Dr. Reddy's Laboratories Limited
Q3 2013 Earnings Call Transcript

Published: 14 Feb 2013

[Operator:]

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Q3 FY '13 Earnings Conference Call. [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 of you, and thank you for joining us today for Dr. Reddy's earnings call for Q3 of fiscal 2013. 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 we submitted to U.S. SEC. To discuss the business performance and outlook we have today, G.V. Prasad, our Chief Executive Officer; Satish Reddy, our Chief Operating Officer; Saumen Chakraborty, our Chief Financial Officer; Abhijeet Mukherjee, President and Head of Global Generics; and members of Finance and Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcasted or distributed in press or media outlet without the company's expressed written consent. Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast. After the end of the call, in case any additional clarifications are required, please feel free to get in touch with the Investor Relations team. Now I would like to turn the call over to Saumen Chakraborty, our CFO.

[Saumen Chakraborty:]

Thank you, Kedar. Good morning, and good evening to everyone. Let me begin with the key financial highlights. For this section, all the figures are translated to U.S. dollars at a convenience rate of INR 54.86 to a dollar. The reported revenue for the quarter are at $522 million with year-on-year growth of 3%. As you would recollect we had recorded the onetime benefit of $99 million from the launch of generic olanzapine in Q3 of fiscal year 2012. Normalizing this effect, the year-on-year growth is robust at 23%. Revenues from our Global Generics segment are at $380 million. Excluding the impact of olanzapine from the previous year, the year-on-year growth is at 24%. This growth is largely driven by North America and the emerging market territories. Revenues from our Pharmaceutical Services and Active Ingredients segment, PSAI, are at $130 million and grew by 28% year-on-year. Consolidated gross profit margin for the quarter is stable at 53%. Gross profit margin for Global Generics and PSAI segments this quarter is at 60% and 29%, respectively. SG&A expenses including amortization for the quarter are at $156 million and increased by 12% year-on-year. R&D costs are at $37 million for the quarter, and on a sequential basis, have grown from 6% of the revenues to approximately 7% of the revenues, which is in accordance with our strategy to expand our R&D activities across focus segments. EBITDA for the quarter is at $110 million and is 21% of revenues. In the current quarter, due to the appreciation of rupee, our ForEx lines contains a loss of approximately INR 20 crores, attributable to time value [indiscernible] portion of the mark-to-market adjustment for cash flow options. On the similar structure, we had a significant gain during quarter 2, on account of the then appreciation in the rupee. Time value is a function of estimated volatility, and sign to maturities for the unexpired contracts. Profit before tax for the quarter is at $85 million, which is 16% to revenues. Excluding the benefit of olanzapine in the last year, our PBT has grown in excess of 40%. The effective tax rate for the current full year will be in the range of 20% to 22%. Tax rate for the current quarter is at 19%. Profit after tax for the quarter at $69 million is 13% of revenues. Key balance sheet highlights are as follows

[Kallam Satish Reddy:]

Thank you, Saumen. Performance for the quarter has been stable. We were able to maintain the momentum that we gained over the past few quarters, especially in the emerging markets and North America. The PSAI segment also demonstrated good performance for the quarter. I will now cover some of the specific business highlights for each of our key markets. Please note that in this section, all references are in respective local currencies, with respect to period average exchange rates. Revenues from North America business for the quarter are at $178 million. Year-on-year growth, after adjusting the impact of olanzapine, is at 32%. We have been able to improve our market share for some of our important recent launches

[Operator:]

[Operator Instructions] Your first question is from the line of Bhavin Shah from Dolat Capital.

[Bhavin Shah:]

Just wanted to get an assessment of the R&D spend for the quarter. It's been going up. Is there anything specific that we're incurring those towards?

[Kallam Satish Reddy:]

Normally, it is in the area of Generics and API, nothing extraordinary. The investment in, as you know, quarter-to-quarter, the expense depends on the products that are being developed, the biostudies that we do, the clinical development we do. But having said that, I think we see a trend of increasing R&D as we are investing more in products, which require clinical development. We are also going to be investing more in our Phase I study for biosimilars. And these 2 things will somewhat increase the R&D spend moving forward also to the -- incrementally as we go forward.

[Bhavin Shah:]

I understand that, sir, but in this quarter specifically, has there been some sort of extra spend, because the nature of filing will not change Reddy, or is it something...

[Kallam Satish Reddy:]

Filings usually lack the bio studies, and they don't happen on the same quarter. So you can't correlate based on spend and filing in the same quarter.

[Bhavin Shah:]

Got it. And the U.S. OTC business, how's been the growth there?

[Abhijeet Mukherjee:]

Abhijeet here. The U.S. OTC business is doing well. There is -- there was no other new launch in this quarter. Lansoprazole was launched in the earlier quarter, although the faction on Lansoprazole was not very high. But the other products, which is the major ones, Omeprazole, fexofenadine family, that has been, they're -- it's doing well.

[Bhavin Shah:]

Could you quote a broad number to this quarter for this segment, the U.S. OTC?

[Saumen Chakraborty:]

No, I -- it would be...

[Kallam Satish Reddy:]

We'll get back to you.

[Bhavin Shah:]

No problem. And that, lastly, the CapEx guidance for next year?

[Saumen Chakraborty:]

We have incurred INR 150 crores during the current quarter. YTD, spend is about INR 500 crores for the first 9 months of the current fiscal.

[Bhavin Shah:]

So FY '14, could you quote the figure?

[Saumen Chakraborty:]

It will be in the same range, Bhavin.

[Operator:]

The next question is from the line of Anant Padmanabhan from Cowen and Company.

[Anant Padmanabhan:]

I actually have 2 questions. First, I was wondering if you could elaborate on the performance of the North American Generics line a little bit more. It seemed like there was some good product flow in the quarter with Amoxil, Boniva and Singulair, and then Mylan's withdrawal from Tacrolimus, so why is there a delay in realizing a benefit from these launches? So that's my first question. And then the second one is in terms of your aspirational revenue guidance for 2013, I just wanted to get a sense of where it currently stands. Do you think you could you do over $650 million in the next quarter, particularly given [indiscernible] ?

[Saumen Chakraborty:]

So on the North America generics, this quarter in particular didn't have any major launch. We just launched Sildenafil which is, well, it's very insignificant in revenues. The products you mentioned, yes it got ramped up in terms of revenues during the quarter, montelukast, between oral, solids and the granules, that got ramped up. Also, metroprolol, we got our market share, but being the fifth player, being making sure we got it. But at -- the revenues are coming in from this month actually, from January. So overall, in North America, since we didn't have any major launch, the revenues could be little subdued. So the second question, which you asked on projection, I don't think we would be able to provide you a specific guidance on that. But yes, the [indiscernible] launch has gone very well. The market share, which is in, it is recently been reported as well past 70%. And for a launch, I mean, it's just about a month old, I think we are quite pleased with it.

[Anant Padmanabhan:]

If I could just ask a quick clarification, I think in the past, you said revenue guidance for '13 of $2.5 billion and then possibly $2.3 billion. So I just wanted to see where you stand on that at this moment?

[Gunupati Venkateswara Prasad:]

So this is Prasad here. That guidance was based on the certain assumptions of approvals based on the historical run rate of approvals. We are not very sure when these approvals are going to make it live. So there are -- the entire, if we have 1 or 2 approvals of the products that we hope will get approved, we could reach that revenue target. But everything depends on approvals by the FDA, and we have seen some level of a slowdown. I don't know if it's a pattern or if it's particular to our products, but I can't give you that kind of understanding. Subject to the approvals coming, we could reach that guidance, but it's uncertain. If it doesn't happen in the fourth quarter, it will happen in the next fiscal year.

[Operator:]

Next question is from the line of Anubhav Aggarwal from Credit Suisse.

[Anubhav Aggarwal:]

Just 1 question in the PSAI division. On the disclosure that you give out on gross margins, margins this quarter was quite weak on PSAI, compared to let's say, if I see trend of last 5 quarters. Despite the scale on PSAI being strong, any particular reason you see -- you did mention in your opening remarks that there was some delay on few high-value orders. But besides that, was there any particular reason?

[Saumen Chakraborty:]

Anubhav, there is no specific reason for this. In quarter 2, we had a very favorable product mix, as Satish mentioned. That's the reason we were tracking around 35% in quarter 2. But margins would move in the trajectory of 20% to 23% for the segment.

[Anubhav Aggarwal:]

Okay, so from the -- do you -- let's say, do you expect now the product mix to significantly improve from here onwards, when you say there was no particular reason?

[Abhijeet Mukherjee:]

There has been some price compression in 1 or 2 launch products. That's the reason for the quarter margins being stronger. But having said that, as we launch new products, it's likely to recover. There is some volatility in the margins based on pricing pressure. And -- but we don't see that as a trend.

[Anubhav Aggarwal:]

Okay. Just one more question on the U.S. business, we -- earlier you had mentioned about getting approval of 2 limited competition products in FY '13. Any status you want to provide on that? Should we -- and since we are almost there at half of this quarter, should we assume that most of these products will be shifted to FY '14?

[Kallam Satish Reddy:]

I have no idea, really, because we could get a [indiscernible], we could launch, but it all depends on things that we don't control, so we can't bear it.

[Anubhav Aggarwal:]

Okay, sir, just one clarity on metroprolol. What is the current market share? You said that most of the revenues was, it started from January. What's the current market share of metroprolol?

[Saumen Chakraborty:]

The contracted market share is in the range of 15%. Currently, what's tracking in public domain is about 10%, 11%, that's about 15% contracted market share. But however, you do, remember that, if the projections if at all, you're trying to make, we are the fifth player. And any player coming in would pull the prices down to a certain extent.

[Anubhav Aggarwal:]

Yes, sure but, just are you currently, let's say that -- I meant the February sales that you're doing, you're already doing, occurring 15% market share or 10% market share?

[Saumen Chakraborty:]

About 15% from January.

[Operator:]

Next question is from the line of Girish Bakhru from HSBC.

[Girish Bakhru:]

Just following on U.S., I mean, you've said that the next quarter probably we'll see benefits from the new launches, can you give color on, I mean, how many products you see in the next fiscal in U.S.? I mean, in terms of number or I mean, where do you see that business going to?

[Gunupati Venkateswara Prasad:]

Firstly, we didn't say that there are 2 products we're waiting on approval. There are many products waiting approval. We are not able to predict the approval timing. If some key products get approved, we could see a rebound in the revenue from North America. But the uncertainty of approval dates remain, and we can't give you color on that. I mean, there's nothing pending from our side. It is a normal regulatory process.

[Girish Bakhru:]

No, yes, but my sense was to get all of the pending, in these -- how many in these do you see, should see an approval occurring to you in U.S. in next year?

[Gunupati Venkateswara Prasad:]

We can't say that. We can't predict that.

[Girish Bakhru:]

Okay, and just another, on the -- Antara, I mean, if in case Mylan is able to launch, say in March, would you be able to clarify if you will enter the same time?

[Saumen Chakraborty:]

No, I don't think there is any plan on Antara.

[Girish Bakhru:]

But given that you have an approval, you -- is there something that would still block you from launching the product?

[Saumen Chakraborty:]

Girish, we'll separately come back to you on this one. We can't comment at this stage.

[Operator:]

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

[Bino Pathiparampil:]

Just a clarification on the U.S., the $178 million figure in your press release, is that the actual dollar invoicing?

[Saumen Chakraborty:]

Yes, Bino. That's the dollar invoicing.

[Bino Pathiparampil:]

Okay, so roughly if I calculate, you have taken the U.S. revenue at 52 to the rupee? Is that how we reported in rupees?

[Saumen Chakraborty:]

Yes.

[Bino Pathiparampil:]

So I understand that there haven't been any major launches in the quarter, but we had certain products ramping up in market share. Still sequentially, quarter-over-quarter, I see a decline. What can that be attributed to?

[Saumen Chakraborty:]

So, no, in U.S. generics market, if you don't have a launch in a quarter and price compression erosion is a regular picture of the business. It's likely to affect. It's important in being U.S. generics, being 45% of our Generics business, it's important that we have some meaningful launches every quarter. Metroprolol, as I said, got ramped up only this quarter, biggest reasons. So it's -- I think it's as per the business model.

[Bino Pathiparampil:]

Originally, when we were looking at $900 million plus in the U.S. sometime back for FY '13, we were also, at the same time, roughly guiding to already low growth in the U.S. in FY '14, given the way it lowers base in FY '13. Now that it looks like you will enter only a little about $700 million in the U.S., can we look at FY '14 as a strong growth year?

[Abhijeet Mukherjee:]

So we wouldn't comment on that figure specifically, but in general, you're right. Any deferred revenue because of approval is bad news for a particular year, and possibly better news for the subsequent year.

[Bino Pathiparampil:]

All right. Then finally, on the ALK contracts that you are recently there in Germany, how have your -- has your position been, compared to what it was earlier?

[Gunupati Venkateswara Prasad:]

We have taken a strategic decision in toning down and going low on the tender businesses because the -- it's not bottom line accretive. So we -- the competition has taken the prices to, we have taken a conscious decision in going down on tender play in German business.

[Bino Pathiparampil:]

If you could give out the German revenue, separately from the rest of Europe, it would be great.

[Saumen Chakraborty:]

We did EUR 19 million during the quarter, Bino.

[Bino Pathiparampil:]

In Germany?

[Kallam Satish Reddy:]

Yes.

[Operator:]

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

[Sameer Baisiwala:]

Just curious about -- I know year to year, the approvals can make things quite difficult to predict. But if you take a view 3 years out, what do you think is the sales growth potential of the business? Is it early teens, mid teens, late teens? Any color on this would be very helpful.

[Saumen Chakraborty:]

So are you talking about the Branded business or you're talking about the U.S. Generics?

[Sameer Baisiwala:]

U.S. specifically, and overall, if you can.

[Saumen Chakraborty:]

U.S. specific -- U.S. business, as you know, Sameer, it's very, very dependent on the product approvals. And going ahead, we have actually mentioned many times over that the product mix is going to move towards more complex, less competition products. And hence, the predictability of approvals is equally sort of uncertain. So it's -- if you get approvals on time, if you get the right products, it's going to be very good. And if it gets deferred, it's difficult to put a number based on a year-on-year basis.

[Sameer Baisiwala:]

Yes, but what I'm saying is, 3 years average, so...

[Abhijeet Mukherjee:]

We remain optimistic. The U.S. business is certainly -- has a lot of potential if we can bring in the differentiated pipeline to bear. I hate to put a number at this point of time. But we still think it's one of the [indiscernible] for the company.

[Saumen Chakraborty:]

And I think there was a question on increasing R&D costs, and some of these things are directed to us, high competition, the highly complex products.

[Sameer Baisiwala:]

Okay just on that point, and I think Prasad also mentioned that they're still going into products, which require clinical trials. Is it possible to give more color on this? I mean, what are these different types of...

[Saumen Chakraborty:]

It's difficult to give you specifics, but if you look at the kinds of moves we are making, external R&D partnerships, the acquisition that we just made, we feel more towards technology platforms where a certain amount of clinical developments of -- in our investment in R&D, all these R&D and technology. These are things we are doing with a game plan in mind, complex injectables, difficult to characterize products, Biologics, peptides, these are the areas that we are focusing on. As we file, you will -- the story will unravel. I had to make -- give you something more specific than that at this time.

[Sameer Baisiwala:]

Okay, and one final question. Of the 65 pending ANDAs, is it possible to say what percentage really belongs to these niche products?

[Abhijeet Mukherjee:]

I think historically, it will be difficult. I think the needle haven't moved that much, if you think historical pending ANDA. Going forward, our goal is to have at least 30% of our filings and products, which have some uniqueness to them.

[Operator:]

Next question is from the line of Prakash Agarwal from CIMB.

[Prakash Agarwal:]

On the ForEx currency hedges, the $600 million, so I just wanted to understand how is it spread across or how should we assume the numbers?

[Saumen Chakraborty:]

So Prakash, these are hedged between 55 to 61.

[Prakash Agarwal:]

I understand that. It's for 18 months. So I wanted to understand whether they are equally distributed or it's front ended or...?

[Saumen Chakraborty:]

Yes, most of [indiscernible] is fair, Prakash.

[Prakash Agarwal:]

Okay, and secondly, again on the guidance, I mean, obviously, we had even in the last quarter, we had discussed about, because of delay in approvals, you might see some softness for '14. And assuming there's a high base in '13. So just wanted to get Mr. Prasad's thoughts on that.

[Gunupati Venkateswara Prasad:]

Well, I think -- as I mentioned earlier, it's hard for me to put numbers without visibility on the approval dates. But whatever we don't do this year will certainly happen next year.

[Prakash Agarwal:]

Okay, and lastly, if you could share the market share for fondaparinux and Tacrolimus?

[Saumen Chakraborty:]

For Tacro, within generics, we are at 24%.

[Prakash Agarwal:]

34%?

[Saumen Chakraborty:]

24%, within Generics. We are at 44% for Tacrolimus.

[Prakash Agarwal:]

And for fondaparinux?

[Saumen Chakraborty:]

We are at 29%.

[Prakash Agarwal:]

And this includes the -- you started the other segment, the hospital plus the...?

[Abhijeet Mukherjee:]

It's all included. 29% is all included.

[Prakash Agarwal:]

All included, 29%.

[Operator:]

The next question is from the line of Ranjit Kapadia from Centrum Broking.

[Ranjit Kapadia:]

Some of my questions relate to biosimilars. We have achieved a 47% strong growth in the domestic market, so if you could give some outlook, how the business is going to shape up? And my second question relates to our total saving market share in the U.S?

[Saumen Chakraborty:]

So we have 4 biosimilars in Indian market, and this year, we expect, roughly revenue, roughly in the range of about INR 100 crores, which is a good milestone for us. All 4 molecules are growing, and your second question was? [indiscernible], so we are around 15%, hovering around 15% market share. Being the sixth player, I think there's a fair share for us.

[Ranjit Kapadia:]

And how many players are there, currently?

[Saumen Chakraborty:]

6.

[Kallam Satish Reddy:]

6.

[Ranjit Kapadia:]

We have 6, and we have only 6 players are there?

[Saumen Chakraborty:]

Yes, only 6 players. And yes, we were the sixth one, yes.

[Operator:]

The next question is from the line of Faveka Verwal [ph] from MP Advisors.

[Unknown Analyst:]

So my first question, we look to your margins. Your margins declined by approximately 51 [ph] basis points on quarterly basis. So what was the difference between the last quarter and this quarter that had led to decline in margins around 20%, on quarter-on-quarter?

[Saumen Chakraborty:]

The basic gross margin is fairly stable between quarter 2 and quarter 3.

[Unknown Analyst:]

Yes, I'm talking about EBITDA.

[Saumen Chakraborty:]

Yes, so we have seen an increase in R&D expense and [indiscernible] spend, which is in line with our plans. So I think...

[Kallam Satish Reddy:]

The SG&A, I think, Abhijeet has a comment to make.

[Abhijeet Mukherjee:]

So there is, in Q3, there is some growth in SG&A, primarily a couple of things. With the onset of winter, some products were launched on the OTC side, coupled with the commercial spend, which increased to a certain extent SG&A, and also there was some rationalization in Germany.

[Unknown Analyst:]

Yes, so I just want to know what are the ForEx component above EBITDA line.

[Saumen Chakraborty:]

It's a loss of INR 10 crores.

[Unknown Analyst:]

A loss of INR 8 crores. And is it included in?

[Saumen Chakraborty:]

That includes, that is including the mix of finance expense line.

[Unknown Analyst:]

Okay, net [indiscernible]. So I just have one more question. Do you have tentative approval like a tentative approval of Aloxi in U.S., sir? Can you give some timeline when you are going to launch that product? Aloxi.

[Saumen Chakraborty:]

What's the name of the product?

[Unknown Analyst:]

Aloxi, it's a palonosetron.

[Saumen Chakraborty:]

So that's quite some time off. It's going to be a good product, but I think it's quite some time off.

[Kallam Satish Reddy:]

I think that's far away.

[Saumen Chakraborty:]

Yes, yes.

[Unknown Analyst:]

Yes, so this -- [indiscernible]?

[Kallam Satish Reddy:]

We don't have a definite date of launch there.

[Saumen Chakraborty:]

Yes, so if we could look at the certain landscape, you have done today, I don't exactly recall when it is, but it's not recent.

[Operator:]

The next question is from the line Rashmi Sanjiri [ph] from Synergy [ph] Securities.

[Unknown Analyst:]

First question is related to Europe. Can you just give us the breakup, like how much did growth [indiscernible]?

[Saumen Chakraborty:]

Rashmi, we can take this, [indiscernible] after the call.

[Unknown Analyst:]

Okay, apart from that, just a slight clarification. In your profit computation table, you have mentioned INR 1.3 crores as net interest income, and total net finance expense is around INR 9.6 crores. So if I add that, around INR 11 crores, it is related to which item? In the press release, you have mentioned that INR 1.3 crores is your net interest income. And total net finance expense in the P&L statement is around INR 9.6 crores. If I add that, it comes to around INR 11 crores. So can I -- can we say that it is related something to ForEx?

[Saumen Chakraborty:]

I think we can give you the details after the call.

[Unknown Analyst:]

Okay, and my last question is related to your EPS SPF filing. Can you just give us the market price of [indiscernible]?

[Saumen Chakraborty:]

We'll be working on this, [indiscernible] after the call.

[Operator:]

The next question is from the line of Rahul Sharma from KARVY Stock Broking.

[Rahul Sharma:]

So just wanted to get the feel, is the U.S. market getting more and more competitive? Is the landscape changing quite rapidly, sir? And secondly, sir, are CIS's business is gaining good traction. So just wanted some view on that.

[Saumen Chakraborty:]

The U.S. market is getting competitive. But I -- we don't see -- it's been getting competitive for the last -- quite a few quarters. So as more people coming in, it's going to get competitive consolidation of the channels. So there would be competition, but we are all trying to factor in to the best of our capability some those things in all, in all things modeled. The second question was? Yes, so CIS has been doing extremely well. Russia, CIS you're talking about, yes. I think that Q3 anyway, is a good quarter. But overall, I think we have very positively placed in both, in not just Russia, but even the CIS markets have grown very healthy this -- Ukraine is scaling up. There is OTC, which is just sort of being concluded for Ukraine, which will provide some more sort of revenues in Ukraine. So I think the overall, I think it's a very positive story as far as our case is concerned.

[Rahul Sharma:]

How many products launched in the U.S. markets, including all generics on [indiscernible] date?

[Saumen Chakraborty:]

[indiscernible]? We launched 1 product, [indiscernible] .

[Kallam Satish Reddy:]

So [indiscernible] lots and lots of products, actually. So now we have lost count, actually. It's already achieved scale. So this quarter was, as I mentioned, 1 product and not significant, financially.

[Rahul Sharma:]

What about R&D, will it be up 7% going ahead for the years to come, or we will see it in the range of 6% to 7%?

[Saumen Chakraborty:]

I think it will be north of that.

[Rahul Sharma:]

Okay, and what is the tax guidance for next quarter?

[Saumen Chakraborty:]

We have tax, 20% to 22% range.

[Operator:]

The next question is from the line of Nitin Agarwal from IDFC Securities.

[Nitin Agarwal:]

Prasad, you mentioned in the opening you've [indiscernible] mentioned about, the emerging markets in the opening comments, now, are we -- do you see the emerging markets, although we've had fairly decent growth in the segment in the first 9 months, with all the initiatives and all that we will be working on, including the GSK deal and all, are we hitting some sort of a tipping point in the emerging markets trajectory, growth trajectory from here on?

[Saumen Chakraborty:]

I think no, Russia, and a few select markets would continue to drive growth in next few years. And along with the U.S., I think this will be a major driver of growth today. It will be 2 maybe of the lesser growth for Global Generics business, not to [indiscernible].

[Nitin Agarwal:]

Outside of CIS, which of that markets where you see growth really scaling up from this level, from -- as we go along?

[Abhijeet Mukherjee:]

Collectively, there are many markets, but there are 3 or 4 large markets.

[Saumen Chakraborty:]

So basically, South Africa is 1 of them. so I think we already talked about the large markets, but South Africa, there's Venezuela, which, of course, has a little bit of currency devaluation now, which is going on. But these 2 are pretty big markets, and in the future, we'd also have China coming in. And Australia is also scaling up quite well.

[Nitin Agarwal:]

Secondly, on the Tacrolimus, benefit from a market disruption which happened, we know at 45%, 46% market share, pretty much -- it's fairly commendable, but is there a risk of some sort of a normalization to this business as you go along, an impact on the numbers?

[Saumen Chakraborty:]

Possible, like in an into that's -- an approval's coming. But since we spoke, there have been a couple of entrants.

[Nitin Agarwal:]

And lastly, on the API business, how do you see, the current year was a big year for [indiscernible]. I think a lot of the [indiscernible] are a little bit thinner as we go along for the next 2 to 3 years, at least the next 2 years. So in this context, how do you see how this business really playing out?

[Saumen Chakraborty:]

I think, high single-digit to low double-digit growth is simply [indiscernible].

[Nitin Agarwal:]

Now, on a sustainable basis?

[Saumen Chakraborty:]

Yes, absolutely.

[Nitin Agarwal:]

Lastly, if I could squeeze in a last one. You mentioned about rationalization cost in Germany. If you can indicate some sense in what was the extent of this cost?

[Kallam Satish Reddy:]

Very small. It's not -- it was not very big. The range of EUR 1.5 million, yes.

[Saumen Chakraborty:]

Around EUR 1 million, Nitin.

[Operator:]

The next question is from the line of [indiscernible] from Goldman Sachs.

[Saumen Chakraborty:]

Morgan, you can take the next question.

[Operator:]

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

[Anubhav Aggarwal:]

Two questions. One, metroprolol, can you just indicate roughly, what is the current annualized generic market size of the entire segment right now?

[Saumen Chakraborty:]

That, we wouldn't be able to comment. And we, at this too, the selling price of other countries as well. But you could make your modeling based on the fifth player coming in.

[Anubhav Aggarwal:]

Okay, and just 1 question on Lansoprazole RX, after 2 new entrants getting approval and launching their products, how has been, let's say, if I look from after the 2 new entrants coming in, how has been the price erosion on this product for you, let's say on the pricing front?

[Kallam Satish Reddy:]

So there is some erosion. There is some erosion, but as it happens, if -- as competitors come in, one after another, it's sometimes a little better than all 5 coming together on the first day.

[Anubhav Aggarwal:]

But would you, just for the benefit of us, would you say that there has been like, only some erosion or it's been like, I mean, decent erosion, I mean, just...

[Abhijeet Mukherjee:]

This is perception in our mind...

[Saumen Chakraborty:]

And it's moderately decent.

[Operator:]

The next question is from the line of Monica Joshi from Avendus.

[Monica Joshi:]

Just 2 questions. Just to clarify whether your R&D cost this quarter includes any GDUFA fees, and if not, will that come into the following quarter?

[Saumen Chakraborty:]

Yes, so, Monica, GDUFA fees are included. However, more in R&D, those are included in the G&A line.

[Monica Joshi:]

Could you quantify that?

[Saumen Chakraborty:]

It's $1 million, Monica.

[Monica Joshi:]

That's a little surprising because wouldn't -- given your pending approval status, wouldn't that be a little higher? Or would you have some bit of punching up in Q4, too?

[Saumen Chakraborty:]

In terms of filing, and a lot more of the fees were booked in the previous quarter, Monica. In quarter 2 itself, we have taken that charge.

[Monica Joshi:]

Okay. Secondly on the custom synthesis side, I missed your comment. Did you say that is some shift that you saw in some high-value product, which are going to be pushed into the next quarter? Or is it that you saw some traction this quarter?

[Kallam Satish Reddy:]

We already saw some traction this quarter, and that will continue.

[Operator:]

Ladies and gentlemen, due to time constraints, only one last question can be taken. The last question is from the line of Saion Mukherjee from Nomura.

[Saion Mukherjee:]

Two questions here. Firstly, just on R&D spend, what percentage of the spend, currently you think is going for Biologics, if you can share that? And how you see that, going forward? And if you can also elaborate on your plans for filing for Europe? And any key approvals that you expect over the next 2 years, like in rituximab in Russia, or any other emerging markets.

[Saumen Chakraborty:]

So we are not disclosing the breakup of the R&D effort. And Russia certainly could be possible in the next 2 years, but not in Europe. I think we would still have to do the Phase IIIs before we file. And we're not indicating a timeline at this time for the Russian filings.

[Saion Mukherjee:]

And what about Europe, sir?

[Saumen Chakraborty:]

The new products in Europe. Second question here.

[Kallam Satish Reddy:]

Yes, I know, biosimilars in this [indiscernible] .

[Saumen Chakraborty:]

That is current, and the rituximab? Yes, on Europe the market, are we really?

[Kallam Satish Reddy:]

Can you repeat your question?

[Saion Mukherjee:]

Yes, I mean, was just wondering, you have been talking to the regulatory agency for your filings, now you have a collaboration with Merck as well --

[Saumen Chakraborty:]

This is for biosimilars, right?

[Saion Mukherjee:]

For biosimilars, yes. So I was wondering, so where do we stand? I mean, do you see some filing happening over the next 2, 3 years [indiscernible]?

[Kallam Satish Reddy:]

3 years? 3 years is possible, 2 years maybe too ambitious.

[Saion Mukherjee:]

I see, but do you see your -- I mean, how you see yourself versus competition for the regulated market in Biosimilars? In the products that you're targeting, do think you would be, and any of them, be in the first wave in any of the regulated markets?

[Saumen Chakraborty:]

It's entirely likely but we could be in the first [indiscernible] or at least [indiscernible] for rituximab.

[Saion Mukherjee:]

And I don't know whether you've shared this before, just wanted to check, what is that cash flow hedge loss that you incurred in this quarter?

[Saumen Chakraborty:]

Saion, it's around INR 55 crores for quarter 2.

[Operator:]

Thank you. Ladies and gentlemen, that was the last question. I would now like to hand over the floor back to the management for closing comments.

[Abhijeet Mukherjee:]

Thank you for joining Dr. Reddy's management for the quarter 3 FY '13 earnings call. In case of any additional clarification, please feel free to get in touch with the Investor Relations team. Thank you.

[Operator:]

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