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Dr. Reddy’s Laboratories Ltd. (RDY) Q3 2011 Earnings Call

The financial highlights are as follows. Consolidated revenues for the quarter are at $424 million and represent a year-on-year growth of 10% and a sequential growth of 2%. Revenues from our Global Generics business stand at $303 million for the quarter, representing a year-on-year growth of 16%. Revenues from the Pharmaceutical Services and Active Ingredients segment at $111 million for the quarter represent a decline of 5% over last year.

Gross profit margin for the quarter is at 55% versus 51% a year back. This improved margin reflects the contribution from new products launched in the U.S. this year in our Generic segment. Gross margins for the Global Generics and PSAI segments are at 65% and 28% versus 60% and 31% respectively in the previous years.

This quarter expenses include certain items which are non-routine in nature and total up to approximately U.S. $9 million. These are as follows. A, There are expenses pertaining to our OTC business in Russia. You will recall that we had committed to building a strong OTC portfolio in Russia. This quarter has seen a higher spend on the top four OTC products from our franchise in line with the season at Russia.

B, in addition, we refinanced the betapharm loan in this quarter and as a result had to take a non-cash charge pertaining to debt origination costs, which were capitalized on our balance sheet in line with accounting literature at the time of taking the first Beta loan.

Thirdly, our spend on litigation in the U.S. has been high especially on the Fexofenadine related litigations of which we expect outcomes very shortly.

Apart from the above, in the India business we have seen an increase in manpower and associate expense on account of field force expansion done over the last one year.

Total SG&A expenses including amortization charges for the quarter and the expenses that I had mentioned to you earlier is that $142 million representing a year-over-year increase of 17%. The year-on-year SG&A increase for nine months is only 5%, which again reflects the nature of this quarter having certain one-time expenses.

R&D at $29 million for the quarter is at 7% of sales and represents a year-on-year growth of 46%. This increase is on account of a significant scale up in our R&D activities this year and going forward this upward bias may continue to a certain extent and we do expect to keep R&D at about 7% to 7.5% of sale.

EBITDA at $90 million for the quarter is 21% of sales representing a year-on-year growth of 10%. EBITDA for the nine months of this fiscal is $261 million and is also at 21% of sales. We expect the effective full year tax rate to be approximately 11% to 12%.

In this quarter, the higher R&D charge and build up with inventory for new launches in the U.S. had an impact on tax workings, which reduced the effective tax rate for the quarter. In quarter four, we expect the tax rate to catch up due to the anticipated launches and we expect to end the year at 11% to 12% effective tax rate.

Profit after tax is at $61 million and represents 14% of sales and the year-on-year growth of 19% adjusting for the impairment charges in the previous year. Profit for the nine months of this fiscal is at $172 million and is at 14% of sales.

This quarter our operating working capital increased by $24 million during the quarter. Capital expenditure for the quarter is $52 million and $139 million for the nine months of the year. Foreign currency cash flow hedge options for the next 15 months stand at $540 million as of date, hedged largely in the range of $47 to Rs. 48 to a dollar. Our current net debt is at $216 million and net debt to equity ratio is 0.20.

Starting with North America Generics it recorded revenues of $106 million for the quarter, which represents a year-on-year growth of 66% and a sequential growth of 12%. This has been the fourth consecutive quarter to demonstrate sequential growth of approximately $10 million each quarter. This growth is a result of market share expansion in our base business, as well as new launches and in spite of the delays in the launches of Fondaparinux and Fexo-Pseudo referred earlier.

We have launched seven new products in this fiscal year to date, three of which were late quarter three launches, including an exclusivity launch of Zafirlukast and second wave launches of Lansoprazole and Valacyclovir. Our initial contracted market share numbers for these products are encouraging and will be reflected in IMS numbers in the coming months.

Q4 we’ll also see a full quarter of sales for all these three products. Our launch of Zafirlukast generated lower than expected sales due to the surprise entry of an authorized generic. However, we continue to hold a high share of the volumes in this niche market and additional competitors also winning the exclusivity period could be emitted.

During the quarter, we filed six ANDAs and we now have 74 ANDAs pending approval at the USFDA of which 32 are Para IVs and 12 are first-to-file. These outcomes in Q3 for U.S. business demonstrate our ability to launch new products successfully and consolidate shares in key molecules.

Moving on to India, revenues for the quarter are at Rs. 301 crores or $67 million, which represents a 14% year-on-year growth. Revenues are lower than Q2 due to expanded — due to the expected season effect.

The year-on-year growth in the current quarter was led by volume growth and 8% — volume growth of 8% and contribution from new products launched in the last one year of 6%. During this quarter, we have launched 16 new products in India. Year-to-date the growth for India has been at 19%.

Our biosimilars portfolio continues to grow strongly with a year-over-year growth of 18% till date this year. It has been three years since we launched Reditux and we are glad that it is now our top five brands in India and is still growing steadily.

Our recent biosimilar launch Cresp is also promising especially after the launch in oncology segment in this quarter. In addition, we expect an approval and launch of our fourth biosimilar in the coming months.

Now moving on to Russia, the revenues are at $54 million, recording a year-on-year growth of 11% and sequential growth of 11%. The growth on the high base of the previous year is led by the volume growth across products. Our market rank is 13th as per Pharmexpert’s data for the year-to-date November 2010.

Our secondary sales growth of 21% in value and 33% in volume terms for the year-to-date November 2010 exceeded the market growth of 8% in value and 12% in volume terms during the same period.

Our launches in the last few quarters have being doing well on the back of effective branding and marketing efforts. Going forward, we expect a higher mix of OTC and in-license products in our portfolio.

Europe Generics recorded revenues of 35 euros million that is a decline of 7%. Betapharm recorded revenues of 23 million euros representing year-on-year decline of 24% due to price erosions caused by tenders this year. Our operating profit at betapharm till date is highest relative to previous year, largely on account of actions taken for the SG&A optimization in the previous year.

In December this quarter, the results of the AOK tender in Germany were announced and we could win only three products from this tender. While this is disappointing to us, we had in fact bid at prices, which are in line with the margin and profitability thresholds that we had set for ourselves. We’re also focusing our growth on products beyond the tender now with some launches expected soon.

Moving on to the PSAI business, revenues at $111 million was flat on a year-to-year basis due to the sluggishness in our services segment. The sequential growth of 12% was largely led on the back of new launches and an improved order book status in Active Ingredients business. This quarter we filed nine DMFs that include two U.S. DMFs, cumulatively the total DMFs stand at 436 and it includes 159 U.S. DMFs.

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