Dr. Reddy's Laboratories Limited
Q4 2012 Earnings Call Transcript

Published: 11 May 2012

[Operator:]

Ladies and gentlemen, good day, and welcome to the Q4 FY '12 Earnings Conference Call of Dr. Reddy's Laboratories Ltd. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you, sir.

[Kedar Upadhye:]

Good morning, and good evening to all, and thank you for joining us today for Dr. Reddy's Earnings Call for the Fourth Quarter and Full Year Ended March 31, 2012. Earlier during the day, we have released our results and the same are also posted on our website. We are conducting a live webcast of this call, and a transcript shall be available on our website soon. The discussion and analysis in this call will be based on IFRS consolidated financials. To discuss the business performance and outlook, we have today G.V. Prasad, our Chief Executive Officer; Satish Reddy, our Chief Operating Officer; Umang Vohra, our Chief Financial Officer; Abhijeet Mukherjee, President and Head of Global Generics and 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 outlet without the company's expressed written consent. Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast. After the end of the call, in case any additional clarifications are required, please feel free to get in touch with the IR team. I also wanted to inform you that a new member, Sharnat Stala [ph] had joined our investor relations team and his contact details are available on our website. Now, I would like to turn the call over to Mr. Prasad for his opening remarks.

[Gunupati Venkateswara Prasad:]

Thank you, Kedar. Good morning, and good evening to all of you. I welcome you all to our quarter 4 earnings call. I am pleased to mention that we have ended fiscal 2012 by crossing the $2 billion mark in sales, of course, at our average billion-dollar rates. And we are [indiscernible] company to do so. The strong performance this year was mainly on account of the contribution by our U.S. generics business, the API business and Russia. In India, we've continued to target enhanced field cost activity, as well as improvement in the prescription share of key brands. I am confident that our India business will now grow at industry growth rates for the next year. Other emerging market performance also was healthy on the back of increased focus in South Africa and Venezuela. In addition, the Pharmaceutical Services and Active Ingredients segment performance was very encouraging. Apart from the strong recovery in sales, this segment was supported -- has supported the surge in volumes of internal requirements for our Generic segment, thereby providing competitive cost position for our various markets. I'm happy to see a few emerging themes shaping across the organization this year. The OTC franchise in U.S. and Russia CIS markets have been a success story in a quick span of time. OTC has been an important lever in risk diversification in Russia and now constitutes about 30% of sales in our portfolio in Russia. In U.S. for FY '12, the OTC business was 25% of all our U.S. sales, and helped extend [ph] our market revenues [ph]. In the Indian market, we are in the pilot phase with a couple of OTC products. And depending on the outcome of this experiment, we will expand this initiative. The second theme that has shaped up well over the last couple of years is our limited competition product portfolio in the U.S. As we have been indicating in the past, we have consciously oriented our generic R&D efforts towards more complex molecules. We are now beginning to see meaningful revenues from this pipeline. Between the top 5 limited competition products Tacrolimus, Lansoprazol, Omeprazole, Magnesium OTC, Fexofenadine basket and Fondaparinux, the revenue are in excess of 10% of the overall company's revenues. We have plans to expand the basket further to grow faster in the coming year. On propriety products, a lot of good work has gone in the recent years from product selection and development. I want an early read of the prime results for the developing [indiscernible] product was not encouraging, and we now plan to drop the product. We have a series of mid-stage assets poised for pivotal registration studies and a large pipeline of preclinical assets in the area of pain and dermatology, which we believe can produce a steady stream of INDs and filings in the coming months. In the Biosimilars space for emerging markets, we are seeing good progress in filings as well as building alliances with local partners. This year, we filed 4 of our products across 15 countries in the emerging markets. We are confident to expand our emerging markets franchise further in the coming years. In the regulated market space, we have [indiscernible] on our development strategies. While we concluded FY '12 with strong revenue and profit growth [indiscernible] 2 quarters has set a strong foundation for FY '13. The next fiscal year is one of the most interesting years for the company as we expect a large number of new products, as well as scale up volumes of key products in our current portfolio. With this, I'll conclude my section and hand over Umang to discuss the financial performance of the company.

[Umang Vohra:]

Thank you, Gunupati. Good morning and good evening to everyone. Let me begin with the key financial highlights. Just as a reminder, all the numbers, including those of the previous year in my section are converted at the convenience translation rate of INR 50.89 to $1. Discussion in strategic section will be based on the performance in respective markets' local currency. Our consolidated revenues at the convenience rate registered a figure of $1.9 billion and a strong growth of 20% over the previous year. Revenues for the quarter, which was quarter 4, are at $522 million and grew by 32% year-on-year. Revenues from our Global Generics segment are at $361 million for the quarter and grew by 30% year-on-year, driven largely by the U.S. and Russia. Revenue from the Pharmaceutical Services and Active Ingredients segment, which we shall call PSAI, are at $847 million [ph] and recorded an impressive growth of 25% driven by new launches to all the other generic customers. In this quarter, revenue share from Teva under our partnership for distribution of olanzapine 20 mg was below $2 million. The actual generic substitution rate for olanzapine did not cross 80% during the exclusivity period on account of competitive dynamics vis-à-vis our earlier estimated rate of 90%. In view of this lower generic substitution rate and the higher stocks held by crate [ph] channels, our revenue share in the current quarter had been lower due to the accounting implications of share stock adjustment. Consolidated gross profit margin for the quarter is at 53%. Gross profit margin for Global Generics and GFCI are at 68% and 38%, respectively. SG&A expenses including amortization for the year are at $567 million. SG&A expenses for the quarter is at $142 million and shows an increase of 18% over the previous year, largely attributable to higher manpower costs, distribution costs and the effect of rupee depreciation. Sequentially over the third quarter, SG&A expenses have largely remained flat. There are triggering events in the German market during the quarter relating to the reduction and divestments prices and additional tenders at low bid prices, which required us to test the carrying values of intangibles on our books. Accordingly, since we expect recoverable value from these assets in Germany was found to be inadequate, we have recorded a non-cash impairment charge of approximately EUR 10 million net of tax. EBITDA for the current year is at $499 million, 26% of sales and it's grown by 51% over the previous year. EBITDA for the quarter is at $134 million. It comes in at 26% of sales and shows a growth of 34% over the previous year. The effective tax rate for this year at 23% includes a tax benefit on the impairment charge on intangibles. However, this charge is offset by this change in assumption of olanzapine revenues, which in turn impacted the mix of profits among our subsidiaries resulting in a higher tax rate. Our tax rate without olanzapine would closely be around the 20% range. Adjusting for the interest on bonus debentures and impairment of intangibles, profit after tax for the year is at $301 million, 16% of sales and shows a year-on-year growth of 42%. Similarly, adjusted profit after tax for the quarter is at nearly $3 million and has shown growth of 38% over the previous year. Key balance sheet highlights are as follows

[Kallam Satish Reddy:]

Thank you, Umang. I will now cover the business highlights for each of our key markets starting with North America Generics. Revenues for the quarter are at $176 million, reflecting year-on-year growth of 36% largely driven by product success with ziprasidone, Fondaparinux and amoxicillin clavulanic acid and products from our Shreveport facility. This business was also healthy across our key product success [ph]

[Operator:]

[Operator Instructions] The first question is from Anubhav Aggarwal from Crédit Suisse.

[Anubhav Aggarwal:]

Umang, just one question. Your gross margin for Global Generics segment, 58% is much lower than what was there in the, let's say, first half at 53% [ph], was all the decline driven by share stock adjustment on olanzapine? Because just with the spike we have benefited from Geodon in this quarter.

[Kallam Satish Reddy:]

No. So I think the way we are looking at our gross margins is that there are some adjustments which relate to us [ph], and I think that's definitely they have an effect on the gross margins. The other thing that we are seeing on gross margin is that the relative mix of the business is also different, right? So for example, India is lower in growth in the U.S. is, and in the U.S., gross margin is slightly lower than India because remember, gross margin is also planned expenses. So it makes an impact in a different way. But we are not really seeing so much of the compression in margins as I think what you're alluding to.

[Anubhav Aggarwal:]

Okay, so other than that, on the basis on margin, you're seeing that your gross margin continues the trend you're doing in the first half of this year?

[Gunupati Venkateswara Prasad:]

That's right. We are largely in the same range as what our margins in the first half of the year was. Also, you might want to also take into account the fact that DEPB and other explored benefits have gone up and that's taken an impact on the margins. Other than that, we are largely in the same range.

[Anubhav Aggarwal:]

And just one clarification on the press release. On the call you mentioned that your FTFs are at 7 now. If I understand it was 10, and after that you launched olanzapine and Geodon. So where is the 1 FTF gone.

[Gunupati Venkateswara Prasad:]

FTF, First-to-file. We can send that to you.

[Operator:]

The next question is from Bhavin Shah from Dolat Capital.

[Bhavin Shah:]

I just want a sense of the market share gain in Fondaparinux. And if you could give some highlight on the institution product launch, which was supposed to happen. How is that progressing?

[Gunupati Venkateswara Prasad:]

So probably [indiscernible] look at the year. I think in the first half we were -- the capacity was a bit of a challenge. So all that is behind us. And we are waiting for the capacity and equity [ph] to come on stream. So right now, I think we have in place at the moment, the IMS data shows our market share about 22%, but we're mainly playing only in the retail market, which is about -- that's about 25% of the whole market. So all of our share of the retail market is nearly about 50% market share. Now going ahead, I think, yes, there'll be a [indiscernible] to the play, but these contracts are multi-year. So as and when we have an opportunity and better opportunity we would be getting more market share.

[Bhavin Shah:]

Okay. And any sense from the Biosimilars of how much would that do in your business item?

[Kallam Satish Reddy:]

7% in Europe.

[Bhavin Shah:]

7% for this fiscal?

[Kallam Satish Reddy:]

Yes.

[Operator:]

The next question is from Girish Bakhru from HSBC.

[Girish Bakhru:]

Yes, just on...

[Kallam Satish Reddy:]

Hello?

[Gunupati Venkateswara Prasad:]

I think we lost him. [Technical Difficulty]

[Operator:]

The next question is from Prakash Agarwal from RBS.

[Prakash Agarwal:]

Sir, on this pipeline for North America, are you seeing interesting product launches? I mean, you'd shared the presentation, I could see in the website for December 2011. Could you give us some key products for fiscal '13?

[Umang Vohra:]

Prakash, we are not going to be product specific. All we're going to say is there are some products which are not in the presentation as well, but largely it’s our opinion that whatever is in the presentation, it's more or less figured out by the market. So there are some products which are not in the presentation but we're -- right now, we are not in the position to disclose them.

[Prakash Agarwal:]

Okay. And would you share market share of your top 5 products that you talked about having 10% of sales in the U.S.?

[Umang Vohra:]

The cost on Lansoprazole, we're now 15% market share of the total market. On Fondaparinux, it's 17%. Omeprazole is at 14% of the total market, and on Tacrolimus it's about 12%.

[Prakash Agarwal:]

And Fexo?

[Umang Vohra:]

Fexo is in OTC stage and there's no more -- the level market agency which captured the data.

[Kallam Satish Reddy:]

So, there are -- there is another EBIT share, roughly it's about in the range of about 40%.

[Prakash Agarwal:]

40% of the total Fexo OTC Market?

[Gunupati Venkateswara Prasad:]

Yes. And the combination we are the only player so that's smaller debt, [indiscernible]. We are only saying that.

[Prakash Agarwal:]

And is Lanso [Lansoprazole] OTC is scheduled to launch in fiscal '13?

[Gunupati Venkateswara Prasad:]

Yes, very soon.

[Operator:]

The next question is from Girish Bakhru from HSBC.

[Girish Bakhru:]

Just on the U.S. again. Earlier, you had commented that the larger cost the FY '13 target probably will be met by U.S, so if you just can give some color from 6, 70-odd-million dollars? Are we close to like touching some 900 number, what kind of number do you look for U.S. for FY '13?

[Umang Vohra:]

Well, we had largely said we would be -- that we would have this 1/3 or thereabouts for the U.S. market of our total $2.7 billion, which we had directed towards. So I think that we are looking at the same number as of now. And the other 1/3 is going be from the emerging markets in other areas.

[Girish Bakhru:]

Right. And just to carry this ahead, in terms of patient care settings [ph], where do you see that kind of effect coming into effect like FY '14? Would it be kind of a stable revenue or will it be kind of a decline there?

[Gunupati Venkateswara Prasad:]

I think FY '14, the real clip begins to hit in FY '15. FY ‘14 is relatively stable, but I think FY '15 and onwards from there is when the real impact of the [indiscernible].

[Girish Bakhru:]

Right. And second one on the Biosimilars earlier, I think on -- I mean, there was a comment about you were planning to probably see registrations of some of the emerging markets. Can you just elaborate on that?

[Kallam Satish Reddy:]

So I think on the Biosimilars, we had almost 4 products which we are registering to 15 countries, right? So this visibility [ph] local partners in this country that we have some arrangements for. Get to us in a different point of time.

[Girish Bakhru:]

Okay. And where are we in terms of tying up on the European market side? I mean, given that there has been probably first filing on the monoclonal antibodies just recently in Europe, so I mean, where are we in that...

[Gunupati Venkateswara Prasad:]

We have spoken to the regulator of this. We are designing our trials for fiscal -- we haven't signed any partnership.

[Operator:]

The next question is from Sameer Baisiwala from Morgan Stanley.

[Sameer Baisiwala:]

This is, I think, on the terminals [ph] and the derma product. Can you be more specific, what were the reasons that you had to drop this candidate and how much money was spent on this development?

[Kallam Satish Reddy:]

The total plan was to spend about $8 million or so on the clinical development. We spent about a little over half of that. The initial data does not indicate that it'll meet the endpoint on efficacy, so we decided to drop the product.

[Sameer Baisiwala:]

And can you share some more details on the follow-up compounds candidates in the same delivery-based pipeline?

[Kallam Satish Reddy:]

We have not yet shared these details. As with further benefit [ph] share with you the pipeline for the downturn [indiscernible]. So at this time, we haven't released in public yet.

[Sameer Baisiwala:]

Okay. Well, what I'm trying to understand is, is there anything which is in the human trials or a little bit more advanced stage, or they're all pre-human right now?

[Kallam Satish Reddy:]

There are some in the human trials going on in the derm space. Some of them have completed proof of concept but nothing has entered the Phase III yet. So we would keep you informed as we move assets forward.

[Sameer Baisiwala:]

And for the pain?

[Kallam Satish Reddy:]

Pain story on the pain, we have products which have completed proof of concept, not yet entered Phase III.

[Sameer Baisiwala:]

Okay, fine. And just one final question. Can you share something about your outlook for fiscal '14 over fiscal '13? Just qualitatively, any color?

[Umang Vohra:]

So the growth rate of the fiscal '12 and '13 are very high. We don't expect FY '14 to be so strong. We expect a slowdown of the growth, but we still expect to grow on FY '13.

[Operator:]

The next question is from Ranjit Kapadia from Centrum Broking.

[Ranjit Kapadia:]

My question relates to this impairment charges which are taking off [ph] $1 billion for Germany, if you can elaborate slightly how the German market and what is the future outlook for the market?

[Umang Vohra:]

Ranjit, I think you mean INR 1 billion.

[Ranjit Kapadia:]

Yes, INR 1 billion. Yes.

[Umang Vohra:]

Yes, yes, yes. So all of you getting worried when you said $1 billion. No. So this is the charges related to certain product intangibles, which have gone into tenders and therefore, we believe that the recoverable value of these product intangibles is possibly not going be met. Because not only are tender prices low, it's also -- if you grew the tender, it's going to be difficult to recover these values. So this is tested and we found that this was not recoverable, so we've taken a non-cash charge on it.

[Ranjit Kapadia:]

And how will you see the German market shaping up?

[Umang Vohra:]

So I think that the tender compliance is actually very high at the moment, higher than what we thought and higher the tender compliance. It has a hit to the extent that some of the tenders are based on revenues, although the non-tender part or noncompliance part of the tender. So given that fact, I think it’s tough. The molecules are quickly being drawn into tenders faster than it used to be in the past. So it’s going to be a tough scenario in the German market but having said that, it's in the single digits percentage of the Global Generics business.

[Operator:]

The next question is from Ugish Mondada [ph] from ICICI Securities.

[Unknown Analyst:]

This is Kiragya [ph]. Two question. First is on a quarter-on-quarter basis in your U.S. generic business, what would have changed outside maybe the Fondaparinux market share would've gained marginally. But otherwise, the biggest delta is only from ziprasidone? Would that be a fair way of looking at it?

[Gunupati Venkateswara Prasad:]

No. I think that's not the complete story. Ziprasidone is some part of our revenues that gained good market share expansion on the Bristol products. There's been also revenue increases in other products as well.

[Unknown Analyst:]

On a quarter-on-quarter basis? So third quarter...

[Gunupati Venkateswara Prasad:]

That's right. On a quarter-on-quarter basis, the delta that you've seen between quarter 3 and quarter 4, it probably would be less than half of that delta.

[Unknown Analyst:]

Okay, that helps. The other question was on the 7 First-to-files that we have. Can you indicate the brand size of it?

[Gunupati Venkateswara Prasad:]

We can send you... [Audio Gap]

[Operator:]

Next question is from Hardik Bora from Dolat Capital.

[Hardik Bora:]

I just want to know what is the, are there any contribution from the GSK business facility, if it's possible.

[Umang Vohra:]

GSK business contribution. Yes, it's not significant. Are you saying Bristol or GSK?

[Hardik Bora:]

GSK facility [ph].

[Umang Vohra:]

The Bristol facility, yes, I think there's been a ramp up in values there, and it's sub $10 million for the quarter.

[Hardik Bora:]

For this quarter, okay. There was -- this is according to the impairment charges that you've taken on product intangibles. I just wanted to understand what are the current intangibles that are standing on the book?

[Umang Vohra:]

We have a brand which is approximately EUR 40 million, and we have product revenue intangibles which is approximately another EUR 15 million to EUR 20 million at the next level. And most of these are the product level are now in groups of products and not specific products.

[Hardik Bora:]

Okay. Just one final question. If you can just throw some light on your [indiscernible] since the ziprasidone launch, what is the price erosion and market share that you have so far garnered in that product?

[Umang Vohra:]

The market share is about 24%, 24% to 27%. That's the range that we picked up. And price erosion is in excess of approximately 72%.

[Operator:]

The next question is from Bhagwan C. [Chaudhary] from IndiaNivesh.

[Bhagwan Singh Chaudhary:]

Just one question. A clarification on I saw you guys [indiscernible] on the TV and through probably in the evening that the CMUS mainly a contributor [ph] OTC product of a CMUS recommended has contributed to approximately $200 million out of this secure $100 million and USD $100 million. Is that right?

[Umang Vohra:]

No. [indiscernible] roughly down to $80 million and [indiscernible] around $120 million.

[Bhagwan Singh Chaudhary:]

So combined, that's $200 million?

[Umang Vohra:]

Yes. Yes.

[Operator:]

The next question is from Alok Dalal from BNP Paribas.

[Alok Dalal:]

Any update on the important admin of psycho facility [ph]?

[Kallam Satish Reddy:]

There is no specific development as such, but we had an inspection by the USFDA, we believe it went well. The FDA has to submit their report on the inspection and after that, they've got [indiscernible]. Right now, there is no update as such.

[Alok Dalal:]

Okay. And are there any comments on the GSK alliance? Is it going as per expectations or there is some delay here?

[Kallam Satish Reddy:]

There is some delay in terms of revenues, but we didn't expect any revenues in this 2, 3 years. We're a lump sum business. Some of the products are just being developed, they have to get approved no doubt. We didn't high expectations and they don't figure in our revenue in a significant way.

[Alok Dalal:]

Okay. And what could be the tax rate guidance for FY '13? Is it 20%?

[Umang Vohra:]

Yes, approximately that number.

[Alok Dalal:]

Okay. And Umang, what would be the R&D guidance?

[Gunupati Venkateswara Prasad:]

We're maintaining R&D at up to 7% of sales.

[Operator:]

The next question is from Sonal Gupta from UBS.

[Sonal Gupta:]

Just on –- sorry, I might have missed these assignments [ph]. So I just wanted to know, are you still sticking with the $2.7 billion target given how the currency, et cetera, moves? And...

[Kallam Satish Reddy:]

So we're not specifically giving any revenue guidance. $2.7 billion is what we think directionally is possible. This is dependent on approvals time, launching on time, so a number of different factors. So I wouldn't point you to a specific number. Broadly, we are comfortable with that growth rate that we had this year over 30%. We will be in similar growth rates. That doesn't mean $2.7 billion is a number which we are guiding you.

[Sonal Gupta:]

Right. And just want to check up on whether you're still confident of a the 181 [ph] launch for Lipitor?

[Kallam Satish Reddy:]

We still don't have approval and it depends entirely on approval.

[Operator:]

The next question is from Chirag Talati from Espirito Santo.

[Chirag Talati:]

Firstly -- again, this is regards to your Promius Pharma in the -- had a very large portfolio. When is the earliest that we can see a candidate entering Phase III? And is it correct to kind of know that you will not be able to launch anything from your internal pipeline before 2016, 2017 now?

[Kallam Satish Reddy:]

Yes. I think that's a good, fair estimate. It could happen earlier. Maybe not a year earlier, but 2016 a good time to think about. We should have a Phase III asset this year, sometime this year.

[Chirag Talati:]

Would you like to comment on what kind of candidate is it? Is it a reformulation? Or you know of what indication it is targeting?

[Kallam Satish Reddy:]

Dermatology and reformulation.

[Chirag Talati:]

Okay. Fair enough -- and secondly on the penicillins portfolio, I mean, data just seem to indicate that you had a very strong pickup in market share in Q4 on the products you’ve launched. So what is the kind of revenue that you would have seen in Q4? Is it tracking your $60 million annualized guidance that you had provided at the beginning of the year?

[Kallam Satish Reddy:]

It's about there. Like marginally short of the $60 million, but around that range.

[Chirag Talati:]

Okay, fair enough. So in this quarter, we would have seen a positive contribution coming from the GSK plant in terms of gross margins?

[Gunupati Venkateswara Prasad:]

Right.

[Operator:]

The next question is from Abhay Shanbhag from Deutsche Bank.

[Abhay Shanbhag:]

Yes, I just wanted to check up on Zyprexa. I mean, what are the issue [ph], because it was launched, it'll only -- are you sharing all the profits? So was it a [indiscernible] so it would be -- you're not allowing the generics to take market share or what was it?

[Gunupati Venkateswara Prasad:]

Well if I may guess, there are a couple of factors. This is a CNS drug. CNS drugs don't completely switch. Many patients don't like to switch CNS drugs. That is one dynamic at work. There was an authorized generic which is taking care of the [ph] market share. So this market share pricing dynamic that is clear, and I think that we have done as good a job as anybody else out there.

[Abhay Shanbhag:]

Okay. And are there any implications for other follow-ups -- follow-up it keeps going forward, but is it only restricted to CNS and the market share gains are much more difficult?

[Gunupati Venkateswara Prasad:]

[indiscernible] very difficult to enforce on one launch and extend it to every launch. So yes, the dynamic depends on how deep the discount is from the innovator, what kind of a product [indiscernible] to be launched. So I don't want to hang that against and say this is [indiscernible].

[Abhay Shanbhag:]

And so I've been also at Watson did indicate -- announced on this conference call that there could be a 96% dilution on [indiscernible]. Would that be too aggressive an assumption or too conservative of an assumption?

[Gunupati Venkateswara Prasad:]

Depending on the [indiscernible].

[Kallam Satish Reddy:]

It could be worse.

[Umang Vohra:]

Can't comment on it, Abhay, right now. Can't comment.

[Abhay Shanbhag:]

And you're saying whether your launch would happen because you said it will depend on the approval time.

[Gunupati Venkateswara Prasad:]

Yes. We are ready to launch if we get approval on time.

[Abhay Shanbhag:]

Okay. One last question is on Europe, this pricing environment -- I mean, do you see some sort of stability coming in Germany after 4 to 5 years, or do we see these sort of erosions continuing?

[Gunupati Venkateswara Prasad:]

So there must be an end to this. It has to stop somewhere. I think, as a vertically integrated company, as we select products carefully, we will be comfortable in this game at some point. We haven't reached that point yet. We are working towards the rebuilding of product portfolio for this market, and we continue to believe that we can make a difference in this market and be a significant player.

[Abhay Shanbhag:]

Okay. And Russia, will the pricing rate still be recently stable so there's no -- not much of a threat in that market?

[Gunupati Venkateswara Prasad:]

Well, it looks like a typical branded market.

[Abhay Shanbhag:]

Okay. And there are no talks as what happened in Germany, any reforms of whether we're taking it towards tender or towards any other form of transactional reform there?

[Gunupati Venkateswara Prasad:]

No. Not yet.

[Operator:]

The next question is from Revic Aggarwal [ph] from MP Advisors.

[Unknown Analyst:]

Revenue from Germany declined by 15% in local currency largely due to continued tenderization of German markets. Is that phenomenon going to affect on top line and bottom line in our coming quarter?

[Umang Vohra:]

So I think if we continue to decline, it could have some impact on both the lines. But it is only less than 7% of our company sales today.

[Operator:]

The next question is from Hitesh Maida [ph] from Fortune Equity Brokers.

[Unknown Analyst:]

So this relates to PSAIs. You're seeing 21% growth in FY '12. So is this growth sustainable going forward or will we see a lower growth going forward? And sort of how is the -- are we seeing traction in the contract research space as well apart from the active ingredients space?

[Gunupati Venkateswara Prasad:]

Well, the businesses grew at similar rates. Growth in the API business is driven by the large number of products mix here in previous years. As long as products didn't expire in the filing time, this businesses, sustainable business.

[Operator:]

The next question is from Nitin Agarwal from IDFC Securities.

[Nitin Agarwal:]

Just alluding to the remark that Umang made earlier about FY '15 probably being there of uplift as far as the U.S. generic business is concerned. If you were to take that view, take about one step sort of 1/3 of the business creating some sort of uplift situation, PSAI is 25% of our business and it's -- with the patent, mega patent sort of, of expiry phase going off. There clearly will be limited growth opportunities for the business. And Germany on the other side is 6% of business. Just nearly 55% or 60% of our business essentially, we're facing growth issues in the 2 years. So where do we see a medium-term growth projected for the business. And what's going to drive it from there from there on?

[Gunupati Venkateswara Prasad:]

So the universe is somewhat slowing down. But that doesn't mean there are not enough opportunities that we can still go after. And the growth rates will come down, but then we are saying that we're still targeting growth in FY '14 onwards.

[Nitin Agarwal:]

So when you say that this lift situation in FY '15, this is with respect to the market...

[Gunupati Venkateswara Prasad:]

[indiscernible] does not mean that there are -- more like an exciting move here. There's a renewed set of opportunities and if you're clever about how you select your products and how you're going to grow the business, there's still growth possible. A rash of patent expiry, but there are other patent expiries, there are products expiring in the year. There's still an opportunity for us there.

[Nitin Agarwal:]

So you don't see a situation for you. I mean, you're hitting a $1 billion sort of a mark in about 1 year or so, and that being a challenge for you to grow sustainably from there on as far as generic part of the business is concerned.

[Gunupati Venkateswara Prasad:]

It's a challenge and we will live up to that challenge.

[Nitin Agarwal:]

And lastly, on the base of the business -- base that you hit on Q4 as of on the top line [indiscernible] EBITDA level, is it a sustainable sort of a base to run with? Or there is a lot -- compared to your seasonality, which are one-offs which are there in this number that is there for the current year -- quarter?

[Gunupati Venkateswara Prasad:]

There are some one offs, but I think the most [ph] one-offs on an ongoing basis. If you have enough of the critical mass of the pipeline, you will hit regular one-offs in the business. On a year-to-year basis, we should have regular annuities from these opportunities.

[Operator:]

The next question is from Kartik Mehta from Daiwa Capital Markets.

[Kartik A. Mehta:]

If you can update on the launch to-date or just your view on the upside for actually Fondaparinux in the EU market. And if I heard you right, you said you have 22% of the total market share or 22% of the retail market share for actually Fonda in the U.S. market?

[Kallam Satish Reddy:]

[indiscernible] of 22.5%, so I get to-date a view of the roving market. But having said that, how much of hospital is very significant, we have no idea.

[Kartik A. Mehta:]

So this is 22% of the total market in the U.S.?

[Kallam Satish Reddy:]

This is IMS data.

[Kartik A. Mehta:]

Okay. Yes, and on the EU, your partner there had some updates, could you throw some light on your...

[Kallam Satish Reddy:]

We just filed the product. It's too early to give you a date. Have to go through the R&D cycle [indiscernible] so the partner announced the filing.

[Kartik A. Mehta:]

Okay. And on you -- and bidding with a larger quantity in the U.S. market, is there any timeline with capacity constraint would be less from what it is now?

[Umang Vohra:]

So I think we have, at the moment, the divestments and we had an uptick that could be for the U.S. market. We have time for the new market, and we're gearing up for that.

[Kartik A. Mehta:]

No, I was actually mentioning to enter in the hospital part of the U.S. market.

[Gunupati Venkateswara Prasad:]

Kartik, we have enough...

[Umang Vohra:]

Lots of capacity for both, if we wish to take a part of it.

[Operator:]

The next question is from Dinesh Partak [ph] from Goldman Sachs Asset Management.

[Unknown Analyst:]

What would be the gross margin in the German's end of business?

[Kallam Satish Reddy:]

We don't provide that level of detail, but the margin is probably one of the lowest across all our business.

[Unknown Analyst:]

Even those in PSAI?

[Kallam Satish Reddy:]

Well, I was talking about the Global Generics businesses. So we don't provide product specific, but it will be at -- more or less at par with the business you mentioned.

[Unknown Analyst:]

Okay. Keeping it high in the last 2 years, what will be the guidance of CapEx in FY '13?

[Umang Vohra:]

We're continuing to see about $150-odd million.

[Unknown Analyst:]

Okay. And where is the CapEx going in [indiscernible].

[Umang Vohra:]

I think we're actually [indiscernible] the plant that we were looking aboard for our foundation units into a Biologics plant. These are some of the bigger CapExs.

[Unknown Analyst:]

Final question, the U.S. OTC would be about $160 million, right?

[Gunupati Venkateswara Prasad:]

[indiscernible].

[Unknown Analyst:]

FY '12?

[Umang Vohra:]

It was around $130 million.

[Unknown Analyst:]

$130 million. But the bigger ones here would be [indiscernible] and Allegra. Can you give a sense of how much these 2 are individually?

[Gunupati Venkateswara Prasad:]

We don't provide product-specific information.

[Operator:]

The next question is from Aditya Khemka from Nomura.

[Aditya Khemka:]

Can you give us some more color on the PSAI segment and the good growth that you are seeing this quarter? How do you see the segment exactly panning out in the next fiscal year and beyond that? How do you the business panning out from here at this [ph]?

[Kallam Satish Reddy:]

Yes, for this year, it was on the back of good product launches and all that. So that one is pretty well. So also, the services segment also revived, right? So you could probably expect something similar next year, but I don't think specifically talk about the growth numbers, but [indiscernible] from this call.

[Aditya Khemka:]

Okay. Okay, that's helpful. That's helpful. So just another question on -- so going forward, we're seeing good business, actually. And I understand that there's a little bit [ph] of cash. Do you see that there are enough inorganic opportunities in the market to which you would like to pursue or which you would like to assess going forward? And what can management tell us about that?

[Gunupati Venkateswara Prasad:]

There has been no specific answer to this. We are open to acquisitions, but they have to make sense for our strategy.

[Aditya Khemka:]

All right. And do you feel that -- as a part of the $2.7 billion target, any inorganic plans that you would require to do for that to achieve the target?

[Gunupati Venkateswara Prasad:]

No.

[Kallam Satish Reddy:]

No.

[Operator:]

The next question is from Priti Arora from Kotak Securities.

[Priti Arora:]

So I just wanted an update, have you launched Boniva tablets in Europe?

[Gunupati Venkateswara Prasad:]

No, not as yet.

[Priti Arora:]

Any reason why you got late approval compared to the initial peers who have come in?

[Gunupati Venkateswara Prasad:]

We don't have any specific reason on it. And we also don't know why we got late approval. But we haven't launched it yet [ph].

[Priti Arora:]

Okay. So I mean, should we expect the launch in near term or is it dependent on the litigation status?

[Gunupati Venkateswara Prasad:]

We can't comment on that right now.

[Priti Arora:]

Okay. And just your OTC business, you mentioned $130 million. Was the number for FY '11, around $60 million?

[Umang Vohra:]

Yes. $60 million.

[Priti Arora:]

Sorry, can I -- what did you mention?

[Umang Vohra:]

$60 million [ph].

[Priti Arora:]

And can you just update us on the Rosiglitazone 180-day exclusivity, what's happened with that?

[Kallam Satish Reddy:]

There's no market left for Rosiglitazone. There's no market left. So actually, no [indiscernible]. So I mean, considering the safety and the REMS program and all these issues, I think it's not an opportunity anymore.

[Priti Arora:]

Okay, okay. And can you quantify the Clopidogrel 300 MG version, how much is that market out right now?

[Kallam Satish Reddy:]

Priti, we can do this for you offline. I think there's a lot of indication that can be worked out based on market size and pricing. Maybe you can speak with Kedar and he'll try to help you out with that.

[Operator:]

The next question is from Rahul Sharma from KARVY Stock Broking.

[Rahul Sharma:]

I just wanted a sense on the market share of Fexo and Tacrolimus and Omeprazole OTC.

[Kallam Satish Reddy:]

I would really share these offline with you.

[Rahul Sharma:]

Okay. And another thing was on the [indiscernible] front, I probably did not hear it properly. It's going to be mad next year or what...

[Kallam Satish Reddy:]

It will be -- we've guided towards about 20-odd percent next year at the consolidated level for the company.

[Rahul Sharma:]

And do you foresee further impairment in the German markets coming in next 2 years to 3 years?

[Kallam Satish Reddy:]

I cannot comment on that. I don't know what the situation would be. I think what we are carrying on our balance sheet right now as a value close to EUR 65 million, EUR 70 million. And I think that should reasonably support the business.

[Operator:]

The next question is from Chirag Talati from Espirito Santo.

[Chirag Talati:]

Just a couple of questions. Firstly, what is stopping you or what is hampering your ability to sign a deal on Biosimilars for either for Europe or U.S.?

[Gunupati Venkateswara Prasad:]

Nothing.

[Kallam Satish Reddy:]

Nothing is hampering us.

[Gunupati Venkateswara Prasad:]

Nothing as such we are in discussions among [indiscernible].

[Chirag Talati:]

Okay. And secondly, with the addition of -- it's 1 year now since you acquired Cloderm. Can you give a sense of how the sales have shaped up and are you satisfied with the performance? And also, if you think your current level of sales for Promius make it a sustainable entity for the next 3 years on?

[Gunupati Venkateswara Prasad:]

On your first question, better than expected. We see tracking [indiscernible]. $20 million plus. The business is not at a level where it is sustainable yet. We expect it to take another 2 to 3 years to obtain meaningful value [ph].

[Operator:]

The next question is from Sonal Gupta from UBS.

[Sonal Gupta:]

Thanks for taking the follow-up question. I mean, it's partly similar to what people have asked there. I mean, you would be generating, at least from my calculation, even taking account your CapEx at least about $200 million to $250 million of free cash flow net of dividends. So just want to understand that, what are the areas to which you would sort of look at in terms of potential opportunities? And where -- I mean, what is your strategic fit?

[Umang Vohra:]

Sonal, we are still a net debt company. And if we do generate that amount of cash, we will -- $200 million, we will also net debt at roughly the same level. And so therefore, I don't believe that while some of the cash can be used for finding some strategic capability fit, we are not going to probably do any big bang acquisitions or anything else with this $250 million. So it's going to largely be used for funding an operating cash flows, or for retiring some part of the debt. And then when possible and when we find a strategic fit, we'll make a capability acquisition.

[Sonal Gupta:]

And I just want to understand what is your sort of maintenance CapEx on -- I mean, if you look, take a longer term view, what would be the average maintenance CapEx?

[Gunupati Venkateswara Prasad:]

There's no such thing as maintenance CapEx because we are growing aggressively in the pipeline. We are investing in creating facilities [ph]. So I think $100 million [indiscernible] in the next 3, 4 years. [indiscernible] capacity ahead of the curve. [indiscernible] We need more solid capability so [indiscernible] that expansion. So we're not creating new capacity [indiscernible].

[Sonal Gupta:]

Okay. And just finally, I mean, you're including in your outlook roughly emerging markets including India, Russia would be worth 30% of the turnover. I mean, again, are there any plans to sort of consolidate your position in those markets? And maybe would you look at potential M&A in those markets or are you looking for really just a small acquisition?

[Gunupati Venkateswara Prasad:]

It's hard to be that specific on the M&A strategy, because it's not just your intention, it comes with the availability of the right fit in terms of becoming available. So we retain our strategic option, but it's hard to predict.

[Operator:]

The next question is from Rajesh Galwani [ph] from HDFC Asset Management..

[Unknown Analyst:]

I just wanted to retouch on your guidance, do you still maintain the 25% RoCE guidance that you gave in the past for FY '13?

[Umang Vohra:]

We are maintaining that, Rajesh. We have made good progress here at 23.5% this year. We are maintaining the 25% guidance. And Prasad and Satish mentioned that we'll probably have the same level of growth that we had this year, the same level or higher. And directionally, just moving towards that rate of $2.7 billion.

[Operator:]

Ladies and gentlemen, due to time constraints, we'll take one last question from Ravi Agrawal from Standard Chartered Securities.

[Ravi Agrawal:]

So just on income, going back to the last question, you mentioned growth rate which we expect of around 30-odd percent for this year, or I guess a number which said you'd be comfortable with. Did that -- you roughly worked with around $2.5 billion, is that the benchmark to look for, for FY '13?

[Umang Vohra:]

We're not going to comment on specifics. As we mentioned, we're directionally moving towards the $2.7 billion mark. [indiscernible] growth rate will be offset higher than what we had this year. We're aiming towards -- potentially towards that -- the $2.7 billion.

[Gunupati Venkateswara Prasad:]

In that range.

[Umang Vohra:]

In that range. And we are still directionally going towards $2.7 billion.

[Operator:]

Ladies and gentlemen, that was the last question. I would now like to hand over the conference back to Mr. Kedar Upadhye for closing comments.

[Kedar Upadhye:]

Thank you all for joining Dr. Reddy's senior management for our fourth quarter earnings conference. In case of any additional clarifications, please feel free to get in touch with Investor Relations team. Thank you, and goodbye.

[Operator:]

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