Kedar Upadhye - Investor Relations Saumen Chakraborty - President, Chief Financial Officer, Global Head, HR and IT & BPE Abhijit Mukherjee - Chief Operating Officer.

Manoj Garg - Healthco Anubhav Aggarwal - Credit Suisse Girish Bakhru - HSBC Securities & Capital Markets (India) Pvt. Ltd. Prakash Agarwal - Axis Capital Manoj Garg - Bank of America Merrill Lynch Neha Manpuria - JPMorgan Surya Patra - PhillipCapital Saion Mukherjee - Nomura Securities Co., Ltd.

Abhishek Sharma - IIFL Chirag Dagli - HDFC Mutual Fund Surajit Pal - Prabhudas Lilladher.

Ladies and gentlemen, good day and welcome to Dr. Reddy’s Laboratories Limited Q4 FY 2016 and Fiscal 2016 Earnings Conference Call.

As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you..

A very good morning and good evening to all of you. Thank you for joining us today for Dr. Reddy’s earnings call for the fourth quarter of fiscal 2016. 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 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 Saumen Chakraborty, our Chief Financial Officer; Abhijit Mukherjee, our Chief Operating Officer; Dushyanth Kurdip [ph] Head of Corporate Development and Sales and Marketing of Proprietary Products business; and Investor Relations team. Please note that today’s call is copyrighted material of Dr.

Reddy’s and cannot be rebroadcasted or attributed in press or media outlets, without the company’s expressed written consent. Before we proceed with the call, I would like to remind everyone about the Safe Harbor.

This discussion will contain certain forward-looking statements which are based on management’s current beliefs and expectations, and involve a number of known and unknown risks and uncertainties that could cause our future results, performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements.

For more detailed information on the risks and uncertainties associated with the company’s business activities, please see the company’s Form 20-F for the fiscal year ended March 31, 2015 and Form 6-K for the quarters ended June 30, 2015, September 30, 2015, and December 31, 2015 and our other filings with the U.S. SEC.

Now, I would like to turn the call over to Saumen Chakraborty, our CFO..

Thank you, Kedar. Greetings to everyone. Let me begin with a key financial highlights. For this section, all the amounts are translated to U.S. dollar at the convenience translation rate of Rs. 66.25, which is the rate as of March 31, 2016. Consolidated revenues for the year are at Rs. 15,471 crores, or $2.34 billion and grew by 4%.

Consolidated revenues for the quarter are Rs. 3,756 crores, or $567 million, and declined by 3% year-on-year. Revenues from our Global Generics segment are $465 million. As we had expected and in line with what we had discussed in our last call, this quarter witnessed a series of headwinds.

This includes sequential decline in the ruble, moderation in the injectable offtake post higher third quarter, and continued constrained operations in Venezuela. The North American Generic business continued to be strong and Domestic Formulations business sustained. Revenues from our PSAI segment were $87 million and declined year-on-year by 22%.

This reflects in part the impact of delay in dispatches on account of the ongoing quality improvement activities related to the USFDA observation. Consolidated gross profit margin for the quarter is 56.6%, recording an increase of 180 bps over that of the previous year. This is majorly contributed by relatively favorable business mix.

Gross margins for Global Generics and PSAI were at 63.2% and 20.6%, respectively. SG&A spend, including amortization for the quarter is $176 million, an increase by 15% year-on-year. As guided in our previous call, this increase is primarily on account of the ongoing quality improvement activities.

Also, during the quarter, there was sizable outlay towards launch related activities by our Proprietary Products business. This is for the launch of Zembrace, which has been already launched in April, and targeted launch of Sernivo in the coming week.

Normalized for these charges, the increase in SG&A relates to manpower and other spends and is marginal. R&D expenses for the quarter are at $74 million, representing 13% to revenues versus 13.3% in the corresponding quarter of the previous year. This spend is largely in line with the ongoing state of developmental activities.

As you are all aware, the Venezuelan government recently announced a long pending devaluation of the bolivar. As per the announcement, the erstwhile official rate of VEF6.3 to U.S. dollar is now devalued to VEF10 per $1. Over the year, we have not received approval to repatriate amount beyond $4 million.

While we continue to engage with the Venezuela government, however, in the interim, it is appropriate to use the DICOM rate, that is VEF272.5 per $1, instead of official preferential rate that is VEF10 per $1 for translating the monetary assets and liabilities of the Venezuelan subsidiary as at March 31, 2016.

Accordingly, the resultant impact of Q4 FY 2016 and fiscal 2016 is Rs. 431 crores and Rs. 509 crores, respectively. After considering the above adjustment, EBITDA for the quarter stands at $73 million, which is 12.8% to the revenues. Normalized for this change, the adjusted EBITDA would have been 24% for the quarter.

Tax expense for the quarter is high, primarily on account of proposed distribution of profit by our subsidiaries and exceptional translational loss provision with respect to Venezuela. Normalized for these two, the annual effective tax rate is within the range as guided earlier. Key balance sheet highlights are as follows.

Our working capital further decreased by $33 million during the quarter. Capital expenditure for the quarter was at $49 million. As of March 31, 2016 we have net cash surplus of $97 million. Our net debt to equity ratio is now at negative 0.05. During the year, we have generated Rs. 2,668 crore of free cash flows, Rs. 1,468 crore generated last year.

Foreign currency cash flow hedges for the next 12 months in the form of derivatives and loans for U.S. dollars are approximately $290 million, largely hedged around the range of Rs. 64.4 to Rs.69.3 to the $1. In addition, we have balance sheet hedges of $253 million. We also have foreign currency cash flow hedges of RUB900 million, at the rate of Rs.

0.94 to the RUB1 and €6 million, largely hedged around Rs. 75 to Rs. 82.05 to €1 maturing over next 12 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. As you would remember in the last call, we had alluded to many external challenges and this quarter has been more or less in line with those.

We’d also acknowledge the trend of fourth quarter numbers witnessing a sequential dip in the offtake for U.S. injectables portfolio, seasonal dip in Q4 across branded markets of India and Russia. Irrespective of these quarterly movements, I believe that the underlying performance across geographies was quite resilient this quarter.

Further, we continue to spend considerable amount of time and effort towards ongoing quality improvement and risk mitigation activities. Now, let me take you through some of the highlights for each of the key markets. Please note that in the section all references to numbers are in respective local currencies.

Our North America revenues are $285 million and grew by 4% year-on-year. FY 2015 revenues at $1.17 billion and grew 12%. As alluded earlier, the sequential dip is primarily on account of higher offtake of injectable products during the third quarter and margin adjustments with respect to the competition coming in valganciclovir.

Overall, we were able to sustain pricing and market shares across our key molecules. We further consolidated our market share position in metoprolol, sumatriptan autoinjector, and esomeprazole. Recently USFDA approved our ANDA and 505(b)(2) filings of palonosetron.

Overall, approvals have been an issue through the year, partly on account of ongoing FDA matters and partly as an impact of calenderization of our filings. However, we believe that the approval scenario to improve going forward mostly towards second half of the year.

On the OTC front, Habitrol is well integrated now and we have started working towards increasing the customer base and also expanding the overall franchise further. During the quarter, macroeconomic factors continued to impact most of our emerging market territories.

Despite these headwinds, in constant currency terms, Russia business grew by 12% year-on-year in Q4 and 1% for full-year 2016. Through the year, focus has been to improve the productivity, broadening the product portfolio, and entering new geographies by leveraging the current portfolio.

Recently, we received the registration for our brand of rituximab, Rituxan, in Russia. We are now working towards pricing approval and preparation for tenders in Venezuela.

As discussed earlier, the graduations are at significantly low levels and hence we chose to apply the official market exchange rate to record the translation loss that Saumen explained.

However, we will continue to actively engage with the Venezuelan government to provide affordable medicine to fulfill the need of the people of the country, subject to repatriation of funds. India business revenues are 527 crore and grew by 11% year-on-year. Portfolio acquired from UCB has been fully integrated in our supply chain.

FY 2016 revenues for India market at 2,129 crore, grew by 19%. PSAI business posted revenues of $86 million and declined 28% year-on-year. This decline is primarily attributable to delayed dispatches on account of ongoing remediation activities, however, sequentially we grew 11%. Our efforts are directed towards building a healthy order book.

On the proprietary product side, post final approval from USFDA, we’re happy to announce the launch of ZEMBRACE. Sernivo will be launched in the coming weeks. We all are really excited about this new journey. This is a critical milestone in our bid to establish a portfolio of differentiated assets in the United States.

On the ongoing quality improvement activities, we submitted our first update to FDA on January 28, followed by our second one on March 30, this year, stating our progress towards sustainable compliance. We believe most of our commitments to the agency will be over by the end of this quarter and post which we will request agency for re-inspection.

With this, I open the floor for Q&A..

Thank you very much, sir. Ladies and gentlemen, we will now begin with the question-and-answer session. [Operator Instructions] The first question is from the line of Manoj Garg from Healthco. Please proceed..

Hi, good evening, guys. Just a few from me. One, just trying to better understand your commentary around quality improvements. Can you update us on the remediation efforts at Srikakulam and the associated timelines there? Two, it sounds like you are pointing to an improvement in the pace of approvals in the second-half of the year.

So in general, is that when you are expecting some resolution there? And then three, lastly, we saw about 200 basis points of gross margin erosion year-over-year. The U.S. guys are definitely talking a lot about price erosion. So maybe if you can spend sometime and just update us as to what you are seeing in the marketplace in the U.S.

on the pricing front?.

So I’ll take it, Manoj. On the quality front, as I mentioned post warning letter in the first week of November, our first update went towards the end of January, and the second one towards the end of March.

We are planning to provide the third update towards the end of May, which – by which time very large part of the commitment we made to the agency would be completed. And soon after, we intend to seek an audience and thereafter request for re-inspection.

Beyond that, of course, you would expect that we can’t comment and it’s up to the agency when they would come and see. Broadly, as we had mentioned earlier, I think, the resources spend, the management bandwidth put in is very, very substantial, both from the manpower side and also financially.

And we feel quite good about the progress made, while of course, this is a journey. So this is on the quality. Launches, as usual, we’ll not get into numbers, but this is likely to be certainly much better than last year. Last year was a very tepid year, and we – it’s going to be brisk, a little loaded towards the second-half, starting second quarter.

So, this is not to do entirely on the – on – after the the sites to come back or something of this sort, because there are – filings are from various locations actually, and also launched through partner sites and so on and so forth. So we – these, of course, when I’m making the comment that it’s going to be a brisk year for launches.

I mean, we are taking into account the uncertainties related to regulatory aspect, litigation aspect, but of course, based on reasonably – reasonable assumptions, we are cautiously optimistic on the launches. Third, in price erosion and I think rather simplistically I mentioned that we have managed to contain erosion.

But to give you a little more flavor on that, I think, of course, there’s the value erosion.

But what has happened is, by and large the same has – the same amount has been counterbalanced by increasing volume of the base business, which basically means that we had to adjust prices in a few, we gave up a little bit somewhere in some places, and we won several new bids as well.

Broadly, the two nullifying each other, okay?.

All right.

So, I guesss, can you give us a number, I mean in terms of what kind of pricing erosion that your base business is seeing in the U.S.? And then just a follow-up on the regulatory, so this past quarter, just to give us some confidence that this is not a – or that the agencies are not concerned with the system-wide issues, were there any successful investigations this past quarter?.

So back to the erosion, there’s not a lot of – last few – last couple of weeks have seen various companies talking of price erosions. And we are pretty much in agreement with those figures. If you just – standalone price erosion high single-digit, but as I mentioned the value – the volume increase nullifying similar amount.

So that probably broadly gives you some indication on price erosion. On quality and remediation, I gave you the brief about those three types, but you are asking about more general things.

I think we are getting the – and probably we mentioned in the last call as well that EIRs of, most of other types which were audited is coming in one by one and there is nothing adverse to comment at this juncture. Overall, several few other sites – one or two other sites got EIR, closure of audit et cetera.

So we’re not able to read anything negative to be the detail..

Okay, great. Thank you for the time..

Thank you very much. Our next question is from the line of Anubhav Aggarwal from Credit Suisse. Please proceed..

Yes. Hi, guys, good evening. My one question is on the….

Anubhav, can you be….

Mr. Aggarwal, can I request you to speak a little bit loud, your voice is very low..

Sure.

So recent deals that we’ve done on the Phase 3 compounds, I just wanted to understand that, is there a target that we’re working in terms of next five years from this kind of division or do we have a target on how much we want to spend on this, because when we had R&D day, we did not even talk about this as a possible segment that we will target.

So that appears that this is something new that we guys are pursuing now?.

Can you repeat the question, the initial part of the question?.

Yes, sure.

Phase 3 compounds, we’ve done the deal with XenoPort recently or Eisai recently…?.

So, Anubhav, I will request Dushyanth to speak.

Dushyanth, you are on the line?.

I’m Kedar..

Yes..

So the question was Dushyanth, this is a new segment that is emerging in our portfolio. Do we have some broad targets in terms of the next five years, not in financial terms, but in terms of our – the shape of our portfolio..

So broadly we have been – as you all know, building a significant pipeline organically across dermatology, medical dermatology across multiple disease areas and also in neurology across migraine, epilepsy and Parkinson’s.

Our intent is to continue to prosecute these development stage assets and bring them to market to commercialize, as we have shown success exemplified by Zembrace approval and Sernivo approval.

So over the next five years, our goal is to continue with the success that we’ve demonstrated over the past several years and continue to address the needs of patients across these multiple disease areas. As far as our investments, they will be in line with the guidance that both Saumen and Abhijit have shared with you in these assets.

And as far as business development, those will be in line with our objectives of continuing to address the patient needs in these disease areas..

Thank you, Dushyanth..

Thank you.

Just following up on that, am I audited?.

Yes..

Yes, you are audited now..

Yes, just following up on – just to this segment – the areas remain the same that we were doing so far in proprietary products. But the profile changes certainly, now we’re looking at absolutely increase – moving away from the incremental innovation we are now looking at absolute innovation here.

Is that a change in strategy, what prompted us to take the decision of absolute innovation?.

So it is still not absolute, it is still in the line of really taking care of under met kind of a medical need. And if you are really alluding towards are we putting more capital allocation for proprietary products business segment took well growth for the company in the period beyond 2019, and yes, we are.

We are doing that, and while bulk of it will happen to the organic R&D route, we have also tried to expedite early commercialization kind of opportunities, as well as investing further on something which is in advanced R&D pipeline in a similar area..

Just one clarity on the results also, the depreciation number that you guys report that sequentially has moved very sharply by almost Rs. 38 crores. What have you commercialized that such a sharp increase in depreciation, because our annual CapEx is Rs. 1,200 crores that cannot lead to such a sharp increase in quarterly depreciation of Rs.

38 crores?.

Yes, Anubhav, I think that’s in line with some of the high value capitalization of some of our assets, some of those are in ECZ, some of those are in Hyderabad. It’s a combination of both..

But Kedar, so that will be captured in the Rs.

1,200 crore CapEx that’s we doing, right?.

No, this is – the Rs. 1,200 crores would be the cash flow, Anubhav. The capitalization converting WIP into a gross block, so that accounting charge would have created this kind of thing. I can connect with you separately, Anubhav..

Sure.

Sure and just lastly on the Venezuela, write-off that was taken? Is that all in the net interest cost number? Is that all below EBITDA number?.

It comes in F-line..

A large part of that is in F-line. There are certain – so we have chosen to follow this treatment for all the assets. So there is a part in the COGS line as well, large part in products line, a little bit in COGS and SG&A. That’s how it is split.

How much was the number above EBITDA?.

So I think when we compute EBITDA, we take the entire thing Anubhav as sort of EBITDA. So we only take out the interest and income from mutual funds out. But if you want the split between F-line about 88% – more than 85% is booked in F-line, balance 15% is booked in COGS and SG&A..

Thank you..

Thank you. The next question is from the line of Girish Bakhru from HSBC. Please proceed..

Yes, hi. Thanks for taking my question; first on Rituxan registration in Russia, congratulations on that.

Can you give a color on what size of the market that is and when do we expect the launch of the product?.

Most of the size registration approval is there, so that’s in the process and the tenders come with the certain calendar frequency. So we would be able to comment exactly, which one we would be able to look at. But the good news is that process has started. That’s the good news.

And at the moment, I – certainly this will be few tens of billion dollars for the company, but beyond that I wouldn’t be able to how much will be the erosion, how much of this things very difficult to say. Yes, but low few tens of million dollars I guess..

Just clarification here, I mean, given the amount of sales BIOCAD’s SLB is doing, I think it’s in the order of over $100 billion.

Your number seems fairly low, is it because it will take time to ramp up?.

No, it’s a tender market fully government, this fall in the 7 nosologies as it is called in Russia. So it will be fully covered by the government. But there is naturally would be – first of all, we have to see which tender we’re able to catch and what part of the year we are getting in. I mean as much as we’ll try as quickly as possible.

Secondly, sales – there have to be a certain correction in pricing based on the principal followed in Russia on how they would look at the various market pricing and so on so forth. Naturally, the competitor would have to match similar pricing and so no, it’s not about share or anything, but pricing correction..

All right, second on the FDA front, I mean you said that probably your remediation will be over by end of the quarter.

So when you are inviting FDA, ideally one would assume you would invite for inspection for all three sites simultaneously, right? And is that something that you think is a very possible scenario that FDA visits all three sites together?.

Yes, how would inspect sites, it would be difficult for me to comment. But point is that remediation, your question probably that is, are the remediation activities going in parallel in all size? The answer is, yes. Are they progressing satisfactory in all size? The answer is, yes.

When we go and sort of meet up and request, we naturally would give overall free size as well as in our extension of many of those things in other size the whole – the whole picture. And then it’s up to the agency how they want to sort of audit..

Right, and just lastly on India, I mean given the growth that we saw last quarter, I mean bit surprised by a lower growth this quarter.

Any particular element why India did not do that well? Was there a particular impact from recent price correction in the market? Any color on that?.

Sure, one is of course the oncology business was a little slow, institutional oncology business were little slow in Q4. And second is quarter-to-quarter, quarter end cutoffs vary to a certain extent. So that had some more impact. Not that much about all the confusion and turmoil that is there in the market, not so much.

But overall, I don’t read too much into the quarter. Overall the year has been a robust year and this year also by and large mid-teens types of a things is not unusual, not likely – we would look forward to it..

So how much portfolio is currently under DPCO?.

More or less our NLEM impact is in line with most peer group companies, probably the first one we got a big hit when Omeprazole came in, but the rest ones, we’re probably tracking a little bit lower than some of the peer group companies.

And the good news is, on the FDC issue where – which has been another topic, which is much in news these days, the FDCs, which are not scientifically justifiable. Our impact is almost negligible, which – it’s not about – so much about the financial impact, but we’re feeling good that it vindicate the scientific approach in our product selection..

Thank you so much..

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please proceed..

Yes, thanks and good evening to all. Sir, question on U.S. business. You did mention that you are expecting approvals picking up from second half of the year and given the fact that the couple of your key products in the market has started to see some more competition, would you be able to give some color on the U.S.

business spanning our for fiscal 2017?.

In general term, I can’t give you again quantified sort of guidance. But in general terms, yes, I mean we’ve started with a little bit of a negative note, as you will know valganciclovir in March went generic, fairly steep correction with just one player in. So that certainly has major impact.

And Generic VIDAZA has – also seen, I think, Mylan’s approval and 505(b)(2) as well, but that is yet to be felt. There would be some impact, but certainly Valcyte was steeper.

Regarding going ahead on the launches, again subject to all the cautionary note and assumptions et cetera – it’s certainly going to be a year where we used to see a couple of years back, series of launches, similar sort of thing, but it will little back loaded.

The breakup would be probably about 40%, 45% injectables, about 40% oral solids and the balance being patch and cream..

So I mean given the fact that you already saw some margin pressure coming up and with the facts that you just stated on your key product seeing competition, so just trying to understand the margin trajectory as well?.

Look, I mean as far as the last year was concerned, I told you that the fall in pricing was counterbalanced by volume gains, roughly, very roughly, here I think – since the year has past behind us, roughly about $100 million fall in prices, about $100 million volume increase counterbalancing each other.

Now going into next year, of course as I said, Valcyte has an impact, but all depends on the launches. Some of them are not so bad and depends on how it pans out, the margin will sort of play out. Look, the honest answer is it will be foolish to even put in a conjecture here.

Of course, we have a budget, but how another mega generics work, if – in the phase of launches, there is always that possible upside and possible not so great upside. So margins I wouldn’t be able to give you guidance on that..

Sure, sir. Thanks, and lastly on some color on the Nexium pickup, are you seeing the market really stabilized now? You do expect still some market share ramp-up? And lastly on the Copaxone update please. Thank you..

So Nexium with some – for us at least there is some good news and there is some sort of shakeup in the market, because of market because of similar issue in Bangalore. So there was some part of the market got vacated and I think, we could – because our entire supply chain was pretty well poised, we could take advantage of it.

And now I think it will play out in the next few weeks, we’ll see the shares. I think we are – I think certainly we have – going to have due share in the market.

And what was the last one you wanted?.

Copaxone?.

Yes. Copaxone – by the way, Nexium, I mean the pricing is of course with entry has got eroded, but still effective enough. On Copaxone, I think we’ll try and see whether towards the end of – by the end of Q2, we are able to comprehensively answer the CR. We are working towards it.

So unless any – we see more unforeseen things and there is a whole deep characterization, some done here, some done in various parts of the world and various sort of locations. We’re able to put in together we’ll give it a shot whether by end of Q2. Comprehensively answer, yes..

Okay, sir, thank you. All the best..

Thank you. The next question is from the line of Manoj Garg from Merrill Lynch. Please proceed..

Good evening and thanks for taking my question. Abhijit, while you have alluded on the generic pricing scenario in the U.S. over the next one year.

But just would like to pick your mind from a little long-term perspective that how this whole thing is likely to play out, once you start seeing the acceleration in approval, and even people are talking about maybe potential combination of strip and world green [ph].

I just would like to see in the next two, three years how do you see the whole scenario panning out?.

So life is going to be very eventful, if I can say the least. Firstly erosion at the bottom end with multiple approvals coming in, impact due to ongoing expectation of the agency for – everyone to ramp up, the quality levels, so these two would be a continuing factor in the whole game.

But to summarize, I think finally, certainly where things were much better earlier when it was less crowded and one could get more upsides, here unless the assets are good, and I probably repeat what I have said all along that everything would be in the type of products, which we file and get approval so – and in what timeframe, I mean little bit of consolidated backend – sorry, the consolidated customer end, it is very late.

You can probably lead erosion of price, but you may not benefit in the process. So finally back to R&D and the productivity and success of R&D..

And Abhijit, I think a couple of quarters back you have made a comment on Gleevec, like probably you are seeing the launch maybe couple of quarters after Sun Pharma’s exclusivity.

Now given the fact that Gleevec is there in the market and even Novartis had made a comment that they do expect four to six players post-exclusivity, where do we stand and you see Gleevec probably launch this fiscal year itself?.

Yes, this fiscal year, yes. Number of competition, in between anyone’s guess, four to six, in our view its little high. But I don’t beyond that we wouldn’t know..

And just last question from my side. On your proprietary portfolio, we understand like you have the dump field force.

But with regard to your CNS, are we going to use a separate field force or like how do you feel that the current field force could be good to even promote the CNS products as well?.

Dushyanth, you want to take this question?.

Sure, thank you Kedar. For our neurology portfolio, we have deployed a dedicated sales force for Zembrace. This sales force calls on primary migraine treatment providers. So this is a distinct force from the dermatology sales force..

And can you share the number like how many reps or the people who we have – who are directly going to call the doctor?.

Yes, the strength of the team is roughly – around 50..

50?.

Yes..

Yes, okay, wish you all the best, that’s all from my side..

Thank you..

Thank you very much. The next question is from the line of Neha Manpuria from JP Morgan. Please proceed..

Thanks for taking my question sir. My first question is you alluded to having some remediation cost in this quarter.

One, how much was this cost? And second is this all in the SG&A, is that the right assumption, or there are some other parts where this cost is reflected?.

No this is part of SG&A so roughly mainly it is consultant cost. And it will be to the tune of around $20 million..

And since we are talking about completing remediation towards the end of this quarter, I’m assuming we’ll see additional cost in this quarter and then probably that will normalize?.

It did not become zero, but it will substantially reduce..

Got it, sir secondly, in terms of R&D, we’ve we – indicated that you’re increasing investment towards our proprietary product portfolio and I read somewhere that our guidance still remains again 11% to 12% of sales. And we are adding more assets.

So how should we look at R&D going forward? I would have assumed that this number would inch up as we’re looking at more novel products now?.

Yes, if it is going to be successful then we take it forward, it may..

But currently we are sticking to a 11% to 12% guidance, is that correct?.

It can go up I mean beyond 12%, but it will all depend on the hitting milestone and being successful and taking it forward and accordingly we’ll decide..

Got, it. And my last question is, we have seen very strong cash flow generation this year of course, even after a buyback, we have a healthy balance sheet.

How should we look at inorganic growth opportunities, I mean are we evaluating and what would be our areas of interest?.

Buyback process has started, it is not yet completed so of course, whatever we are going to earmark for buyback, we’ll have to take it from the current balance sheet and not market related. But we have been focusing a lot on growth both organic and inorganic. So at any point of time there will be a few targets, which we are looking for.

But at the same time I have alluded to earlier, there are very strict set of criteria we apply. So if there’s a meaningful target, we will definitely consider..

And would U.S.

be our primary market of focus or we’re open to doing deals in other markets too?.

India also will be very open, if there is a good target available..

Got, it. Thank you so much..

Thank you. The next question is from the line of Surya Patra from PhillipCapital. Please proceed..

Yes, thanks for this opportunity sir.

So, again, continuing on the R&D aspect, can you just give us some update on the biosimilar portfolio for the advance market? What is the kind of a developmental progress that we have seen so far?.

Nothing different from what we have been saying. The journey with Serono is progressing satisfactorily And as I said that none of those launches are in near-term. But, while on that I think the clinical development this thing is progressing satisfactorily on the assets..

So those are like in Phase 3?.

Yes. If you are talking about finally the launch it is still few years….

Okay, and second question is that as you’ve indicated in the initial remarks itself that you’re seeing some sort of price correction and all that in U.S. and possibly that is the reason for the sequential decline in the gross margin.

So should we consider that this is the kind of a new norm what gross margin that we are seeing for the quarter or even for the full-year?.

Maybe a quarter or two before the new launches pick up, as told by Abhijit, in the second-half of the year..

First two quarters, as you can guess from whatever we spoke so far couple of assets coming under competitive pressure, our launch is a little more heavy towards the second-half. Given this, naturally it’s safe to assume a muted first-half.

And also the remediation costs which Saumen mentioned, some of it designed to this to this quarter and substantially came down thereafter..

Okay, just last one more question on that Venezuela side, see after this kind of a write-back, so is there any kind of negative surprise is still there or what is our stance on that or what – can you just give some clarity on that front?.

No, no we did after these entire translation loss in Indian rupee terms all that we have is very negligible, less than in INR15 crores. So actually we’re taken a complete that way return..

And what is the kind of revenue?.

By chance if there is any repatriation comes, it could be on the reverse side then we’ll have to reverse..

Okay.

And the likely decline on the revenue side that would be how big on Venezuela side?.

Venezuela has stopped selling completely actually. Last quarter we didn’t sell anything..

Okay..

Almost, because now here onwards the game is completely different. As we mentioned, we remain very, very focused to the geography, because we think there is opportunity there we’ve signed two deals with two government organizations.

They are keen to have the biologics in, because it’s a win-win for them for them and – because we and for us, because we bring in healthier savings substantial and with all that actually so we will stay very, very focused. But only thing the game has changed that it’s always established, advanced through as I mentioned..

[indiscernible].

Before we dispatch. But we stay fully committed. In n fact, President Maduro mentioned our company specifically that they are very happy to sort of done a lean [ph] But the only thing is – that only thing is – that’s all fine, but there is turmoil in the geography, because of the totality business rolling in we no we can’t bank on that..

Okay, yes. thank you sir. Thanks..

Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please proceed..

Thanks for taking my questions.

On the proprietary product side, on the XenoPort asset, which you’ve licensed in, can you give us some indication on the timeline and cost involved in development for the drug for psoriasis, and also for multiple sclerosis, if there are any thoughts at this stage?.

Dushyant, would you take this question..

Sure, Kedar. Thank you. With regard to the clinical development timeline, our plan is to very quickly, within this fiscal to initiate the Phase 3 study. As you know, this asset had completed a large Phase 2. So our intent is to continue the momentum and enter the clinic very soon.

As far as MS is concerned, we as you know were able to incorporate that as part of the deal, where we see it as an upside. And so at this moment, we are evaluating the potential clinical design and strategy for that indication..

And just on the Phase 3 trial.

How long will that take in your view and what’s the cost involved?.

With regard to the timeline, we see this in line with those who have conducted psoriasis studies within a moderate to severe patient population that’s in – that roughly is in the 18 to 24 months time period..

Okay, okay..

And as far as cost is concerned, we also see that as in line with those studies required to get the label indication we seek..

Okay.

And since you’ve launched Zembrace, any initial feedback that you have?.

We’ve only been on the market for a couple of weeks as you know, and the feedback from our constituents, physicians and patients and patients has been very positive. As far as data and scripts, that as you know take sometime to go through a judication and the reporting data basis have a lag, so we do not have that data as of today..

Okay. And one final question on your gross margins. If I see the material cost as a percentage of sales, they have in fact come down a little bit Q-o-Q. The other expenditure as part of COGS has gone up substantially.

So what is the nature of that expense, if you can just explain that?.

One, we alluded to is the remediation cost itself – sorry, you’re talking about the gross margin?.

Yes, yes..

So one will be the business mix, which is there. If you see the Global Generics is PSAI much higher, then the weighted average gross margin for the company becomes significantly improved, compared to – if the PSAI business mix moves up, then it goes in the reverse way..

Just one last question if I can.

Abhijit, you mentioned about the kind of launches you are looking for fiscal 2017, and as we move into fiscal 2018, will the mix more or less remain same like 40%, 45% injectables, or do you think there would be more of injectables and patches as you go into FY 2018? And also in terms of number of launches, how would FY 2018 compare to FY2017?.

FY 2018 would be – earlier comments, because naturally there are always every year some overflows from the early year to next year. But the nature would be somewhat similar, the makeup of the whole thing and I said about 40%, 45%. It should be in the same range.

That itself is very high, given the fact that overall the generic portfolio in worldwide is 80% oral solids, and the rest is all between injectables and topicals and et cetera, et cetera, devices and other things.

So there I think this itself is substantially skewed with a purpose and a design, and I think broadly if we can maintain a similar one, I think we should be good..

Okay. Thank you..

Thank you. The next question is from the line of Abhishek Sharma from IIFL. Please proceed..

Thanks for taking my questions. Most of them have been answered. I just had one around your commentary on the prior year’s change in the U.S. dynamics. You said that there was a fall in prices and then that was compensated by volumes.

Just wanted to understand where exactly did you see this volume uptake? Was it led by – was it in the same products, where you saw the price erosion, or was it a different set of products and whether that could be extrapolated to the next year? Thanks..

The two parts of the volume increase, actually the volume meaning eventually translating to value, of course. The first is some supply failures by the other competitor company. That would account for a significant part of that, which happened to be in the portfolio where our supply chain is geared to take it.

As you know, in U.S., someone may have supply failure, but you need to have the supply chain robustness to swiftly capitalize, because no one’s waiting for anyone. So that has been one part. And the second part is, of course, some companies, as you know, going to this – piecemeal, here and there.

Some bids added up the balance – win in the bids added up the balance..

Right. All right.

So it was basically largely on account of disruption at competitor?.

I don’t think – I don’t have an exact data. But I’m just quickly trying to put things together. Yes, there’s a – reasonable part of that is supply failure..

Fair enough, sir. And just one more, which is in the RoW, ex of Venezuela, would it be fair to say that your business has grown at 25% plus kind of a number? I mean, my back of – my rough calculation gives me a very high number..

No that’s not – I don’t say that….

So the RoW outside Venezuela is largely Australia, South Africa and a number of small markets, Abhishek..

Yes..

There has been a currency hit there as well. I think the local currency number could be double-digit, but eventually in rupees it’s smaller..

All right. Okay, thanks..

Thank you. Ladies and gentlemen we will take our last two questions now. The next question is from the line of Chirag Dagli from HDFC Mutual Fund. Please proceed..

Yes, sir. Thank you for the opportunity. Sir, as you look at your U.S.

portfolio in FY 2017, do you think price erosion for the base business will be much larger than in FY 2016?.

So, again, erosion per se without taking into account new launches et cetera, certainly will be higher, because that itself has got a reasonable hit. So, yes, I mean the answer is yes, and hence it’s important that we have the launches..

Fair point.

And sir, [indiscernible] in Russia for Rituxan, what will be the price discount versus the innovator’s product at the final level, once there is sort of – we are in the market?.

Sir, actually the market is more with BIOCAD actually, as you know. So – and, earlier in the call someone mentioned some figures. So there would have to be a discount and it’s a partnership launch. So I gave a rough indication of low tens of million on an annualized basis. So let’s see how it pans out..

This is for us, okay.

And what will be our CapEx, next two years?.

Some 1,200 crore..

This is for FY 2017, you know, sir?.

Yes..

And then similar number for FY 2018 as well?.

Well, maybe a couple of years, it could be at that level, and after that it may come down..

Fair point. My only point, sir, is that – I mean, last three years CapEx has been significant, so have been the R&D investments.

If you can give us some color of what broad buckets does this CapEx, say last couple of years and the next couple of years sort of broadly fit, where do they fall? What are these – what is this CapEx for?.

When we really launched our injectable business, it was all getting outsourced from others. Then we have developed the whole capacity in-house now. Then of course, we have also built up facility for topical others that we didn’t have.

Then even on OSD side, there requirement to expand the capacity, because you can’t have a capacity constraint when there is an opportunity in the market, because if you cannot cash on opportunities, then it’s a double earnings.

And also, going forward, there will be requirement to expand our biologics capacity a bit, particularly on the emerging market perspective, if there are more and more countries if you’re going to get approvals. And there are CapEx also in other areas.

For example, we are considerably stepping up investments even in IT, more from -- ignore overhead where quality is concerned, some automation. And then even on the cyber security perspective. So all these add up to that..

Fair point. And last question, if I may sir.

Do we continue to do business in Venezuela?.

As Abhijit already said, we are very actively engaged with the Venezuela government. There are two contracts, which have been signed with both government companies. So only condition to the contract is that, we will dispatch only when we get either the LC or some advance. And when we get, we will then have that business there..

But then the profits on that business will be converted at this lower rate, or at the higher rate, sir?.

No, I mean, the thing is now we always position ourselves as a company coming from India, where the medicine is more affordable. Secondly, our pricing will be on that. Now, so far as the thing is there, it is on a preferential rate kind of a thing – official preferential rate. As and when we get LC and thing, it will be on the preferential rate..

So, these contracts largely will be in U.S. dollars, simply put, yes..

Also we’ll record – we’ll continue to record at the higher rate and then we’ll wait and see if we get the money?.

No, no. What Abhijit is saying the contract itself, the money that we get, we will straight away get the dollar, so there’s no need to have bolivar and then have a particularly rate of translation..

Oh, that is the change that we are looking for. Okay, sir. Fair point. Thank you so much. All the best..

Thank you. The next question is from the line of Surajit Pal from Prabhudas Lilladher. Please proceed..

Thanks for taking my questions. Most of the things have pretty much answered.

Could you please give some idea that if remediation cost is not there, how much benefit could be seen in EBITDA margin? And what could be your effective tax rate in FY 2017 and FY 2018? And number of site transfer you have done till date or in FY 2017, where you could expect or that could help your launch in FY 2017 and FY 2018, as planned?.

So it will be very easy for you to compute what would have been the EBITDA, if you take out that $20 million that I alluded for the remediation cost for the quarter..

Okay $20 million, you have mentioned, okay..

Then in terms of the effective tax rate for this year, it was within 21% to 22% as I explained earlier. The adjustment which has happened because of two reasons, one is this whole translation loss of Venezuela. Other is, we have decided to – we will look forward to repatriate some money from subsidiaries. And so that changes the OpEx mixing.

And on the….

So about four or five have already been executed in the site transfer. One or two approved, one – few already submitted and as we speak some executed and just to be in the process of being submitted few more. So we are more or less, here onwards whatever we have lost, we lost, as I said last time.

But going ahead we are trying to see we mitigate the balance..

Thank you..

Thank you very much. Ladies and gentlemen that was the last question. I now hand the conference over to Mr. Upadhye for closing comments. Over to you, sir..

Thank you all for joining Dr. Reddy’s senior management for Q4 FY 2016 earnings call. In case of any additional clarification, please feel free to get in touch with the Investor Relations team. Thank you and good day..

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