Kedar Upadhye - Head of Global Generics Finance & Investor Relations and Senior Director Saumen Chakraborty - Chief Financial Officer, Global Head of Information Technology & Business Process Excellence and Member of The Management Council Kallam Satish Reddy - Vice-Chairman, Managing Director, Chief Operating Officer, Member of The Management Council, Chairman of Management Committee, Member of Shareholders' Grievance Committee and Member of Investment Committee Abhijit Mukherjee - President of Global Generics and Member of the Management Council.

Anant Padmanabhan - Cowen and Company, LLC, Research Division Sonal Gupta - UBS Investment Bank, Research Division Anubhav Aggarwal - Crédit Suisse AG, Research Division Surya Narayan Patra Surajit Pal - Prabhudas Lilladher Pvt Ltd., Research Division Manish Jain Sudarshan Padmanabhan Girish Bakhru - HSBC, Research Division Bino Pathiparampil - IIFL Research Sameer Baisiwala - Morgan Stanley, Research Division Saion Mukherjee - Nomura Securities Co.

Ltd., Research Division Alok Dalal - Motilal Oswal Securities Limited, Research Division Arvind Bothra - Religare Capital Markets, Research Division Prakash Agarwal - CIMB Research Manoj Garg - BofA Merrill Lynch, Research Division.

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Q2 FY '14 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you, sir..

Good morning, and good evening to all of you. Thank you for joining us today for Dr. Reddy's earnings call for Q2 FY '14. 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.

The discussion and analysis in this call will be based on IFRS consolidated financials. To discuss the business performance and outlook, we have today Satish Reddy, our Vice Chairman and Managing Director; Saumen Chakraborty, President and Chief Financial Officer; Abhijit Mukherjee, President and Head of Global Generics; and Investor Relations team.

Please note that today's call is copyrighted material of Dr. Reddy's, and cannot be rebroadcast or distributed in press or media outlet without the company's expressed written consent.

Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast. After the end of the call, in case 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 Saumen Chakraborty, our CFO..

Thank you, Kedar. Good morning, and good evening to everyone. Let me begin with the key financial highlights. For this section, all the figures are translated to U.S. dollars at the convenient translation rate of at least INR 62.58, which is the rate as of 30 September, 2013.

I'm happy to report our highest ever quarter revenue and a healthy margin for Q2 FY '14. Revenue for the quarter is $537 million and grew by 17% year-on-year.

Revenue from our Global Generics segment is $434 million and grew by 32% year-on-year, driven largely by new product launches in U.S., continued momentum in the emerging markets territories and benefit of rupee depreciation in multiple currencies.

Revenue from our Pharmaceutical Services and Active Ingredient segment is $102 million, while it declined by 19% year-on-year, it grew on a sequential basis versus Q1. Consolidated gross profit margin for the quarter is quite healthy at 58% versus 52.4% for the same quarter of the previous year.

Corresponding values for Global Generics and PSAI segments for this quarter are 66.1% and 24.6%, respectively. Global Generics gross profit margin has seen significant improvement due to limited competition, new product launches, coupled with improved contribution from the emerging markets.

PSAI gross margin declined, primarily on account of an unfavorable product mix. Nevertheless, on a sequential quarter basis, there has been an improvement by almost 600 bps. SG&A expenses, including amortization for the quarter, are at $156 million, and has grown 21% year-on-year.

As a percentage to sales, this is higher by approximately 100 bps over last year. There has been the impact of normal year-on-year salary increments, along with select brand-building activities in the emerging market territories. In addition, a major part of our SG&A is denominated in foreign currencies, which had the effects of rupee depreciation.

Approximately 30% of the increase in cost is due to currency movements. R&D cost for the quarter are at $48 million, representing 9% of revenues versus 6.1% in the previous year. The increase in R&D expense during the year is in line with our planned scale up in activities.

EBITDA stands at $152 million and is 28.3% of revenues and there is a strong year-on-year growth of 27%. Current quarter EBITDA represents 800 bps to revenue improvement on a sequential basis. Profit before tax for the quarter at $123 million is 23% of revenues.

While the current quarter's effective tax rate is lower at approximately 10%, the annual effective tax rate for FY '14 is likely to be around 20%. Key balance sheet highlights are as follows. Our working capital balance increased by $75 million over June 2013. Capital expenditure for the quarter is at $60 million.

Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $460 million, largely hedged around INR 56 to INR 60 to $1. In addition, we have balance sheet hedges of $561 million. Net debt at $352 million represents a net debt-to-equity ratio of 0.28.

With this, I now refer Satish to take us to key business highlights..

azacitidine, Decitabine, donepezil 23 milligrams and divalproex ER. As mentioned earlier, these products were in the limited competition space and they lured [ph] the pricings premium for the quarter. These launches have helped enhance the mix of limited competition products in our portfolio compared to previous quarters.

We also increased the market share for some of our top molecules such as fondaparinux, tacrolimus and omeprazole DR. Further, our anti-allergy OTC and antibiotics portfolio brought on a gradual improvement on a sequential quarter basis canceling the seasonal demand pattern.

For our India business, despite the issues on market disruptions that I mentioned earlier and also lower pricing due to the new pricing policy for our top molecules, the business has been resilient enough to post INR 4.1 crores of sales with year on year growth of 8%.

The recent IMS numbers also record our above market growth rate on a consistent basis. Our [indiscernible] September growth was 13%, as compared to the market growth of 6.3%. On the [indiscernible] growth percentage scale, we are the fourth highest growth company.

We have launched several initiatives to sustain this momentum, wherein we will be selectively exploiting our current portfolio in the nonprescription channels such as OTC and institutional segments.

On the emerging market front, Russia revenues at $74 million for the quarter grew by 31% in ruble terms because of the higher offtake in the current quarter, as well as due to the low base effect of last year. For the first 6 months of the fiscal, we have grown at a healthy 16% on year-on-year basis.

The market sales data for Russia of the recent months indicate a reduction in the market growth rate and in some cases, negative volume growth due to a variety of reasons. In this scenario, our secondary revenue growth indicates a healthy trajectory.

As you are aware, the mix of OTC products in our portfolio is increasing and we have also improved our ranks. The U.S. markets grew by 24% on a year-on-year basis on the back of new product introductions in Ukraine and growing base in other regions. European operations are in line with our expectations.

As you are aware, we have transitioned our Germany business model to a much leaner and simplified structure with a conscious exit from the tender-based revenue model. Our PSAI business registered a deep growth of 19% on a year-on-year basis. However, sequentially, the business has registered marginal growth on the back of improving market dynamics.

We hope this trend to normalize over the coming quarters, and as you would have noticed, the gross margin of this business improved by 600 basis points over the first quarter, indicating a slight improvement in the product mix.

As we look forward to the second half of this fiscal, the opportunity in serving patients in various global markets is quite significant and we feel quite excited to deal with the growth challenges in these markets. Outcomes from our global R&D activities in the coming years will help us build a sustainable and growing portfolio.

We have seen the needle moving significantly in our development pipeline in terms of greater mix of non-oral, soluble fixed forms [ph] and high-value complex molecules. While we are required to spend higher R&D costs to invest in the associated development, we are also consciously calibrating the resources and prioritizing wherever required.

Our biosimilar portfolio is a case in point where we continue to focus on the focus of the pipeline. All our regulated and emerging market development programs are on track.

Preparation for some of the multi-region, clinical trial programs are in advanced stage as well, and we feel good about the progress of the ongoing collaboration on developmental and manufacturing aspects with our alliance partner, Merck Serono. With this, I would now like to open the session for Q&A..

[Operator Instructions] First question is from the line of Anant Padmanabhan from Cowen and Company..

I have a couple of questions.

First on generic VIDAZA and Dacogen? Could you give us a sense of the sustainability through the rest of the year? I mean, what is your internal thinking in terms of competition, number of players and just how you're seeing pricing in these markets?.

Your question is on Dacogen and -- which is the other molecule?.

Azacitidine, VIDAZA..

VIDAZA, yes. So in VIDAZA, there is an authorized generic, Sandoz is there and we are there. Market shares are satisfactory. In Dacogen, we are only generic, we shared market share with innovator.

So it's a 2 team -- 2-player market in Decitabine and 3 player in azacitidine and the prices are in line with the expectations of similar participation amongst competitors. Going ahead, it's a difficult guess. There are -- we hear there are people coming in, but we don't -- we have not heard signaling from the market as yet..

Okay. And then one more question. Europe continues to do poorly, and so, one of your larger global competitors recently discussed divesting some of the Western European assets. So just a couple of questions related to that.

Is this business EBITDA positive and could you talk about any strategic options you have here?.

So it is EBITDA positive and as we have moved out from -- into commodity play, especially the tenders play in Germany. Currently, as we speak, although the business has not grown, our gross margins have improved because of certain steps taken. We are consciously moving into certain sectors of the business.

Having said that, is there active intention? The answer is no at the moment..

The next question is from the line of Sonal Gupta from UBS Technologies..

I guess partly a continuation of the last question, but I just want to understand, I mean, on a quarter-on-quarter basis, is this sort of a represent a sort of, I mean, this quarter in the U.S. represented some sort of a bullish because you had these big launches coming through.

And so I just want to understand the sustainability of these $220 million number, I mean, on a normalized basis.

I mean, assuming that there are no competitors coming through in these -- or the current situation prevailed in these products, so any thoughts on anything in terms of how do you see your pipeline for the rest of the year and if you could give any outlook on for FY '15 in terms of that U.S.

pipeline? Are there more differentiated products that you are expecting in the second half or in -- sometime next year?.

So on VIDAZA and Dacogen, as I mentioned, there would certainly be competitors coming in. When is the big question? We haven't heard specifically anything in the market, and the market doesn't take too much time for someone to show up. I'm sure, it's in development with others and they would come in. And then there would be erosion, steeper erosion.

There are the products which are also being launched at [indiscernible] products next major release, which is I think much more sticky in terms of revenue. There are few other products which are sustainable. So all in all, I think great quarter, there will be erosion, but I think we are fairly optimistic on things.

There's also, I think, our supply situation has improved substantially and it has helped in taking some case-specific market share increase, which has helped, hopefully should sustain for a while. But given the nature of the business, there's always erosion. With a good product, there's always erosion..

Sorry. But -- I mean, because you had a sort of like, I think, beginning of the year, you talked about 10 to 15 new launches in the U.S. and we've seen a very significant number of those coming through right now.

So do you see any more meaningful products in the second half, fairly speaking?.

So in public domains, yes, [indiscernible] coming up in January. There are a few more coming in, but we may not be in the big league..

Okay. But I just want to understand, is there like in Q3, in Q4 last year, you had because of Propecia, you had a big number and then in Q4 and Q1 this year, we saw a decline on that base.

So is there a similar sort of cycle here as well that because you just got these approvals and you pushed in a huge amount into the system and next quarter when it normalizes, you'll see a little bit of a step down?.

Not in our view. Not a great deal. There are launches, but as I said, none of them in the big league..

The next question is from the line of Anubhav Aggarwal from Crédit Suisse..

Satish, just one question on PSAI business.

When you look at the order book now that you have for the rest of the year -- well, it's basically for the next 6 months, how does it compare with what you had 6 months back?.

I think like we indicated in the last quarter that there's been changes in terms of the customer inventory holding and [indiscernible] things like that. So that's again played out in the second quarter, but there's been an improvement.

So the outlook is -- still remains the same, which is, whatever is gone, we can take it back, but certainly in the Q3 and Q4, we will see a ramp-up in sales and then we are hoping to normalize things, right? So I mean, they should have quite a few, like I said, the customer inventory corrections.

We do not have significant launches and we are waiting for the sales to ramp up from now onwards, so....

So you're saying on the current base, what you reported in the September quarter, if you expected to ramp up in the second half?.

Of course, yes..

Okay. And just one clarity. On the fondaparinux approval in Europe, how close are you or how far are we? Is it still quarters away? Or is it like near-term because you filed last year in Europe and cycle approval is depending on that.

What do you think is the status of that application?.

It will take a little while more, maybe a couple of quarters more..

Okay. And just last question. On the gross margin improvement, your average currency, it was about 60 this quarter. How much of the Global Generics margin, about 66%, what you reported this quarter benefited from the currency? Because it's moved from -- let's say, if you look at June quarter, it was about 61.5% and it's close to 66% this quarter.

Can you just roughly indicate how much would have been the benefit of this currency movement there?.

There have been some benefit. We won't be able to exactly share how much is the benefit. But all that we can say that we cannot expect the kind of gross margin level that we have in Q2 for Global Generics segment to continue. The PSAI gross margin can improve. Global Generics may decline..

Saumen, I probably didn't put the question correctly.

So based on translation benefits in this quarter in the gross margin, right, it is all translation gross margins?.

Yes..

The next question is from the line Surya Patra from Phillip Capital..

Just wanted to have some more clarity on the U.S. business for next 12- to 15-month period.

So like -- can you comment -- some -- what is the kind of -- how many product that are -- product approval that you are you anticipating for, let's say, next year? And what is the size of those opportunities are? Some clarity on -- and secondly, out of this 62 -- 65, all the pending approvals, what proportion of that would be like a different set of generic or injectable or some niche opportunity that is there in your pipe?.

So the number of launches would be more or less in terms of numbers somewhat similar, and give or take, the approvals coming through in time. The intention -- and the pipeline is clearly moving towards more complex areas, where a limited competition is what we hope for.

But having said that, this is our definition of complexity, a lot of generic companies are working on making -- moving out of non-niche [ph] product and trying to get to the niche ones. So only time will tell whether we have -- we are sort of ahead of others in setting these products or not. But overall, I think we remain optimistic.

Very difficult to exactly put on a year-on-year basis how things will move or go. These things in generics business, approval timelines, specific expiry time, the patent landscape, these are very dynamic applications. But consistently, one message we are sending through that as Satish mentioned in his section that R&D costs are rising.

And we have sent out cost on continually moving the pipelines on from [indiscernible] more and more if you got different types of businesses. So, overall, I think we should be looking in something like that. [ph].

Okay. Just today, it seems the market seems to be lower than the anticipated levels.

Any particular reason for that?.

Sorry, I mean, [indiscernible] to come out. And we just launched a [indiscernible]. And it's for the innovator, it's before the IMS figure, from before launch with $280 million. Sandoz AG, we are the only generic..

In fact, to my query was that because Sandoz has a good demand of market there, though the [indiscernible] data, so that is it?.

It will take some time for market share numbers to reflect..

Okay. Just lastly, on the PSAI side.

What could be the key growth drivers for PSAI subsequently, whether it is like a substantive kind of operation? Or is it the API business that would really drive share on?.

So mix of both price. So on the EPS side of the business, so you're not seeing. One part of the geography are expected to pick up. So that's the growth driver for API. And on the CPS, it's really some of the contracts picking up with innovative companies..

The kind of growth level, what we are seeing in the recent past, but if -- can we again reach that similar kind of growth for the PSAI operation, considering the expanded or enhanced platform because of the October circulation in this phase?.

Not really. I think the drivers are completely different for this business compared to what October represents to us. So, I mean, the simple answer, is yes, the growth will normalize, right.

I mean, the first 2 quarters we have an exception in terms of how they grew compared to the previous year's quarters because of the various things that explain, this time and even the last time. But after the third quarter, we see the revival of this..

Can you just explain your reply in terms of how many such customs and opportunities are there? Or how many products like Phase III, Phase II molecule opportunities are there for supply opportunities? Anything on that side..

That metric won't be important, right? Because I mean, just to give you a flavor of the Custom Synthesis business, there are contracts on which we work with some of these innovators over a period of time. There'll be some, which will be at the very early stage. There'll be some, which are, all the products, for example is a mix of bag.

There are some which are existing molecules. So the mix of all these things. So it would be very difficult to give a flavor of exactly how many and all. It doesn't really....

Okay.

But we are confident in the growth, there will be again reaching to that year levels that you earlier indicated?.

It will [indiscernible], but I definitely see it happening..

The next question is from the line of Surajit Pal from Prabhudas Lilladher..

I have just 2 questions. Is that, I think [indiscernible] here was supposed to be launched.

It is not yet launched in last quarter?.

Yes, it's launched. It's launched. It's not in the same league of the aforementioned, but it's launched. It's launched..

Okay. And then the main question is that, in your OctoPlus N.V., which you have said is that you have -- that company has patented technology in liposome. Does it mean that you can also venture into the 2 liposome technology, drug available in U.S. market.

Given the current scenarios of just few months back, USFDA has formed a team, which will evaluate all nano-technology drug.

Can you throw some light on that?.

Sure. The purpose of OctoPlus acquisition was mainly to gain access to their experience and insight into complex injectables. And I think, at the moment, that is the main objective. Few assets are being progressed through OctoPlus, there's maybe 3 or 4.

And these are high-value assets, most very difficult, time-consuming, would be needing clinic and all are in progress..

That's true. But the point is that given the kind of profitability, as soon as they're very few competition of the 2 drugs. I mean one is Lipodox and another one is atorvastatin [ph] expecting launch in the next year. But could you expect, so would it fair to say 2, 3 years Dr.

Reddy could be there is a possibility?.

Yes, certainly a possibility..

Okay.

Another question is that what is the status of de novo, [ph] number one? And two is that have you gotten any unexpected benefit for Propecia, because there is only one guy has got approval unexpectedly?.

So I will get back on the de novo [ph] piece. It's not very large asset, anyway. We'll get back on that. On Propecia 1mg, yes, actually, there are 2. There is -- 2 companies are coming. We have lost share as well as financial erosion in the asset.

So all that, actually, there are quite a few efforts that we have lost financially in terms of Q-o-Q, we have lost out. So that means sufficient margin..

The next question is from the line of Manish Jain from Axis Holdings..

I just wondered what is the R&D likely to be as a percentage of sales on a steady run rate basis annually..

Manish, currently, for the quarter, it looks like about 9%, right. So likely indicated, so there is a step up in R&D, which is something that we've indicated some time back. But you're seeing it in reality now.

So it is all about the kind of spend that we are increasingly now putting in on biosimilars, since they are moving development on one of the assets. And also on the Propriety Products, plus also the increase in the development cost of some of the generics. It probably takes [indiscernible] also.

So I think if you see it on a yearly basis, it could be at the levels that we're talking about for the quarter, or even slightly more than that. Again, it all depends on the sales at the clock..

And second thing is, if you can throw some light on progress of Proprietary Products in the U.S.?.

Not much significant milestones reported at this point of time, because like you have seen in our commentary in the past, there are several assets being progressed. But to be specific about which products and what has progressed, I think it's a bit too early right now..

The next question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund..

See, when I look into the balance sheet on the long-term debt, I do see a INR 1,250 crores increase. And given the fact that the company is in a position of generating fair amount of cash, I mean, would my assumption be right that you would be looking at a long- or short-term acquisition probably in the U.S.

or in any part of in India?.

At any point of time, we have been evaluating any ideas that comes our way. And it will be in line with our most strategic plan, both in emerging markets, as well as in North America in very specific niche area. So the next time we have taken some long-term borrowing, but not very significant amount.

But net debt-to-equity ratio is again less than 0.3, actually, 0.28..

Okay. And so can you throw some light on your purchase agreement with ecologic chemicals.

Is it primarily to acquire capacity? Or is there something else to it?.

The ecologics activity has a very low-cost technology profit study, intermediate of one of our product, on which we have significant business opportunity within the PSAI segment. So there's a reason we thought that getting back would give us tremendous advantage over our competitors..

The next question is from the line of Girish Bakhru from HSBC..

Taking you back to azacitidine and Dacogen.

Can you give some color on how is the -- if you can give some breakup of whether there is more retail component to it? Or is it more mail order, like channel wise, how is the drug [indiscernible]?.

Both our oncology injectables, and as you know, these are clinic-heavy products. So there are institutions and there are GPOs. We have set up a team -- front-end team, for taking the injectables, in getting the right value out of the injectables, so that will be about 8 months back.

And they're slowly sort of building momentum and separation of these things happening. So I think we are doing justice to both assets..

How much will be GPO, I mean, if you can give that percentage?.

I don't have that off hand at the moment to sort of hazard a guess. But the large part is they -- this was all published there, and most of -- a pretty significant part of this are in the hands of 2 major institutional players, as you know, and [indiscernible] especially in oncology products.

This will have a percent range of, let's say, 50%, 70% of the U.S. market will be in the [indiscernible]. And the rest GPOs. But there are also other complexities here that is not all about the shares [indiscernible], but the compliance of getting those shares converted to volumes. That's what I was talking about.

In terms of the front-end team and players on their feet [ph] trying to achieve that..

Right.

And so when we say gradual pickup, would it be something like what we have seen in case of or Fonda? Or would you see a significant chunk come in Q3 as well and maybe then diving from there?.

So as I said that we don't -- we haven't heard any messaging in the market that anyone is imminent. That's about that [ph]. This sort of thing can only take you [indiscernible] for a month, a month and half, 2. Beyond that, it's difficult to say..

Right. And just other question was on Lunesta, I mean, you had lost the appeals case against Sunovion.

Just wanted to get a sense if you have the possibility to reappeal? Or has it been reappealed? Or is there possibility of settlement like many other peers have already settled?.

So it's actually not complete. It's actually -- you read through the judgment. It's mainly saying that in it is -- there are [indiscernible] so it's hard not -- we're not -- there are institutions. But having said that, the percentage veracity of [ph] our ratings substantially come down.

We're feeling this may not be the best idea, but we're trying to seek other revenues..

And settlement will be one of that, right?.

Could be..

Fine. And just lastly on the CapEx side. You have already done INR 580 crores in this first half, which is close to INR 660 crores you did last fiscal year.

What's the overall guidance there? And where all this is being attributed to?.

So part of this is these ecologics effects last year that we had, for which the CapEx has gone up. But for the rest of the year, we do not visualize more than INR 300 crores or so..

How much did you say, sorry?.

INR 300 crores or so..

The next question is from the line of Bino Pathiparampil from IIFL..

First, a couple of clarifications. The $220 million in the U.S. that you said, is that actual net invoicing in the U.S.

without any impact of hedging or currency translation?.

That's the dollar invoicing in U.S..

In the U.S., okay. Right.

Second, would you be able to comment anything on development of generic Premarin in the U.S.?.

We won't be able to comment on this product at this stage..

Okay, sure. And, finally, on the biosimilar pipeline development, you have increased your R&D spend, which clearly denotes to some advances in the pipeline, I guess.

So in which case, at what time will you be able to publicly disclose some of these products in the pipeline and the stages, et cetera?.

Right now, it's a very few asset, Bino, so I think probably the next couple of quarters or so we can talk more about it..

Okay. Very few assets, as in -- do you think any of them entered or just about to enter the final Phase III trial or IV.

Is it actually a bit, slight expiration [ph] there?.

Okay. So starting with one of the things I mentioned. Yes, it is the one, which is getting into clinical trials. That's why I said that, yes..

I mean, clinical trial as in the pivotal trial, or the share in clinical trials?.

This is a biosimilar, right, so it requires that trial..

The next question is from the line of Sameer Baisiwala from Morgan Stanley..

Just for the U.S. market, for divalproex ER, the IMS report survey, your market share right now is under 1% or 2%. So but I guess you also read primary sales, so it may come at a lag.

So what was the market share that were digested in the quarterly results for the September quarter?.

I think we are probably the fourth meaningful player. The market still has inventories of some of the earlier players. Market share, being the fourth player, is quite fair in our view. And the way this market plays out, and maybe you're well aware of, I think it's a fair market share. Not a whole lot has quite [ph] reflected in Q2.

There is some, but that didn't [indiscernible] as we speak..

Okay, excellent. Okay.

And do you expect the current price levels for this product to sustain for the foreseeable future?.

So this is I think would be a little more sticky product than many other products. I think it's complex. As you know, it's been generic for quite a while but the effectiveness has gone up. So I think it will be sticky in our favor..

Okay. And the second question is on VIDAZA. I think you launched it pretty much steadily the part of the quarter, September or so.

And so was this -- anything that the quarter reflected the full impact for the product, or do you think this would be seen as you go forward?.

Yes, so in -- typically, oncology in typical [ph] launches, first month has some certain significance. Even though it's a month of launch, as you know, it's not insignificant. But going ahead, second half, we'd see the full benefit, provided of course we don't see more players.

As you know, I mean, if you studied this, this has gone through different way of justification. There's a lot of science involved in the approval, and eventually you see this through our guidance from FDA as well. So we are cautiously optimistic..

Okay.

And for the next year, do you think this would be a meaningful material opportunity for the next fiscal?.

Quite early to comment. November next year, long way to go..

Yes. But I guess because you are going to be as part of the settlement, so you may have some idea how many players to expect over then....

Two are -- I don't know, 2 are already there. 2 have -- 2 would immediately show up. So depends on how many more, we don't have any public domain information actually on that and how many more. I wouldn't be commenting on this at the moment too much..

Okay. One final question, if I may. Looking beyond the traditional markets where Dr. Reddy's has been strong over the last few years, which is India, U.S., Russia, et cetera.

Is there some other markets that you are training guns towards and you want to scale up going forward?.

Not exactly at the moment. I think debt [ph] is still name of the game. We are certainly looking forward to -- brand acquisitions in our therapy focused areas in the similar markets, and I think we can still grow much deeper in these markets.

But having said that, strategic initiative at some point in time, maybe we will look at it, but not at the moment..

The next question is from the line of Saion Mukherjee from Nomura..

One question on the U.S. launch, and you mentioned about Lunesta in fourth quarter.

What's the kind of dynamic that you expect in that product?.

So I think there are 2 players already in public domain, including us. Having said that, it's a complicated product, it's not very big as you know. But this is -- there are not too many big products as well. So again, it shouldn't be too bad..

But is there any exclusivity kind of situation there?.

Not to my knowledge..

Okay. And on biologics, and your strategy you mentioned about this collaboration with Merck Serono.

I mean, so how are we taking some of these big products? Is it like you're doing harmonized kind of an approach both for U.S., European markets? Are we going to see some more launches in India and then taking these products to developed markets? Any thoughts on that?.

Right. On -- you heard -- depending again on the products, right, so some of these products are already launched here, which are also part of the deal with Merck Serono, right? So there would be towards reaching to markets, which were not launched before on one side.

Obviously, the big thing there will be Europe, right? So because that has a very clear pathway. U.S. has been still some time away, right? So the initial focus will be on Europe for a particular product, to begin with, and then we also look at certain other emerging markets, large emerging markets.

There are markets where we present on our own, we've got to keep go into these products, right? So given the pipeline of the biologics -- if your question was, given the pipeline of biologics, our intent always is to launch first in India and then take it to emerging markets after that. That's normally the trend..

Okay.

And any update on the [indiscernible] in Russia and other key emerging markets?.

Nothing specific at this moment..

Filing in progress..

Okay. And one last question.

Can you share the cash flow, if it's loss or gain that you might have booked in this quarter?.

[indiscernible] booked INR 65 crores of [indiscernible] in the quarter..

Sorry, I didn't hear that..

INR 65 crores of these loss, we are booking in the quarter..

The next question is from the line of Alok Dalal from Motilal Oswal..

I'll start a question on Russia. You mentioned that the market is going through a decline in volume fees.

So what are the reasons for the volumes declining in Russia?.

So there are a couple of reasons, right. So [indiscernible]. And one of the things is clearly the GDP growth, which normally has a reflection on consumption of pharmaceuticals in the market. There's been a slowdown, right? So that's one reason at a very macro level.

It is also the issue of the seasonal effect, right? So this whole issue of the flu season and the consequent onset of winter and things like that. So this also tends to play a role, and that's one of the things that we've seen..

Okay. So Russia, normally, the December quarter is the strongest quarter because of the onset of winter.

Is that correct?.

That's correct..

Okay.

And on Russia again, is there a risk of the [indiscernible] list expanding in the foreseeable future?.

Not in the near future, because -- are you asking about the number products in the [indiscernible] list?.

Yes..

I don't see that happening lately, no..

Okay. One more question on Naproxen.

Sir, what is our market share here in Naproxen?.

Talking of API or the mixtures [ph] or....

No, API..

I think that the dominant market share holder globally on the percentage [ph]..

Dominant market share?.

Yes..

Okay. And one last question on the ecologic again.

Sir, can you provide any color on what is the sales of this company or what is the book value of this company?.

Actually, we have put independent valuers to value the company. And based on that, we have perceived assets [ph]..

But would you be able to give some number?.

We have disclosed in terms of the total value that we have paid in terms of both fixed as well as the current assets..

The next question is from the line of from Arvind Bothra from Religare..

A couple of questions from my side, one on the Russian market. You mentioned that your growth would sustain at current levels and the OTC share is increasing.

How much is OTC share right now?.

OTC, of the total percentage of sales, is in the range of 34%, 35%, up from 32% figures, which is last year. So a very healthy rapid growth, and we are in top-tier growth companies [indiscernible] in the OTC sector in Russia..

Okay. And last, in the press release, you mentioned that the SG&A increase also includes select brand building activities in Emerging Markets.

Does it include some one-off item or something lumpy, which may subside in the coming quarters?.

Not really. I think with the growth in OTC, I think we are committed to more of ATL. ATL means television coverage and so on and so forth needed in those sectors. So some of those -- these are part of the business. But having said that, in the seasonal product, the intensity of spend can vary from quarter-to-quarter..

Okay. Finally on the domestic market, you did a commendable growth in the quarter and the impact of disruption is still not over.

How do you see this again happen the year beyond that, especially noting your enhanced efforts to get back above industry-level growth?.

The great disruption is largely, in our view, is largely over. I think there is a general degree of amicability [ph] in them. So going ahead, I think second half, we are much more optimistic than the first half. We saw lots of these one-offs that doesn't move [ph].

But I think second half, we are optimistic, the market in September has given those signals to us.

More importantly, I think we are very focused now on what we would do and what we won't do, mainly in terms of mega brands, therapy focus, getting [indiscernible] all channels, including institution channels here, [indiscernible], [indiscernible] to [indiscernible] institution channels to get things [ph] started.

So some of those things, but India is one of the most competitive difficult markets to be in. It's going to take time, but I think we are on the right path..

Okay. And the last question, the operating margins are 20% were clearly pretty solid. Is this a benchmark we should look at going forward? Of course, we'll take into factor the fact that R&D spend may go up and there could be some correction in gross margins.

But somewhere directionally, where are we headed?.

Are you talking of India -- which one are....

Overall operating margins this quarter, we had 20%, rate.

So just wanted to understand how should we look at from a medium-term perspective given the high-margin launches are here to scale up?.

So I'll here also say that the Global Generics segment for this particular quarter, we have got a very high gross margin, which is 66.1%, which is really not sustainable. So definitely [ph] some drop in that margin. But at the same time, PSAI this quarter is 24.6%, so that included into this corporate improvement there.

So overall, at the company level, gross margin will -- were better than the previous year and we can live that.

Can we [indiscernible] the number of questions?.

We'll take last 2 or 3 questions, please..

The next question is from the line of Prakash Agarwal from CIMB..

On ecologic chemicals, I mean, the focus clearly had been doing niche segments, R&D and stuff, I mean, now incrementally buying this and improving PSAI.

So when we said that normalizing growth in PSAI going forward, so does that normalizing growth factor in this acquisition or do we expect more growth coming out of this?.

Just to clarify, this is an asset purchase, right.

So of -- one of the key intermediates, right? So the thing is, if we're able to start ground up, right, because it would have taken us a much longer time for a specific product opportunity in the CPS business which is why we did this, right? So this more for the long term and securing that opportunity to serve the customer.

That's how it should be taken as..

Will this can lead to gross margin -- some benefit on the gross margin, or it would take some time to actually....

It would take some time, right? So because this is a huge commitment in terms of an order that we have from an innovative company, right? So it will take time before it plays out. The important thing was to acquire that capability of the intermediate..

Understood. Great. And secondly on this, I mean, the kind of good numbers we have, especially on the U.S. with high-margin products. So clearly, we would see next couple of quarters much good base.

But I mean, just going back to 3, 4 quarters back, we had a comment on the management saying, that fiscal '14 growth could be softer on a base of -- higher base of '13 when we were expecting these products to come in.

Now question is, these products are coming now, so do we continue to see equally interesting products in fiscal '15, or on this high base, we could see some softer growth?.

First, I think we have stopped giving guidance that we have earlier told. We are telling that every year, we are expected to launch limited number of products. So we can gauge around 10 to 15 products in a year [ph] that's something that sold [ph] our total portfolio and development progress which happen, then the filings are done accordingly.

So in terms of specific products, how does it pan out, what is the competitive landscape at that particular point of time when the launch happens? It is very difficult to predict and tell you upfront..

Understood.

Any color on the equally interesting products, if you could help us there?.

So as repeatedly we have been saying, we are increasing our R&D cost to make products and sales more complex, more difficult. So definitely, we have a lot of interesting products in our portfolio..

What is the question? I mean, whether it is in the U.S. [ph] specific, it's difficult for us to spend [ph] down next year. So no, it is an ongoing journey, as I mentioned..

Understood. Great. And on Russia, I mean, I think I missed on that.

Did we see volume decline, or you expect volumes to continue robust as volumes and value to be as robust as we saw in this quarter?.

No, no, I said that the market itself, right? So the whole market. Dr. Reddy's in the whole market, the units have declined, that's what I said..

Okay. But would you have....

If the value of the market -- our advice, if you see the value growth in the markets, that would be about 10% high. Compared to say maybe 14% in the past, it's been slightly lower than 10%..

Yes, understood. And would you have a comment on the already existing players in Russia investing in local manufacturing facilities.

So are we also on the plan, or does not take too much time, because I understand, seeing pharma 2020, that one needs to be locally present to have continued growth in the future?.

So only in one of the complex products, we are in partnership and a few other oncology products as well. So we have started partnership manufacturing in some of those, not very significant at the moment, but we can certainly scale up at some point in time whenever it's needed. The immediate part is not to put a greenfield site or something..

Understood.

And lastly, on betapharm number, can we have that number, please?.

We did about -- I think [indiscernible] we did about EUR 15 million [ph] for cash, EUR 15 million [ph]..

And betapharm specifically?.

I'd reward [ph] separately..

[Operator Instructions] The last question will be from the line of Manoj Garg from Merrill Lynch..

Just like to understand that clearly, you've been have been investing into injectables and biosimilars. I just focus on the linked [indiscernible] drugs.

Are there any other also which we intend to invest or we are looking to invest?.

So the development is in progress in the areas of topicals, patches and 1 or 2 partnered [indiscernible] products for U.S..

And has we made filings annual for these products or still under development stage?.

They're all in development stage..

And when do we start seeing the filing happening out of OctoPlus technology big [ph] pharm, like whether you started already filing it first or it will still take some time?.

So the [indiscernible] internal ones, I'll take them as [ph] a good examples internally developed, so they have already filed. Some of the external ones will start certainly be in getting to the filing -- are you saying OctoPlus? That -- these are very specific assays. We wouldn't put a time frame to this, but advancing well..

Okay. And the last question for my side. Like someone had made a comment that you always keep looking or evaluating the inorganic opportunities.

Looking at the longer-term strategic intent in mind, do we have anything in the near term, or you're still in a very, very preliminary stage?.

So we are evaluating, maybe we will be doing dividend somewhere. So specifically, I will not be able to say whether it is near term or medium term. But at the end, we are [indiscernible]. But there is always the possibility. Thank you, and anyone else can contact our Investor Relations team..

Thank you.

So would you like to give any closing comments?.

Oh yes. So thank you really [ph] for joining our senior management for the Q2 FY '14 earnings call. In case of any additional clarifications, please feel free to get in touch with the IR team. Thank you..

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