Kedar Upadhye - Head of Global Generics Finance & Investor Relations and Senior Director Saumen Chakraborty - President, Chief Financial Officer, Global Head of Information Technology & Business Process Excellence and Member of the Management Council Abhijit Mukherjee - Chief Operating Officer and Member of the Management Council.

Balaji V. Prasad - Barclays Capital, Research Division Saion Mukherjee - Nomura Securities Co.

Ltd., Research Division Neha Manpuria - JP Morgan Chase & Co, Research Division Surajit Pal - Prabhudas Lilladher Pvt Ltd., Research Division Sonal Gupta - UBS Investment Bank, Research Division Anubhav Aggarwal - Crédit Suisse AG, Research Division Prakash Agarwal - CIMB Research Girish Bakhru - HSBC, Research Division Manoj Garg - BofA Merrill Lynch, Research Division Sameer Baisiwala - Morgan Stanley, Research Division Surya Narayan Patra - PhillipCapital (India) Pvt Ltd., Research Division Chirag Talati - Kotak Securities Ltd., Research Division Aditya Khemka - Ambit Capital Pvt.

Ltd., Research Division Ranjit Kapadia - Centrum Broking Private Limited, Research Division.

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Limited Q2 FY '15 Earning 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 the second quarter of fiscal 2015. Earlier during the day, we have released our results and the same are also posted on our website. We are conducting a live webcast of this call and a transcript shall be available on our website soon.

Just a reminder, the discussion and analysis of 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 Saumen Chakraborty, our Chief Financial Officer; and Abhijit Mukherjee, our Chief Operating Officer; along with the Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlets 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 the 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 net operating working capital increased by $36 million during this quarter. This is partly due to the windup of stock, or forthcoming launches in U.S.A. and North America generics and PSAI, and increase in receivables in line with agreed credit period. Capital expenditure for the quarter was at $32 million. Our net debt to equity ratio is at 0.10.

Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately at $610 million, largely hedged around INR 59 to INR 61 to a dollar. In addition, we have balance sheet hedges of $524 million.

We also have foreign currency cash flow hedges of RUB 840 million at a rate of INR 1.70 to a ruble maturing over next 6 months. With this, I now request Abhijit to take us through the key business highlights..

Thank you, Saumen. Greetings to everybody, and I extend a warm welcome to you on this earnings conference call. While we are reporting single-digit growth on an overall basis, the performance reflects several sustainable growth trends in our key markets, partly offset by the impact of some extremities.

Our India business performance has become relatively more predictable than the past, and in this quarter, delivered a healthy double-digit growth. Emerging markets business was able to maintain trajectory as we sustained supply to Venezuelan market which helped offset macro issues in Russia and Ukraine.

Due to the absence of major approvals during this quarter, U.S. generics recorded single-digit growth. At the same time, injectable line of business in U.S. is clocking its expected run rate. For PSAI business, while performance is flat for this quarter, we expect a relatively stronger second half.

Now let me take you through the key highlights for each of the key markets. Please note that in the section, all references to the numbers are in respected local currencies. Revenue from North America generics for the quarter was $235 million and grew by 7% year-on-year. As mentioned earlier, we did not receive any new approval during the quarter.

However, going forward, we expect the number of launches for which we -- our supply chain a very good [indiscernible]. As you would have read, we launched sirolimus in the market yesterday. Parallelly, INS data shows good progress by us on the market shares for several key molecules such as Metoprolol, divalproex, and atorvastatin.

Decline was a sequential quarter in sales is attributable to the usual price erosions in base business, full quarter impact of channel consolidation and changes in the buying pattern between Q1 and Q2.

India formulation business has posted its all-time highest revenues of INR 480 crores and grew 14% year-on-year on the base of higher pre-MPTD [ph] prices of previous year. This growth is largely volume-led and represents improved portfolio mix and healthy share expansion, especially for major products covered under [indiscernible].

The team continues to target portfolio expansion by introducing differentiated products and addressing unmet medical needs. On the emerging markets front, Russia revenue was RUB 58 million for the quarter and remained flat in local currency terms on y-o-y basis on a high base of last year.

Current geopolitical situation in Russia and Ukraine has started to impact the healthcare system. In this background, we continue to outperform the market in volume and value terms. As per IMS, YTD August 2014 of Russia, it grew by 13.3% versus 12% of market growth in constant currency. In volume terms, our growth was 4% versus market decline of 1.4%.

OTC continues to be an important lever for Russian business, as IMS YTD August 2014, we grew by 20% versus 12% market growth in constant currency. From the other emerging market geographies, Venezuela continues to deliver superior growth both on volumes and price realizations.

It is turning out to be a high potential market for us, providing substantial upsides, while the possible currency devaluation is always a strong headwind. PSAI sales performance is flat year-on-year. However, the product mix has improved, which is reflected in improved gross margins.

A number of initiatives have been taken to achieve the twin objectives of sales growth and healthy margins. The filings have picked up for API business, orders for the custom services business are also seeing an uptick. With this improving trend, I feel business is poised to deliver a relatively stronger second half performance.

You'd have noticed the increase in R&D spend that we are reporting for the last 2 quarters. It is a conscious decision and signifies our efforts to strengthen the portfolio across complex generics, Proprietary Products and biosimilar businesses.

We'll continue the journey of building a rich and differentiated generic pipeline through the globalized R&D platform. During the first half, we filed 11 ANDAs in U.S. Most of these are high-quality filings and are characterized by technical complexity, which helps us target limited completion opportunity at the time of launch.

We have also been able to diversify our filings across dosage forms and enhance the estimated potential value for our filing. Parallelly, for the Proprietary Products business, several assets are in the late stage registration trial. The portfolio of assets both in dermatology and neurology is quite robust.

In dermatology, our assets are targeting the indications of steroid-response kits, dermatoses, acne, rosacea and actinic keratosis. While in neurology, it is primarily migraine. We are targeting our first NDA filing by the end of this fiscal year.

In the biosimilars portfolio, we have spoken about IND filings of filgrastim and peg- [indiscernible]earlier. The Phase I global trials for both these molecules are on track. With this, I now open the call for question and answers..

[Operator Instructions] We have first question from the line of Balaji Prasad from Barclays..

Firstly, on the U.S. congressional litigation.

Have you responded to the question on price hikes? And if so, what is the gist of your responses?.

Yes, we have responded. And, basically, out of these 2 products, atorvastatin is what we are not marketing and the other one on divalproex, we didn't take any price increase during the period referred to in their queries..

Understood, Saumen. Do you drive or re-share the price increases in any of the -- in either of these products? Or were you....

I clarified in these 2 products, are you asking other than this?.

In these 2 products?.

No..

No. Okay.

And so what will be next steps be that we need to -- we ought to look out for?.

So we have responded to the query. Now if there is any further query again, we will look at that..

Understood. Secondly on Russia. Can you also explain to us the nature of your distribution arrangements.

And also what percentage of your Russian sales in local currency?.

Yes. Russian sales are in local currency only..

100%?.

Yes. Arrangements mean, Russia, a number of distributors are -- mainly it is quite consolidated kind of thing, 10 to 20 kind of number of distributors..

Understood. I remember, you also used to have portion of the sales being booked in U.S. dollars couple of years ago.

That's not the case anymore?.

That's not the case, Balaji. Now we have subsidiary from which we sell entire sales i in the Russian rubles only..

Lastly on -- quick question on the NDA, pardon, then I'll jump the queue. So you said you expect to file the first NDA in Q1. So I presume this is the intranasal symmetric term [ph] that you have spoken about.

What stage of the trial this is in and the response that you're seeing and how confident are you?.

So we're not specifically talking of that yet. But yes, before the end of the financial year, the first filing will go through. So naturally, the product is in late Phase III..

Sure.

And the expected time line of approval would be on 12 months from your date of filing?.

Normally, that's the NDA -- the way NDAs are approved..

We have next question from the line of Saion Mukherjee from Nomura..

One question on the RoW market, can you share the key markets, including Venezuela, how big that market is for you? And secondly, the dynamics in that market, in terms of your market share, how many products you're selling? And how should we think about sustainability of the business going forward?.

Sure. From the time the social unrest broke out in Venezuela, the market has been volatile and there are lot of players who have not been able to keep up the supplies in the market. Our traction in terms of prescription and our credibility with the doctors were already high, and then this opportunity came up, and we seized it well.

We were -- we had taken decision to stock up the market in advance. And the current run rate is very, very healthy. A large part of the RoW growth, which you see, the major difference has come from Venezuelan market. So it's a very significant market right now for us. The biggest headwind, which could come in is devaluation.

And given that oil basket is weak currently, and considering it is extremely oil-dependent country, so this could happen. But so far, so good. We're gaining ranks rapidly, and it's an important market..

Okay. And the second question regarding the U.S. market, you've seen a sequential decline.

The impact of additional competition in Decitabine, do you think is fully in the numbers now in the second quarter?.

The competition, as you know, being in sometime in the second quarter. So it's not fully factored in. But having said that, I think, overall, I think we're doing okay. There were still some amount of innovative share which was left in the generic market, as you may recall. So not fully factored in, but we are not very far either..

Okay. And how do you see the second half in terms of new launches when compared to the first half..

So I think we are more optimistic about the second half. Some are in public domain now with deal on launch by Ranbaxy and we have got tentative. Rapamune, we just launched, basically, we are the first to launch, because the SKU which was launched earlier was only 5% of the market value.

But surely enough, you'd see both our generic has just come in as well, and we might see one more maybe. So the rest, I wouldn't be able to comment on, but we are cautiously optimistic. The slowness in approval from FDA, I gather, it's for other people as well. So if that picks up, then it will be better..

Your next question from the line of Neha Manpuria of JPMorgan..

First, on the PSAI margin that we saw in the quarter, you did mention improvement in product mix.

Is this a one quarter sort of unit improvement because of probably more development revenue coming into the quarter, and should probably taper off? Or with the improvement in revenue, you could see these margins improve further?.

We are doing some structural changes in terms of improving the gross margins essentially through reducing the lay [ph] low margin products, looking at costs, and as well as focusing on some -- so there are some structure -- to answer the question, there are some structural changes being attempted in the right direction.

We're also looking at extending the definition of the business to deals, to which -- and compares to what we call API plus, which means, this is mostly for the emerging markets where we can sort of look at the revenues as well for the complex APIs, which may not be very value accretive as pure API business. So which is beginning to happen.

So all in all, I think we are moving in a direction with a design..

Okay.

So it would be fair to say that margins could improve from these levels, even if some of these one-off revenues which have been this quarter go off? So basically, I want to highlight, there is a sustainable margin improvement?.

So that's the intent. Any structural change may see a little bit of movement either way, but that's the intent. It's going in a direction with design..

Fair enough. Sir, second question on the U.S. business. You mentioned one channel consolidation as one of the factors which impacted the quarter-on-quarter decline and the change in buying pattern.

First, what was a rough estimate and impact from channel consolidation in terms of pricing erosion? And what was this change in buying pattern that you saw from first quarter to second quarter? So could you provide some light on that please?.

So without giving you exact figures, I think this has been one of the doable [ph] years of price erosion as the channel consolidation has been heavy in U.S. The impact largely has gone through now. It's not much left of, almost it's done, but it has been quite heavy.

Partly, we have been able to sort of counter a part of it through some market share increase which is the product -- which is available in public domain, but it's been quite heavy. Launches have been weak, so that has -- that's the other factor which has added to Q2 performance..

We have next question from the line of Surajit Pal from Prabhudas Lilladher..

If you can throw some more light on the filing you have done 11 ANDAs, as well as the portfolio you were developing in terms of injectables in that particular area other than what you have said already?.

So the quality of the pipeline is changing, we messaged it earlier as well. A few years back we are primarily an oral solids company. To just to give you a broad feel of it, I think currently, what's pending approval is already at 40% non-oral solids.

What's being filed this year is 50% non-oral solids, largely injectables, topicals, patches and soft gels. And what's in development is going to go up to about -- almost 60% non-oral solids.

So that's how it's moving, which has its flip side as well of higher R&D costs, because it's certainly the amount of partnering is going up in which we, of course, this partnering is not just off-the-shelf buy. We do a certain part of it with a partner, some of it we put in ourselves and so on so forth. But we fund it.

So as a result, that's sort of pushing up the R&D costs. And also the products, are needing inpatient trials more and more, and some of them are also needing some efficacy clinics as well as mandated by FDA. So that's pushing up the R&D costs..

Okay. So it looks like you were going to be pretty big in derma space, particularly in older dermal products where competition is very less and price rise opportunity has opened a pretty big area for you..

We are looking at -- yes, we are looking at topicals, but it's still -- and we started filing as well, good product. But we are not looking at only price rise products. We are looking at clinic-based products where upfront investment is a little high and the entry barriers are a little higher..

Okay. Second question is that, the kind of around 40 million deficit in terms of sequential companies in your off-U.S. [ph] revenue.

I mean without taking any particular number, do you believe that the major part has been attributing to Dacogen?.

Surajit, we won't be able to go product by product. I think to an earlier question we answered that it is largely because of the erosion in base portfolio and customer consolidation. We won't go product by product..

Okay.

So in this year, any kind of major product till March or till this FY '15 launch in U.S.?.

Can you come again?.

He is saying the new launches in the next half? [indiscernible].

Yes, public domain is only [indiscernible}, with the FDA, and there is a fixed date. The rest are not in public domain..

We have next question from the line of Sonal Gupta from UBS Securities..

One, I guess, just in terms of, again, coming back to the R&D spend and while the step up is in line with your expectations, where it's still around 11.5%.

I mean, how do you see this sort of developing going forward? Currently, you have 2 proprietary products in the clinics, a couple of, I think, Phase I trials for biosimilar, correct me if I'm wrong.

So how does that sort of really change? So next year, how many do you intend to have in the clinic? And if you could sort of give a sense of -- I mean what sort of step up do you see further in terms of percentage terms in R&D from current levels, say in the next 12 to 18 months?.

This particular quarter, it has become 11.5% because we had a muted growth in the top line. Otherwise, we expect R&D to be between 10% to 11%. And going forward, we don't really anticipate any big change from this number..

So what I'm trying to ask is that currently, like you have 2 in the clinics and proprietary products is something that you're quite bullish on.

So next year, do you intend to have like 4 in the clinics and that pushes this up much further? How does this work? Or do you think that the run rate on proprietary products in terms of clinical spend will remain at similar levels?.

We have factored in all our existing plans, and that's highly [indiscernible] our R&D. So as you have seen, it has gone up from a range of 6% to 7% of sales to 10% to 11% and within a span of 1 year. So that's why we have factored in all these things which were to happen in proprietary products, biosimilars.

But having said that, as we said earlier, that our ratio of R&D spend across say Global Generics API to biosimilars and proprietary products remains at 60 to 40. So that means the increase in R&D spend, Global Generics and API is also that much higher as the increase in other..

Okay. And I know you're quite excited about these propriety products, but I mean, could you give us some visibility in terms of I mean when -- what sort of clinical end points do you need to achieve? And what sort of, I mean probability do you see to these, I mean, typical probability as a rule of thumb.

Because, and given that the payer environment in the U.S.

has got much tougher, I mean, really, I mean, what sort of realistic targets are you expecting out of this? I mean what gives you a lot of confidence on some of these sort of 505(b)(2) sort of products that it will sort of work out that way?.

You will have to wait for the R&D day that we are going to have so that we can put all these questions to our Head of Proprietary Products and he can field these questions..

Okay. And just so -- last question is, I mean anything in terms of x of Copaxone for next year. How do you think about your U.S.

business growth? I mean it's -- and do you know Copaxone, given the -- depending on how the regulator looks at it? I mean, do you think you will be able to still grow next year x of Copaxone on the current base?.

We think so. Irrespective of the uncertainties of Copaxone, as you rightly mentioned, your guess is as good as mine. While it's -- I think there is no bad news as yet. But other than that, also I think we have reasonably robust year next year..

So you do expect some other complex launches to come through next year?.

That's what I'm saying..

We have next question from the line of Anubhav Aggarwal from Crédit Suisse..

Some clarity on few products in the U.S. market. You won litigation on Propofol.

When can we expect to get approval from FDA on this product? In the sense is it within 1 year or it could even take longer?.

Did we expect approval slowdown from FDA? I think most companies are looking at it. So it's difficult to -- so the short answer is, firstly, the litigation is not through fully, and so I will not be able to answer this question..

Okay, okay, but -- okay. So just another product, sirolimus, you mentioned that you expect one more player to.

Is that Actavis who had exclusivity on this trend? They have the exclusivity forfeited? Or what's the status of them? Or is that second player expected to be Actavis?.

So as per FDA rules, as you know, unless the FDA has forfeited, the other players cannot come in. So probably that answers your question..

Okay.

And do you expect this scenario of 1 or 2 players to sustain for almost a good amount of time, let's say about a year or could be little [ph] competition could be for much shorter duration?.

That's again a difficult question. I wish I knew, but this is -- we do not claim any product really. So your guess is as good as mine..

Abhijit, just one more clarity on Nexium settlement that you've done with their channel. Actually I'm very confused on that case, because first, only few players, let's say, Dr. Reddy's, Teva and Ranbaxy from several participants were sued in that case.

And by settling with the channel, you certainly get benefit that you are absolved of all the potential liabilities. But what's the flip side? What do you lose out by settling with the channel, because this option was always there. You could have settled much earlier as well if there was no flip side..

No, no. Settlement happens only when both sides agree on a settlement. But the point is that I think throughout, we were very confident of our legal position, and we are glad that it's validated through this settlement with no financial impact to us. So the flip side you're talking about, there is no flip side.

There's no financial impact to us, it's settled. That's because largely, where our legal position was strong and we also maintained that, actually.

So does that answer your question?.

So your opportunity from Nexium front, whatever it was before settlement that remains as it is even post the settlement is done?.

These are 2 different things. Completely different things. This is completely different legal case to the opportunity. I wouldn't comment on opportunity, but at least I can tell you that they are 2 completely different things..

And just last one product update is fondaparinux in Europe.

What's the status? The last update you gave was that you were expecting by the end of this fiscal, you would have some update on fondaparinux in Europe application?.

So our first filing ran into some different views from European agency. And we are just sort of in the process of filing again. And but you know, it's a very, very competitive market in the sense that pricing is extremely competitive. So there is -- it's a high top line, relatively low -- we won't calculate that, actually.

So it's not a very highly impactful, and so as the whole company's bottom line is concerned..

We have next question from the line of Prakash Agarwal from CIMB..

First question relates to our understanding on the GDUFA transition by USFDA. Now we have clearly seen by yourself and other industry players where the approvals have slowed down. Now we stepped into the next quarter, which is October to December.

Have we started receiving CRLs, and hence, we have better visibilty of approvals in the second half?.

We just got one approval that we already told you, but probably your information is better than ours because you talk to everyone. Too early. We just stepped into the next quarter. Difficult to say. We stay optimistic..

But any read to on the GDUFA transition both in terms of filing and approval guidance?.

FDA is not providing a lot of guidances, so normally, it's not that fixed. So the answer is that whether there is a distinct improvement, which is foreseeable, the answer is no. But at the same time, it's very early for next quarter. Let's see. I mean, somewhere, this has to move up or step up in terms of speed..

Perfect. And the second question relates to our portfolio, one in biosimilars and second in proprietary.

First on biosimilar, I mean, apart from the MAbs and the GCSF, are we targeting other segments in biosimilar space?.

Well, no, I think there are only a few assets in the Merck deal. But in the pipeline, yes, that continues. The larger cost implications are from the products, which are more or less known and in public domain. There's many of them we have launched in India.

So the current expenses are on those products, but the early development and the other MAbs, et cetera, that's in progress actually..

We would be looking at the other pieces of the portfolio in biosimilars..

In due course of time..

Okay. And second, on the proprietary, sir. What is the portfolio that we are looking at? Earlier you had mentioned that 15 products with a peak sales potential of $30 million to $300 million.

So has there been any progress there?.

So Prakash, as Saumen mentioned earlier, probably, we'll defer this discussion to our R&D Day..

Okay. Is the date certain currently or....

No, we are yet to finalize. We'll communicate at appropriate time once final..

Perfect.

And lastly on the Copaxone, what's our current understanding in terms of the first to file getting approval and our monetization?.

Not much changed from the last communication, which we had. The rest of it, you're reading in public domain, a lot of things are happening. The questions raised, queries in court by the innovator, the view, et cetera. So those, you see in the public domain but not really -- not much from our side. The file keeps moving..

We have next question from the line of Girish Bakhru from HSBC..

On U.S. again, just trying to get a sense of how the second half could be.

So with sirolimus, say, giving a good traction, would you say combination of certain recent approvals like XOPENEX, sirolimus second half would be definitely better than what first half has been at $500 million?.

So the 2 caveats I would like to put there, one is we don't know about the large injectable assets, whether there is any further approval coming in, so that's one. The second thing is the base level, if you're talking of comparison, last year Q3, these injectable assets were in full flow versus what it is right now.

But having said that, yes, I think some approvals would come in the second half, so we expect better than Q2 for sure, for sure..

H2 better than H1..

Well, I would defer that. I mean, overall, I think Q1 was pretty good, but let's see. I mean, you see with 50% of the generics business coming from North America, and that's about 80% of the company, some of the questions, which I know as little as you know, can change things..

Right.

But just on the market, why is this -- the XOPENEX, is it a material market you think that there are only 4 approvals and probably less would come in time? How interesting will it pan out?.

Which one is the....

Levalbuterol..

Levalbuterol?.

Yes..

No, which one?.

Levalbuterol, yes..

Levalbuterol is the 2 AGs, 3 generic players and we're the sixth 1, a small launch for us, partnered, nothing of significance..

Okay, okay, okay. Just, again, a clarity on one product in U.S. How do you see Gleevec? I know the case is pretty fresh for you guys, and with Sun settling for Feb.

'16, does it give you a window to launch in August? Or it could be further delayed?.

In discussion at the moment and litigation..

So you would say that your litigation outcome will essentially decide your launch, right?.

Yes, unless we are able to sort of converge..

Right, I mean, unless you settle, then probably....

Yes, yes, that's right. That's right..

Okay. And just lastly on Habitrol, actually, I did not really get what is the current view of the product.

And I mean, just judging by the overall market, where I see nicotine replacement market actually has been declining steadily and with all this new e-cigarettes and all things that are catching up, how interesting do you see this asset?.

So yes, you can put a factor of 0.45 [ph] to IMS, so which brings it in the range of $60 million odd top line. But there is potential because e-cigarettes have run into some controversies as well. These products have been moved from behind the counter to in front of the counter.

Having said that, this is a store -- a combination of store brand and up to a lesser extent, a full-fledged brand. So we'll see. We already have an OTC business. We have connectivity with the OTC players, OTC channels, and we'll see where it goes..

We have next question from the line of Manoj Garg from BofA Merrill Lynch..

Just continuing with the previous question.

Do we expect similar kind of deals more in the pipeline going forward? And just want to understand the overall thought process behind this deal with Novartis?.

So this was -- as you know GSK Consumer care and Novartis Consumer care merged, and FTC mandates divestiture of some assets, so this came up. As you know, that primary asset is NicoDerm. And so this came up. And we were one of the bidders, and we went through. Having said that, it is still to be cleared through the FTC process.

So while we are going ahead and we have closed the deal, but the process with FTC is yet to be completed. To that extent, it is not 100% complete..

And do we expect some more deals, similar kind of deals in the other segment going forward?.

Yes, like any other company, we are on the lookout opportunistically, but unless it falls in our areas of focus, we would be choosy. But a lot happening in the emerging markets as well and various types of assets, et cetera..

And are you sharing the financial details, like in much -- how much we are paying for these assets and all?.

Not at this stage, Manoj..

Okay, okay. And the last question from my side, Abhijit, like in the past, we kept on saying that incrementally we are filing 10 to 15 products because our focus is basically more on the quality pipeline.

But in the last 2, 3 quarters, we have started seeing the ramping up -- ramp-up in the filing itself, and even in the first half, you filed around 11 ANDAs.

So do we -- we expect now going forward probably we will have this filing run rate of around 20, 25 products annually?.

Actually, what we earlier said about 10 to 15 was in launch. So of course, your annual filing, you have to be higher. Then, you have to get the approval and then launch..

Yes. We're better than last year. I mean, last year, we -- U.S., we filed 12. This is certainly much better than last year but not 25 or something as you're saying but somewhere in between, let's say, 18 or so..

The last question if I can ask, just want to understand, like the long-term aspirations in terms of about margin guidance, like from the current level of 23%, 24%, where do we see the margin over the next 2 or 3 years?.

So we expect to be at approximately 25%..

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

Just, Abhijit, checking on the Nexium settlement with the channel.

If you had a strong case, you would have won the court case, no? I mean, why did you have to settle with the channel and then cooperate with them, which I understand would be against the AstraZeneca, Ranbaxy and Teva?.

No, no. So let me -- so basically, we have -- given our depositions, we stand by our depositions, and we will repeat our depositions. So basically, this is our view, our facts, which we have with us and so on and so forth. So in terms of the -- your question was if you have a strong case, why not keep fighting. The U.S.

legal costs, I mean, are pretty high, okay? And if you have an opportunity to sort of come out with no financial impact, and we don't ever do a lot. It's a question of -- so we have chosen to come out..

Abhijit, just on this point, would your settlement be any different from that of, say, Teva both were supposed to be 181 days if I remember correctly? And would this then, in that case, be too different from Ranbaxy? It could all be addressing the same patents before and after, which you are coming? So would the 3 companies more or less not be in same the boat, at least you and Teva?.

So firstly, I wouldn't have the details of what Teva has or anyone else has. And you would know better than me that I'm not able to share anything about our settlements..

Okay, that's fine. And the second question, I'm not quite sure to what extent this can address, but it looks like the proprietary pipeline is not too far away, maybe getting approved in 2016 sometime.

So how are you thinking about the marketing and sales front end for this?.

So we are there in U.S., as you know, Sameer, are already with a front-end sales force. So that is....

Most especially for neurology and derms..

Yes. So neurology and derm. And that is not -- See, these assets, as we have said in the past, are not NCEs. These are unmet needs designed around properly and then taking them through to a logic and a full-fledged clinic. These are not 505(b)(2)s as well.

So I think the front end is not a very large concern for us because, I think, the company is familiar with creating value. Important thing is how does the filing and approvals go through..

Just to understand this clearly, but you would be required to -- these would be brands and you'll be required to market it to the doctors..

Yes, of course. Yes, of course..

Okay, okay. Okay, that's fine. And just one final question on Habitrol.

Is it a mature product the way to think about it and a steady cash flow? Or are there ways to unlock value in this?.

So that -- the first is right. But this is only the patch, and as you know, there are other smoking cessation products in the market, and we don't have that portfolio. Although there are ways to sort of in-license some of the other things like lozenges and a few other things. So the portfolio can be also completed.

But the larger part is the patch, and it's not going to give a large value to us, but there is some growth there, and there's some growth in the channel, increase in presence in the channel a little bit more..

Next question is from the line of Surya Patra from PhillipCapital (India) Limited..

In fact, all my questions has been already answered. Just a clarification. See, in -- for the Russia business, in fourth quarter, we have seen a constant currency growth of around 18%, and second quarter, we are seeing flattish number.

So what kind of growth visibilty one should have for that region?.

Surya, we have been, over the years, demonstrating healthy double-digit growth for Russia. We'll not give you specific number guidance for the market..

Yes, but qualitatively, can you give some sense why because we are seeing multiple concerns around that market? So can you give some qualitative sense about it, whether we can maintain the growth momentum there, as well the geopolitical issues continuing and all that?.

So growth momentum would be there, but we are more concerned about the currency movement, actually. And of course, the sanctions are -- will have an impact on out-of-pocket purchasing and all that. So that's a little bit unknown, but otherwise, operation wise, we feel very, very confident to sort of move ahead of the rest..

Okay. And is it possible to share the size of the OTC business in U.S.

and the kind of performance that the [indiscernible] are doing? Or what is the kind of growth that they have reported in the first half?.

So annualized OTC business in U.S., Surya, is around $120 million, $130 million at the current scale..

Okay. And finally, is it again possible for you to say that what are the kind of budget that you have earmarked for your clinical trial for this biosimilar assets in U.S.

market?.

So what I already said is the ratio, which is in the Global Generics, API, kind of R&D, vis-a-vis, propriety products and biosimilars. Between propriety product, biosimilars maybe, at the moment, proprietary products is, I think, a little bit higher than total biosimilars. The detailed partner breakup, we'll not be able to divulge, no..

We have next question from the line of Chirag Talati from Kotak Securities..

First question relates to the migraine products. We've seen that the FDA has come out with the possibility of the guidance being revised for the triptans product category as a whole.

Do you think that can have an impact on your filing time lines or on your endpoints? Or will you be required to do additional trials?.

So I think, specifically, we are not saying anything about any effect. We are seeing one NDA filing being targeted before end of the fiscal. Specific guidances and questions, someone mentioned that there'll soon be an opportunity, I think, sometime earlier part of next year for the R&D Day to ask these questions directly.

But overall, I think the journey is progressing at least on track at the moment..

Secondly, my question is -- I mean, how did you go about selecting the therapies for proprietary products? I mean, why neurology? It's not been one of the core strengths for Dr. Reddy's. It's a market that's highly competitive. You're competing against Zolmitriptan, an established brand, with no field force, no additional products.

So I mean, what was the rationale behind going into some of these proprietary products or therapy areas per se?.

So basic thing was to look at where there is a need, which is currently not met properly or sufficiently, where there is enough opportunity. And based on that, we have chosen specific -- I think there's very limited number of specific areas that we are focused, and within that, we specifically picked up the product where we can focus on.

But more questions on that, again, I would like you to just wait for some more time, and you will get an opportunity on the R&D Day..

I guess my -- the point I'm coming to is I'm just wanting to -- I want to understand the capital allocation policy that goes behind some of these decisions because, to me, it seems that you seem to be diluting your focus by going into many therapy areas with limited number of assets.

So what I'm trying to understand is could you have done better by filing fewer more of these complex generics instead of going into a neurology area..

So the capital allocation decision that we are taking, that will be across the BU. And within the BU, definitely, we are not serving our complex generics submissions at all from the point of view of being able to allocate capital. Now if we were at trading off, then your questions could have been more valid. We are not doing that..

Chirag, just to sort of -- listen, the journey didn't start 6 months back. This journey is for quite a few years. We have invested into this for several years. So why should one pull the plug of having come so near? And we are quite focused, 2 therapies, not a very large doctor base in both these therapies.

We have unmet needs in these identified, so why not?.

[Operator instructions] We have next question from the line of Aditya Khemka from of Ambit Capital..

So firstly, sir, on the PSAI segment. So we saw on the first Q, your SEC filing disclosure that maintained that among the top 10 products you had Capecitabine in there as a big product, which was contributing more, and there appears to be some rationalization on the lower-margin products of citalopram and Naproxen.

So just to understand the second quarter result for PSAI better, is it still this one large product, which is sort of contributing materially to be sequential growth between 1Q and 2Q '15?.

There is -- as I mentioned, there is conscious structural change also contributing. Any business will have some large products, some smaller products, but we're all -- I think, directionally, we are moving in a specific direction with the design.

More than that, I don't want to sort of go deeper into it, but we will move with the -- an acceptable gross margin. And things were much slower earlier, so we'll unlikely to see the slow margin..

Sir, I appreciate that, but my concern is that in first quarter of FY '15, almost 20% of your PSAI revenues came from 1 product, right? And if this is your new product, which has grown like sequentially from 1Q to 2Q and it might be currently contributing anywhere between 27%, 30% and this is a product which is under exclusivity in the U.S.

market, so once this market goes off exclusivity, it faces competition and price erosion.

Is it that we are coming back to the sort of sluggish margins that we have seen in the past in the PSAI segment?.

Okay. Maybe we can just give a one-line clarification that you can expect H2 performance to be better than H1 in PSAI, and with that, we'll leave it there..

Okay. And, sir, my second question is on the U.S. generics, the North American generics business. So we have seen a $35-odd million sort of decline sequentially, and as you mentioned, most of this impact seems to be that of channel consolidation, price erosion.

If I just take it on a percentage basis, then you are talking about roughly more than a 6%, 7% sort of a price erosion sequentially between 1Q and 2Q.

Is my assessment correct?.

There are also the factor of absence of new product launch, with [indiscernible]. And we'll have new products where we have also improved market share..

So that's right, sir. So....

[indiscernible].

yes, certainly sequentially....

So what is going for us because what Abhijit already clarified, the impact of customer consolidation is almost over..

Sir, I understand that. But just to reiterate my question there, so our revenues are down 13% sequentially in the United States or in the North American generic market. And that -- out of that 13%, if majority is driven by price erosion in the base business, then I'm assuming at least 7% is price erosion.

So my question precisely is that is this 7% totally entire base business price erosion a correct assessment..

Yes, it's probably more than 7% actually. So what else could be where one could lose base business? Yes, there are some launches of products. That, again, mainly -- basically leads to price erosion because you'll defend your -- decisions [ph] you take between channel consolidation and new launches.

Probably, the impact of channel consolidation will be about 70%..

That's helpful. And sir, one last question if I can squeeze it in. So I mean, I saw the presentation, and we saw some market shares being maintained between -- in the United States, again, between May and August of this year, and there is significant price erosion, obviously, in many of those products as we just discussed.

So it is about hanging onto market share despite price erosion in the generic segment, but in the PSAI segment, we appear to be going in the opposite direction earlier where they are letting go of market share for better margins.

So I mean, is this slightly like -- is there a difference in the dynamics of the 2 business that leads us to believe that it's better to hold onto the generic business despite high price erosion, and in PSAI, it is better to let go of a low-margin business and sort of look at higher-margin products?.

These decisions are dynamic and dependent on what status the business is in. It is not that we continue to sort of lose market share and give up share in PSAI. It is not also true that we are -- we continue to hold on and let things erode. The businesses are very dynamic.

And these are -- for PSAI especially is a bit of a correction, which is being done. As far as generics business is concerned, again, it's very, very case specific. It doesn't have to be that every time. You don't have to hold onto market share, but that's certainly not the way to operate in North American market..

And then I will put it that the market share expansion has actually offset some of the price erosion..

We have last question from the line of Ranjit Kapadia from Centrum Broking..

Well, my question relates to the European market. You have seen a negative growth rate for the Global Generics -- in both PSAI and Global Generics business. And I just wanted to know what is the management thought process for the turnaround of this business -- both businesses in Europe..

So for PSAI, the Europe business is defined as where we sell but not where it goes eventually. So there, depending on the customers and all that, there could be -- there are some changes. Although the large part of it is, also, you're right in -- it was a downturn of new generics business, so the customers are becoming more and more defensive.

On the pure generics side, probably after a long time, Q-o-Q, we are flat. So -- and we have been always been saying that we are trying to sort of look at the product mix. And so with this flatness and new products coming in, we hope that, at least on the bottom line, it's going to get better certainly in the second half.

Having said that, as you know, it's at, what, probably 5% of the total business, generics Europe business..

No, 4% business..

4%, yes, because it's a small business, so I don't know how much more detail you would like to have on that..

Both the businesses are 4%. That is PSAI as well as the Global Generics business, but that makes 8% in the European market. And if it is de-growing by almost 29%, it's a matter of concern..

So it cannot continue to do so. There are -- that's -- it has happened, so going ahead, we'll have to sort of see where it goes from here..

Ladies and gentlemen, due to time constraint, that was the last question. I would now like to hand off the floor back to Mr. Kedar Upadhye for his closing remarks. Over to you, sir..

Thank you, all, for joining Dr. Reddy's senior management for the quarter 2 fiscal '15 earnings call. In case of additional clarifications, please get in touch with the Investor Relations team. Thank you, and good day..

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