some of the areas within a specific range. We have been telling you that we have been focusing a lot on productivity improvement. And some of the explanations beyond that, I cannot be more specific.

The next question is from the line of Saion Mukherjee from Nomura Securities. Please go ahead.

Sir, I have few questions on the Proprietary Product business, first on DFN-02. I'm just wondering is the label in line with what you have expected, and how should we think about launch and cost associated with, and if you have any peak sales expectation that you would like to share?

I can take that question. Hi Saion, this is Anil. The label for DFN-02 is very much in line with what we had expected, so in terms of onset of response and the efficacy rates. We are in the middle of preparing for launch. At the same time, we are looking at other options as well to see whether we can expand through partnerships and so on. As far as peak sales go, it hasn't changed from what guidance we have given in the past. Our market research clearly indicates that there is a large number of migraine patients today who can benefit from the properties of this drug. And so, as far as guidance for the peak sales, I think, it's in line. And we’ve spoken before about it as well.

And on the cost, in terms of launch-related cost, anything we should -- if it's material, we should factor in our estimates?

I cannot comment on the exact cost for launch. It will be typical of any specialty product. We expect it to be slightly higher than what we have invested at the launch because this is a much larger product and a larger subscriber base. We expect the sales force to increase by around 15% or so; and adequate marketing investments to make sure that there is significant awareness of this product as it comes on to the market.

Okay. And just one follow-up you know the filings for some of the other products which you mentioned in your opening remarks. On DFD-03, you have not made any mention there. So, what's the status, are we still progressing with that product?

We are making certain determinations in terms of whether -- what the market potential for that drug will be. So, at this point, I cannot comment on what our plans are with this product.

Okay. And just one more question then on the PSAI front. You mentioned about some strength in the API business. Actually the segment has been stagnant for many years now. So, how should we think about PSAI business as a whole from a growth perspective going forward?

The PSAI will grow. We are now focusing on it and give it importance. There a couple of reasons why we believe that it will not be stagnant in the future. One is the product that we are working on and second is the fact that the competitive landscape is changing as we speak. We discussed quite a few times about the changes with China. This is naturally still relevant. And I believe that the primary focus for us is -- now is to give attention to those areas that we believe we could grow and execute on them. So, for us, it's a space for growth.

Thank you. The next question's from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Thanks and good evening, everyone. Just following up on both NuvaRing and Copaxone. Erez, you gave us the timelines. But, just wondering, is that a bit more what's behind these timelines? Last time I remember, you had responded to FDA in full. So, is there anything which is pending for these two products? Did FDA come back and are there any pending queries?

We are getting -- we are in the weekly and biweekly calls with the FDA. So, we are receiving questions and queries on the product, nothing that’s in form of CR. And we’re addressing those questions. It looks like that these timelines are still on track as we discussed last time.

And you would say your answer applies to both these products in equal measure, or is NuvaRing a bigger priority for FDA versus Copaxone?

The timelines are different because NuvaRing is a pipeline. So, with NuvaRing, we expect six months and with Copaxone we expect 10 months, we’re still in the area of expectation, subject to the fact that we'll not get another CRM.

And just on biosimilar, Erez, I missed here the name of the product for which you are targeting the BLA filing.

This is E7777, it’s an asset that we required years ago and it just has biologic applications. So, this is the product that we call E7777, like E four times 7.

Okay. Yes. That’s right. Okay. And you said one more product, I thought.

This is the product that I mentioned.

Okay, fine. Fair enough. And just talking about Rituxan, where you mentioned that you’re taking into Phase 3 clinical. I’m just wondering because we’re at the cusp market opening up in U.S., and Europe is already open. So, in all likelihood, all things going right, you would be the fifth or a sixth player. Does it make any sense to put money behind these kind of assets?

We used U.S. FDA as opening gates for many, many markets that wants to get to the U.S quality and they don’t have their own standards. So, it’s not necessary to launch in the U.S. If it will not make sense to launch in the U.S., we will not do that. We will not lose money on that.

Okay. That helps. And sorry, with your permission, two more if you don’t mind. One is on the receivable. Saumen, what has changed for receivable to have come down so dramatically? Are the contractual terms changing with your customers for the…

I mentioned, in USA, we have started factoring. I mean, we have been selling some receivables with a very small discount factor. So, that is helping. Beyond that, there were earlier receivables which we have got in this quarter. Overall, there is an improvement in the receivable, as well as in the payables side. Only thing I would say that the other part of the working capital, which is inventory, there, there is opportunity but we have still -- will have to move towards that direction, maybe with some of the launches, there will be improvement in that front.

Okay. And one final one for the U.S. market. Erez, how is the market behaving in terms of -- you talked about volume gains over there, what was driving -- are there -- are you seeing competitors exit and that's what's driving your market share and volume gains?

We are giving a great service to the U.S. customer, and they like us.

Why are they liking you now more than what they had liked you for last few quarters and years?

I guess, we are giving a better service. Seriously, we do see certain opportunities on the current molecules. And in terms of supply situation, it's a mix of supply situation and our ability to gain share because of certain agreements with the customers, and focus. It's always worked.

Thank you. The next question is from the line of Mehul Sheth from PhillipCapital. Please go ahead.

Just one clarification about the products that had been procured from Teva, the Rozerem. Is it a calendar ‘19 opportunity?

Yes, absolutely. We mentioned that it's in the first half of fiscal ‘19.

And similarly one quick question on the

Calendar year. Yes, I said fiscal, I meant calendar ‘19.

Okay. And quick question on the taxes also, if that's okay. Since last couple of quarters or last three quarters, we are witnessing a significantly lower tax rate whereas the guidance was something higher for the full-year. So, whether this is a new norm that we are seeing currently, or what is it? Any guidance for future period?

So, what I said is what could be for this year. What would be for the future years, I'll be able to only give you some indication at the beginning of that year as we complete our planning process for that year. See, this time, it was lower. Primarily there are three reasons, and you can when you read 6-K you will find there. One, last year you see, there was this reduction of the federal income tax rate, which was 35% to 21%. So, because of that there was higher tax implication. So, year-on-year comparison, that affect us. But, this particular quarter, there have been two things which has happened. There is some resolution of a certain tax matter in Company's favor, which results in reversal of some income tax expense but into earlier years. Also, there is some claim of deduction of an item in the current quarter, which was previously disallowed for tax purpose. So, these are the things which in the beginning of the year we could not factor in or estimate. And that's why now for the year we feel our EPS could be in the range of 15% to 17%. But, next year, I will be able to tell you when we are announcing the full-year results.

Fine, sir. Just one more question on the growth outlook. About the revenue growth, it was indicated that okay, it is the emerging market India, which will be driving. And you have also emphasized more on the new market entries. So, can you indicate something more on the new market aspect? And, what is your growth outlook for the U.S. business, considering the price indication, what you have given earlier and considering the kind of pipeline what you have provided a hint on?

So just to make sure that -- first and actually, we're not giving guidance, but we did indicate that all six spaces, not just the spaces that you mentioned are going to grow, including the United States, including the other spaces. Specifically for the other markets, our -- there are a bunch of small countries, and each one of them are primarily based on either biologics or hospital product as a primary expense that each one of them picking up, primarily based on B2B model that doesn't require a lot of S&M activity. Here, we are leveraging portfolio, which was developed for the U.S., and selling it in markets that do need these products.

And any indication that you're providing for U.S.? I know that okay you're not giving any guidance, but last two years we have been seeing a kind of declining trend.

The reason that we are not giving guidance because you never know in the U.S., you can get 60% discount, you can get 90% discount. You can get 10% market share, you can get 40% market share. So, it's -- we cannot predict that well. But overall, our portfolio is promising and we are in a very, very good wave of launches.

The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.

Sir, on the emerging market business, we've had two very solid quarter in the RoW business. Just want to check, I mean should we take the base -- the numbers that you have -- the revenues that you have done in the last quarter as a base for this the business or there's going to be an element of lumpiness in this business, given that there is a surging of hospital business will be driving this business?

If you open in a new market, for example say Colombia, we opened two, three years back. And this was one country where we became profitable and started making an impact right from the year one itself. For Brazil, even though this is not the first time we have got into Brazil, but this time, when we have gone to Brazil, backed on these hospital products for oncology and all the complex generics, which we are leveraging out of the U.S. complex generic portfolio, the growth has been very good. So, the thing is, there are opportunities, but it is completely linked with the kind of product that you can launch in these markets and then how much you can grow. And already, I said that this as a global hospital business will be one of our focus area and we expect to grow there.

Okay. And secondly on the U.S., the key for us going back to the top three products, which are the three filings that we have. Sir, for just my overall perspective, for the next two years, how much of our growth would be really contingent on how well do we do on these products? I mean, is that a broad quality difference, how would you sort of explain that bit?

See, there are 103 ANDAs which are pending approval as on date, and we have been continuing to file. So, yes, these three products are prominent. We have been discussing over time, and these are very, very important and it can provide a very key impetus for our growth there. But the reason that we are spending so much on R&D is with the expectation of creating value in several markets, and U.S. is the very key market for us to create that kind of value.

Okay. And secondly, sir, last one. On R&D, how should we look at R&D spends moving forward? As a percentage of revenue, is there a reeling that we should be looking at or in absolute dollar terms -- growth in dollars terms? I mean, how are we looking our R&D spend view over the next couple of years?

So, as I said, maybe this year, there is an improvement in the productivity. Quarter-on-quarter, there could be some timing issues. But overall, for the year, it could be slightly lower than what we normally would have been spending. But as a ballpark figure $250 million to $300 million per year on an absolute basis is a right kind of indication of the R&D commitment for us. As a percentage of sales, it will depend how much sales we are generating. So, not to take on an absolute manner.

Thank you. The next question is from Anuj Momaya from ValueQuest Research. Please go ahead.

Good evening, sir. So, can you just let us know what is the status of Revlimid litigation, or where are we in that?

Which litigation?

Revlimid.

Again, you're talking about lenalidomide, just to make sure?

Yes, Revlimid.

Yes.

Revlimid he is saying.

Yes. Sorry, we did not pick up the question. So, I'll take it. We have basically the three forms on this product, whether our indication patents or the polymer patents and we have of course the rents patent. So, for each one of them, we are proceeding nicely with all fronts. We believe that we have a very, very good position on this one.

So when are you hearing some of these litigations enduring, any time line you can suggest for this?

We are not providing time lines. Once it will come, we will know.

Okay sir, thanks.

Thank you very much, due to time constraints we'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

Thank you everyone for joining us today for the conference. In case of any further queries, please reach out to the Investor Relations team. Thank you.

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