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 - Managing Director, Vice-Chairman, Member of The Management Council, Executive Director, Chairman of Management Committee, Member of Shareholders' Grievance Committee, Member of Investment Committee and Member of Corporate Social Responsibility Committee Abhijit Mukherjee - President of Global Generics and Member of the Management Council.

Saion Mukherjee - Nomura Securities Co.

Ltd., Research Division Anubhav Aggarwal - Crédit Suisse AG, Research Division Nimish Mehta - MP Advisors Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division Neha Manpuria - JP Morgan Chase & Co, Research Division Prakash Agarwal - CIMB Research Sonal Gupta - UBS Investment Bank, Research Division Ranjit Kapadia - Centrum Broking Private Limited, Research Division Anant Padmanabhan - Cowen and Company, LLC, Research Division Sameer Baisiwala - Morgan Stanley, Research Division Surajit Pal - Prabhudas Lilladher Pvt Ltd., Research Division.

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Q3 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. And thank you for joining us today for Dr. Reddy's earnings call for third quarter of fiscal 2014. Earlier during the day, we have released our results, and the same are also posted on our website. We're conducting a live webcast of this call and a transcript shall be available on our website soon.

Just a reminder, the discussion and analysis in this call will be based on IFRS consolidated financial statements. To discuss the business performance and outlook, we have the leadership team of Dr.

Reddy's comprising Satish Reddy, our Vice Chairman and Managing Director; Saumen Chakraborty, President and Chief Financial Officer; Abhijit Mukherjee, President and Head of Global Generics segment; 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..

our working capital balance increased by $47 million over that of September 2013. Capital expenditure for the quarter is at $38 million. Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $331 million, largely hedged around INR 56 to INR 61 to $1.

In addition, we are balancing hedges of $497 million. Net debt at $292 million represents a net debt-to-equity ratio of 0.21. With this, I now request Satish to take us to key business highlights..

Thank you, Saumen. Good morning, and good evening to everybody. And I extend a warm welcome to you on this earnings conference call. I'm pleased to report continuing strong performance and our highest ever sales and profitability achievement in the quarter.

This profitable growth is an early reflection of our progress towards a greater mix of complex generics and limited competition products in the portfolio. While U.S. generics influenced this performance to a great extent, our key emerging market geographies also continued their growth momentum in challenging macroeconomic environment.

Now let me take you through some of the business highlights for each of our 4 key markets -- for each of our key markets. Please note that in this section, all references to numbers are in respective local currencies.

Revenues from North America Generics for the quarter are at $265 million, with an impressive 49% year-on-year growth and 21% sequential growth.

This can be executed to the full quarter contribution, as well as market share stabilization of our key recent launches, namely, azacitidine, Decitabine, donepezil 23 milligrams, metroprolol and divalproex ER. This was made possible by a seamless coordination between our customer-facing teams in the U.S.

and the robust and flexible supply chain operation in India. As you are aware, we have recently received the final approval for Sumatriptan autoinjector and we will launch the product soon in the market.

Our anti-allergy, OTC and antibiotics portfolio are on a gradual improvement path on a sequential quarter basis, canceling the seasonal demand pattern. This quarter also saw the bunching of customer orders and initial billings for some new accounts, which increased the overall level of sales.

While in Q4, we do not expect a material increase in competitive activity on the new launches mentioned above, our sales are likely to see some dip sequentially for the reasons that I mentioned above. Revenues from our India business were at INR 391 crores, despite 0.2% year-on-year growth.

This quarter witnessed a full-quarter impact of the lower price regime and an increased competition across a few of the product lines. The business continues in its endeavor to introduce new differentiated products in India to enrich the portfolio mix and address existing unmet medical needs.

Of late, you would have noticed the launch of the brands mexmol [ph] and Optidoz. Both are in the chronic therapy space, and we hope to scale up in the coming quarter. Our end Q3 December growth, as per IMS figures, is at 12.2% against the IPM growth of 10%. And we continue to be the fourth highest growing company in India.

We believe that with better field force execution, enhanced portfolio mix and presence in the growing institutions business, our India business will sustain its growth. On the emerging markets front, Russia revenues at $70 million for the quarter grew by 6% in the constant currency.

After a robust second quarter performance, this quarter has seen some delayed pickup with respect to the onset of winter. It is also evidenced from the low market growth rates in volume terms as per the IMS reports. The OTC portfolio in Russia is consistently growing and is now approximately 37% of our portfolio there.

We have seen significant improvement in rank by 6 places over the previous year, and we are the second fastest growing company in the OTC space in Russia. The U.S. markets grew by 27% on a year-on-year basis on the back of new product introductions in Ukraine and expanding base in other regions.

Our PSAI business registered a de-growth of 29% on a year-on-year basis. Challenges on the external market front continues through the quarter. Nevertheless, being vertically integrated, this business division continues on its primary objective to support our global generic launches.

Though a little bit early to talk, we are witnessing some positive lead indicators in the form of improving status of the order book and lock-ins for some upcoming launches. This provides us with comfort of improved performance in the coming quarters. With this, I would now like to open the session for Q&A..

[Operator Instructions] Our first question is from Saion Mukherjee of Nomura Securities..

Yes. Sir, 2 questions. First on Russia, we have seen good growth in the past. Now we are seeing slowdown and OTC had also scaled up to 30%, 70% [ph].

How should we think about growth in Russia, say, from the next 2 years?.

So, Abhijit, here. So I think Satish mentioned the growth in constant currency terms of 6% and rupee terms at 17% growth. Given the market, which is flat on value and declining on units, I think it's a significant -- significantly good performance. We have gained ranks, as he mentioned, 2 ranks overall and 6 ranks specifically in OTC.

So I think, overall, we are satisfied with Russia. Emerging markets, as you know, are going through some challenges. But if you are ahead of the pack, you're ahead of the pack..

Do you think OTC can -- in other percentage, can further increase for Russia?.

Yes. The plan is we have already -- a couple of years back, we are in the range of 31%, 32%. We have reached 37% of the overall revenues in OTC. There have been switches last year, some pain, fever products, Ibuclin, Novigan went to OTC, and they're growing very -- in a robust fashion.

Very recently, we have got the approval, first time in Russia, of Omez into the OTC sector. So yes, we are really optimistic about OTC growth in Russia..

Okay. So my second question is specific to some product opportunities in the U.S. Firstly, on Copaxone, if you have heard something from the FDA, and do you think -- what is your take on generics have to do clinical trials on that? And second, Dr. Reddy's had been sued on imatinib recently.

Are you surprised with this because I think this was the first lawsuit that I have come across?.

So Copaxone, the file continues in review, picked up and being reviewed. Beyond that, we won't be able to give you further detail. Imatinib is part of generics' journey. We're not surprised. So it's one of our good filings..

Okay. I mean, because we haven't seen any litigation that's why I was asking this question on....

We are not surprised -- we were not surprised. We were expecting this..

Our next question is from Anubhav Aggarwal of Crédit Suisse..

Just 1 question on the R&D spend, first. Now out of the total R&D spend, we've been spending about 40% on innovative products. Just wanted to get some idea about any proprietary product pipeline.

How many molecules are we working on? And how many of them are in Phase III right now?.

Well, there are 7 programs in this proprietary products suite. To be specific, 2 are in clinical trials right now, Phase III..

Sorry. I missed that.

Are there -- anyone in Phase III?.

I said there are 2 products in clinical trials..

Ah.

Two in clinical trials and both of them in Phase III?.

Yes..

And continuing the same question. So when do we expect on biosimilars European clinical trials for you to start? I mean, first half next year, second half next year, I mean, some timing will be very helpful..

Look, for one of the products, it's already started..

So the expense of that was already part of $48 million, what number you're reporting this quarter?.

Some portion of it, yes..

And how do you see R&D spend? I think you've been talking about this quarter it was 8.5%, of course, on a very high sales. But let's say, would you cap the R&D spend at around 9% to 10% or....

As far as this year is concerned, I think we indicated that 8% to 9%, right, so by the end of the financial year, that's what we indicated. So it could be around that kind of [indiscernible]. We're not capping it at anything, right.

So one of the things which you will see from quarter-on-quarter, again, depending on these products moving into clinical trials, the increased spend in [indiscernible]. When it comes to complex generics, the bioequivalence studies and clinical trials and also biologics, as well as the proprietary products, the trend is on the increase, right.

So there is no cap in terms of a number at this point of time.

Can we just indicate the range at this point of time?.

Okay. And just second question on the PSAI.

I agree it was weak, but what led to sequential decline of 20% in PSAI sales? Was it further price erosion from specific molecules? Or was it like -- it was more on the contract manufacturing part, which part was it?.

It's on both accounts, right. So this is not -- I mean, again, we have to see the trend in terms of what's been happening since the fourth quarter, right. So there's been no major launches. For example, there's been -- in terms of customers rationalizing the inventory. There's been all kinds of reasons, right.

So that's why I indicated the thing in the order book, from now onwards, looks better than the previous one. So we hope things will improve. But it's on both accounts, both inhibitors as well as the generic companies..

And just last question, if I can ask.

Abhijit, you mentioned in Russia you are growing still above the market, but your market share is very low, right? Just wanted to check that how many products have you launched in Russia, let's say, in last 12 months and both on OTC and Rx side, roughly?.

Each year, I wouldn't be able to give you the exact number, but in the range of about 4 to 5 every year..

This is what you launched in last 12 months, roughly 4 to 5 in each, in OTC and Rx?.

No, not each in OTC and Rx. I mean, together, it's a branded market. So together, maybe 5 products..

Okay.

So typically, with your market share and you launching about 4 to 5 products a year, you should be growing much ahead of the market, not at 6 versus market remaining flat, right?.

We are growing far ahead of the market. I just mentioned that IMS, if you pick up, the current IMS gives Russian market value from flat, completely flat in both -- in unit terms, it is declining.

In that context, I was -- what we are giving you, the market, I think IMS -- by the IMS, if I recall correctly, we are low double digits versus the flat market. And our internal is not [indiscernible]..

Anubhav, there could be quarterly fluctuations. On a 9-month basis in Russia, in ruble terms, we have growing at 13% [ph]. We have a strong quarter 2..

Yes, because I had the impression that IMS acquired from expert, and this sort of calibration exercise, so I'm not too sure whether the market is really in the negative right now..

So anyway, overall, based on what they are showing, and that might be true for all, everyone else. Overall rank, we have gained by 2 ranks. Two ranks in a year is pretty good, actually. So if you look at the top players in Russian market, we're doing quite well, actually; and especially in OTC, 6 ranks gained..

Our next question is from Vivek Agrawal of Research Delta Advisors..

Yes. This is Nimish Mehta. First of all, can you throw some light on the generic launch of -- possible launch of sirolimus, that is Rapamune. What I understand is that Watson has the 180-day exclusivity, but they had not been able to launch, probably because of the approval not being granted.

So are we likely to see a forfeiture of the 180-day and other launch-based operating schedule?.

I think your guess would be good as good as ours on this. So you have all the details. So there is first-to-file player. [Technical Difficulty].

Yes. So there is a first-to-file player, not having launched their product. We have no clue when they would launch, what's the status, FDA doesn't give you -- give one visibility of that. So we're all set to launch, unfortunate..

But will you have to wait for Watson's, say, FDA to get triggered or you can launch, let's say, in the worst case, after 180 days?.

No, our current guess -- the current understanding is that we'll have to wait, but -- that's it. We'll be in touch with the agencies..

Okay. And secondly on Avelox, that is Moxifloxacin where we have the FTF.

So what is the latest from that? I mean, I guess because we don't have the tentative approval, are we likely to launch, or what is the status there?.

Can't fully comment on this. We....

Can you repeat it once again?.

Yes. I can't comment on the FDA status, but we're all set to launch on the specific date..

Yes, okay.

And finally, if you can just broadly let us know when do you expect the first product to be launched from the OctoPlus subsidiary that we have acquired? Or general color on what is happening there?.

The exhibit batches for the first product should be in a few months from now, and there's a clinic to follow. These are products which would need -- these are complex injectables would need a clinic. So roughly 4 to 5 quarters from now..

Our next question is from Surya Patra of Phillip Capital..

In fact, I just wanted to have an idea what is the progress on the injectable portfolio in the U.S. for Dr.

Reddy? In fact, what is the kind of market that we have achieved for at least 2 products, azacitidine and Decitabine?.

So as you know, there is AG [ph], standard AG, we have there and [indiscernible]. We have a fair market share. We have a fair market share of azacitidine; and in Decitabine, as yet you know better than us, there is an approval, which is not exactly equivalent as [indiscernible]. So we are yet to see that impact in the market.

But I think, also, we have a fair market share of azacitidine considering the play..

Okay. And regards to pipeline for visibility, I mean, regards to U.S. pipeline front, can you give some sense what you see. So far we have seen a much better growth than anticipated in the U.S.

business because of the steady kind of funds because there's limited competition products or the sustained products, but what is the likely growth that you are expecting, or what is the kind of product approvals or launches that you are anticipating for the subsequent year, some sense on that front?.

So we have pretty healthy number of launches in over the next, let's say, 4 to 5 quarters. But to the best of our assessment, they are not really blockbuster launches. They are good products, but they're not likely to be $39 million-plus [ph] type of product. But we do have a pretty healthy number of launches..

Whether those -- the visible products can maintain the -- or sustain the growth of what you are currently seeing in the U.S.

business on a constant currency basis?.

The generics market is not predictable to that extent. It all depends on not just what you launch but what you lose as well. How much and what you would lose would be anyone's guess. We don't have visibility. We have good products. There would be erosion as other players come in. So it's a factor of erosion and launches.

Even on the launches' side, as I said, good products, but not one of the blockbusters. So hence, yes, I think those momentum will be maintained, difficult to put up in that way..

Sir, when do you really expect your injectable portfolio to be like critical there and [indiscernible] critical mass there in the U.S.? And what is the visibility that you are currently having for the new product launches so far with injectables?.

Surya, currently, all the injectables put together are approximately 30% of the portfolio. And it could be tough to give any known number in the future for that..

Okay, 30% of the -- of pending pipeline..

More on U.S. portfolio..

Okay, just last question.

The kind of margins, what we have been seeing, since last couple of quarters, what is the kind of scene? This is definitely much better than expected, but what are the kind of sustainable margin that we want to look at, I will call it, the swings, what we have seen in the gross margin that is quite significant in the last 2-quarter period?.

So I think, mainly, it will depend on the injectables' erosion. You mentioned the 2 products. I think how they'd behave in the next quarters would decide how the gross margin swing. The other products, we had our share of erosion.

There could be a little bit more, but they wouldn't be leading to wild swings in terms of -- but the injectables products, how they behave with the entry of other generics, will have to be watched..

The core margin, if I were to look at for the 9-month period, it is like more than 25%.

So excluding that impact for this, that means excluding this depreciation and amortization from the margin, so will then -- which is much better compared to the last year's number and all that? So is it still a sustainable number even for the subsequent period or you do see some sort of implication of some other factors?.

EBITDA margin you are really talking about? It is somewhat similar [ph] to what you're talking about and one thing you must have noticed that the margin expansion has helped us when we have focused to quite a bit on R&D and additional R&D is being -- coming out of the margin expansion.

And, of course, our focus will remain, not only in R&D, even we are creating capacity, we are creating capacity in other areas like injectable, so we were let to start of the year, I think caught up quite well, so there are areas where we are going to spend even on CapEx, I know it will be around topical peptides or several other things.

So we will continue to invest for the future and that is the result that we have taken. Having said that, it will be kind of portfolio that we are building up and the strategy that we've adopted on complex generics which, of course, the early success indicators of how it has happened in the past.

We will hope that our margin stabilizes beyond the certain acceptable level of EBITDA. Will there be a fluctuation here? There could be fluctuations, but we hope that we do it. But longer-term we will expect to win different set of formulations of IT products those really start coming in, then we will even have earlier one but those are longer-term..

Our next question is from Neha Manpuria of JP Morgan..

Sir, in terms of our SG&A, you did mention that there were some amount of so-called related to the quarter expense in terms of increments and even specific to the quarter.

So what proportion of -- I mean, I assume what is the normal base that we should take for SG&A going forward, if not the current quarter level?.

So if you really look at SG&A as a percentage of sales year-on-year, there is an improvement, marginal but there is an improvement. And we expect better SG&A leverage but what happens when we get some benefits on the top line when there is a currency movement in terms of dollar rupee.

But there is, SG&A increase also happen because the same currency movement. And quite a substantial part of our SG&A and now it increases almost -- it will be now 30% or so and it gets impacted because of this currency movement. But we expect a better SG&A leverage, going forward..

Okay. And you talked a little bit about CapEx, your focus on topical peptides.

Based on how much we spent in year-to-date, how should we look at CapEx going forward and what would be the focused areas? I mean, what are we spending year-to-date CapEx and what would be the focus areas going forward?.

So we have actually invested a lot of money in our [indiscernible] facility and in several both on the chemical side, as well as on the finished good [ph] side on injectables, both cytotoxic and non cyto and we have actually spent more CapEx than what initially in the beginning of the year we thought we'd spend but we or, let's say, that this is something which helps us with much better supply-chain situation when we are launching product.

If you have seen earlier years, there would have been some difficulty in supply we have got even penalty for failure to supply those kind of things we have improved tremendously. So, I think some kind of additional money which is we are spending on CapEx is helping us even in the longer term.

So we have spent more than INR 230 crores in this particular quarter. We even spend another INR 200 crores last in this current Q4. But going forward in next 1 year, we can even spend higher than what we have seen in this year on CapEx, maybe in the next result time, we will give some figure.

But at the moment, it definitely looks like we will spend more than INR 1,000 crores in CapEx in FY '15..

Fair enough. And one last question if I may. How do you see these unconsolidation in the U.S. impacting our U.S. business? Obviously, let's talk about possible pricing pressure offset by volume, what's your view on that and especially impact on Dr.

Reddy's?.

This -- the retailer, wholesaler merger is just happening. Then last year was Walgreens and Eli Lilly's and then recently you have CVS Cardinal.

Depending on how much customers a company has in each of these segments and the ratio of that would impact [ph] so we also have an impact, we have factored that in into our plans going ahead, so there is an impact I mean, no doubt about it. But it's part of the erosion, I guess, in the generics business..

Our next question is from Prakash Agarwal of CIMB..

My question is on a couple of products, Cymbalta and less effects [ph] which we got during the quarter.

What are the launch plans for the same?.

Okay. All right, so, Cymbalta, I think, we are somewhat surprised by the way it has panned out in the market. Let's say, we caught by surprise. We are back on integrated. We have initiated plans to quickly catch up, so a lot of time it takes in terms of getting the API and validation and going ahead. So yes, we would be planning to get in at some part..

So it would be fair to say during this quarter?.

Not in this quarter..

Not at this quarter, okay. And moving to divalproex, I mean, we fairly got decent market share during the quarter. Just wanted to understand the market landscape. My understanding is the market itself is going 2x to 3x upwards.

Could you confirm to this due to price increase?.

Yes. One of the earlier players took price increase, we came in thereafter. Some supply situations have changed as well after that. So what all it says it's a good product from India. I guess, [indiscernible]. We have been choosy about the market share, more value sensitive than share sensitive..

But would it be fair that a $180 million market-size has become a $500-plus million market size?.

Don't go by IMS figures so there is always substantial factor to apply when we convert IMS to actual values. But all I can say that this is an important product for us..

Okay, understood. And moving to Copaxone, I mean, there was a conference call held recently.

They talked about thrice weekly that is being launched and they expect that 20% to 50% switch, Rx switch in the first year itself, what is our thought on that? I mean, so it's come -- it introduces the size of the addressable market when we get approval?.

So these switches, it's not easy for us to predict. Sometimes it works quite well, sometimes it doesn't. So at the moment, I think we are very focused on the asset we have filed. That's the more important thing and certainly, I mean, there would be players well filed on this I said would also like to follow-up with other asset as well.

So broadly, I think, at the moment, we're focused on the journey to how we sort of move ahead with our existing filing..

Yes.

And would it be fair to assume it's a second half calendar '15 event for us?.

Difficult to put a date, this is a complex product, agency has to do a lot of work. There are, to the best of my knowledge, 2 filers ahead of us. We've provided a different one. So I guess, depending on how well it had been characterized, we will see how, what is the outcome..

Last question before I get back to queue, competitive landscape of Dacogen and VIDAZA. I mean, we have seen one approval coming in 505(b)(2).

So do you think that is a competition threat and some outlook for VIDAZA as well?.

So you are asking about Dacogen, I guess, regarding the 505(b)(2)?.

Yes..

So this again, I think, how the market will play out. I wouldn't like to hazard a guess at this juncture. The approval has just come through so we'll see how it plays out in the next few months. Normally, an equivalent to innovators has advantages in individual space, but we'll see. On VIDAZA, so currently we don't have any further information.

I mentioned there is AG, there is innovator, there is us. And we'll see how this goes through, we are tracking closely..

Perfect.

And last one, bookkeeping on tax rates, any guidance for the year end and the next year?.

No. We have earlier said our annual effective tax rate will be between 20% to 32%, we are holding onto that..

Our next question is from Sonal Gupta of UBS Securities..

Just -- I mean, just couple of questions.

One is could you talk about, I mean in terms of -- in more detail in terms of your biosimilar timelines as to what you're looking at and when do you expect more products in the clinic, as well as when do you expect the first potential approvals in European market or somewhere, could you just talk about that?.

It's a bit early to talk about that and we don't want to be specific because we are part of an alliance as you know at this point of time. We need to just indicate that the other clinical trial have already commenced and next year also we'll see the spend go up for 2 products. And then, I mean the earliest launch season we see some give away..

Okay. Just also again on R&D, because I believe Prasad acted some -- I mean, after some function mentioned that people should be looking at potentially spending double-digit in R&D, so I just wanted to draw, I mean, is that something that should we expect for Dr.

Reddy's in the coming years that the R&D continues to go up as, I mean, you start with more clinicals, et cetera?.

Yes, in the context [ph], what we indicate was even if you see this year, right, we started off in the beginning of the year saying it will be 8% to 9% of sales. And then now we are saying that, it's around 9%, flat in terms of in other sales.

So if you do a 15% under the growth plans and all, that's so -- if I think, Prasad indicated in JP Morgan Conference, you could expect to touch double-digit. Again, this is a reflection of our commitment to increase the R&D spend based on these 3 factors that we're talking about, right, in terms of [indiscernible] it is coming from.

The complex generics [indiscernible] in terms of the portfolio plus the clinical trials which we somewhat affect, that's one substantial increase. There's quite similar spend, I just mentioned that we commenced clinical trials on 1 of the products. The second one also is on the way. And then you have the full year with substantial increase.

And then you have the full and proprietary cost, as which -- we see more and more products getting clinical trials besides the existing 2, more than substantial increase, again, this is vaulted, again depends on the sales growth, right, so in terms of existing estimated spend and the sales that we anticipate, we have to indicate that it could be [indiscernible]..

I'm just, I mean, there is big increase that you guys [indiscernible] you are at 9% increase in employee cost so, I mean, which is I don't think that would have any FX effects.

Could you just elaborate on why we see such a sharp sequential increase?.

Sonal, I can definitely come back to you on that..

Okay. And just finally, I mean, in terms of giving, I mean, I -- great set of numbers and you're operating it very high at margin levels now.

But I mean, in terms of your overall portfolio in terms of geographies? I mean, other that U.S., is there any other geographies which is, I mean, which is about this company-level margin? I mean, I just -- I mean, because my sense of it, is this all completely incremental by U.S.

in that sense?.

Sonal, emerging markets in U.S. will be above company average EBITDA..

Our next question is from Ranjit Kapadia, Centrum Broking..

My question relates to peptide pipeline.

If you can throw some light on the potential of these products and the number of products in the pipeline? And my second question relates to the European business so far, global generics, what are the plans for this since it has de-grown during the quarter?.

So we told you about the azacitidine, which is we spoke about it. And other peptides which are in pipeline, we wouldn't like to comment at this juncture. We will continue to sharpen our skills in this development, which means we'll be targeting some of these products.

These products also are in complex injectable areas, not about the [indiscernible] synthesis only -- there's larger challenges in these product [indiscernible] in that injectable area.

On European generics business, I think the strategy to keep away from tenders especially single tenders with low margin continues, so we will not -- even if we don't grow, we're not going to thought of moving into the commoditized area of single tenders of especially the bigger ones.

The strategy then is also to leverage our complex generics pipeline. Once you develop a product, we will extend these to European geography. Having said that, that you will be having its own challenges. The value out of the asset is quite different from what one gets from U.S. versus Europe.

As a result, there is a short term, the important thing is to, sort of, ensure that we don't deteriorate further and we consolidate but and gradually improve. In the long term, we are looking at some specific products which are fairly complex and value accretive over the next 2 years..

And, sir, can you elaborate on the addressable market size of peptides, if you -- any number in mind?.

I'm not sure.

You are talking of the generics business, right?.

Yes..

So to block peptides as separate group is difficult. And we will be able to sort of exactly carve it out. As I said, peptides go into various types of injectables and we are able to target a few, nothing which will drastically change the immediate scenario..

Our next question is from Anant Padmanabhan of Cowen & Company..

I had a couple of questions, mostly follow-ups from your comments earlier. First, on the supplier consolidation. One of your larger competitors, Actavis, has hinted that development such as CVS Cardinal will make consolidation among generics inevitable in the longer term.

So how should we think about the generics industry longer-term, especially for mid-tier firms such as yourself?.

I don't know about Actavis's comment on this, but yes, there will be some erosion, as I said, as part of the generics business. But would that change the broad aspects of the way we operate, the way we look at business? I don't think so..

Okay, great.

And then on generic Copaxone, have you had any recent interactions with the FDA since the filing? I guess, one of the questions here is what are the FDA approval requirements? And where is the FDA with these applications? So could you just comment on any interactions you had with the FDA on the filing?.

So we filed about 2 years back. It's a complex product. The agency has to do a lot of work as well on this on how they would progress. Beyond that, on specificity of our price, I think we will not be able to comment but work in progress. But it's not going to be something which is -- just on the corner..

So internally, would you -- are you expecting Mylan or Sandoz, or maybe both to receive approval in May of this year?.

I think one of the companies have gone in public domain stating that initially I don't know if they'll change that, that they would. But having said that, again, we can't comment on behalf of others. So the work we have done is, I think, high-quality work, in fact, we'll see what happens..

Our next question is from Sameer Baisiwala of Morgan Stanley..

Just to confirm the previous speaker, you said Copaxone filing was 2 years back, right?.

Roughly..

Okay, okay. And the question is on the basic -- on the overall business model, sir. And if I look at your 9 months overall sales number, this year, $97 billion versus last year, $83 billion. And if you compare the U.S. 9 months this year and last year, $40 billion and $26 billion.

So you can see the $14 billion change which is happening is almost entirely coming from the U.S. business. So which is now 45% of the world business. So thinking 2, 3 years out, do you think your dependence on U.S.

is going to go down, go up, and how do you want to balance the overall business model?.

Because there is a neutralization that has happened because of the decline in CSA, otherwise there is a growth in emerging markets and there is some growth in India markets as well..

That's a very small number, I just want to get into that level of detail, it's about 3 billion so -- plus-or-minus but '14, overall, is coming from the U.S. business. So it looks like a fairly imbalanced model from a growth perspective and therefore the question..

So Sameer, you are right, I mean, at least for this year that's true, I mean in terms of the growth that came in from the U.S., that's what Saumen just said. U.S. has contributed full [indiscernible] the savings.

So I mean, I don't think it will drastically change in the very near term but over a period of time because, I mean, some of the kind of growth rates that you've seen, Russia even at the high base country, which it continues to enjoy, that's also some of the emerging markets, that's also India group at some point of time, right, so currently we've just seen 5% growth in India, that's not indicative of what's going to happen in the future.

It won't dramatically alter but, I think over a period of time things will balance out to [indiscernible]..

Okay, and the second question is on azacitidine. I mean, you've given us a bit of color, but in terms of pricing, you being the almost the only term in the -- well, outside generic.

Is that pricing more than similar to what one would get for 180X [ph] to [indiscernible] as an example?.

Yes, I mean, given the competitive landscape I mentioned in Dacogen retail, so it's likely to be healthy. And similarly, the results we achieved -- it's also fairly looking..

So when you say healthier, okay, I mean, is it more like a single dynamics?.

Sameer, Sameer, you know that pretty well. How can we give you exact details on pricing. I think, that's too much to expect on that. I think, the results are good -- these molecules have got full momentum. So naturally, I think it has a role to play in the U.S. margin increase in the results..

Okay. And so one final question. I think you mentioned that 2 drug candidates right now from proprietary pipeline, which are undergoing 3 clinical trials.

Is it possible to share anything more on this in terms of what categories or what kind of products are these?.

Sameer, it's bit too early. I think we want just to focus on the probability [indiscernible]..

Our next question is from Surajit Pal of Prabhudas Lilladher..

The first question which is that given that you have INR 571 million and the full year, you have around INR 1.5 billion. Even if I assume that in Q4, it's INR 550 million, so it will be similar to what you have last year of, say, similar to that number. So FY '14, you had a pretty good product like VIDAZA and azacitidine.

And in FY '15, if I just remove Copaxone, I mean, there is an uncertainty.

So overall, it will be mainly a balancing act for the company in terms of maintaining the same sales given the kind of few products available and not many blockbuster at this stage, if I don't have Copaxone overall?.

So it's a healthy number of launches, as I mentioned. It's not always fair to put figures for each of the launches, I think a better recognition, they are not huge but they do add up. So we have a -- it's going to grow, not as good as this year.

A lot depends on how the erosion of now these 2 assets and other assets, the assets which have already matured. So North America will continue to grow but we can't be as good as it..

Given that you were increasing your capacity and have put in some peptides there, I understood your peptides there but [indiscernible] does it include also some natural [indiscernible] like Cloderm into that or you were basically in synthetic and semi synthetic [indiscernible]?.

No. We are also looking at other [indiscernible] as well in the pipeline and in the process..

So in case if you have any filing on other non-synthetic [indiscernible] could it be a possibility?.

Again, details, details, these details cannot be given but as I said, there's 2 other [indiscernible] and we are targeting growth..

Okay. Just need 1 update.

Is that -- is there any development on the [indiscernible] from your side to FDA? With the filing?.

Yes. Part of it -- we're [indiscernible] sort of complex injectables could be, couldn't be. We wouldn't be able to comment on that..

May, that I understood.

But reality could be possibly in FY '16, '17 kind of?.

Surajit, we are not disclosing details of portfolio. I will please request not to press [indiscernible] on that..

That would be from Dinesh Pathak from Goldman Sachs..

Is it possible to share what percentage of our R&D are we spending on biosimilar and how much are we spending on proprietary [indiscernible]?.

So let me put it in, overall it is 60-40. 60% we spend on Global Generics and PSAI and 40% on biologics and propriety products put together out of the total R&D spend..

Okay. Split further between biosimilar and proprietary [indiscernible]..

You can say little bit higher on proprietary than biosimilar..

Thank you. That was the last question. I now hand the floor back to Mr. Kedar Upadhye for closing comments..

Good night and thank you, everybody, for joining Dr. Reddy's senior management for Q3 2014 earnings call. In case of any additional clarification, please feel free to reach with Investor Relations team. Thank you and good bye..

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..