Dr. Reddy's Laboratories' (RDY) Q2 2016 Results - Earnings Call Transcript

| About: Dr. Reddy's (RDY)

Dr. Reddy’s Laboratories Limited (NYSE:RDY)

Q2 2016 Earnings Conference Call

July 26, 2016 09:00 ET

Executives

Kedar Upadhye - Investor Relations

Saumen Chakraborty - Chief Financial Officer

Abhijit Mukherjee - Chief Operating Officer

Anil Namboodiripad - Proprietary Products

Analysts

Neha Manpuria - JPMorgan

Anubhav Aggarwal - Credit Suisse

Nimish Mehta - ResearchDelta Advisors

Manoj Garg - HealthCo

Chirag Talati - Kotak Securities

Sameer Baisiwala - Morgan Stanley

Prakash Agarwal - Axis Capital

Kumar Saurabh - Motilal Oswal

Saion Mukherjee - Nomura

Prashant Nair - Citigroup

Nitin Agarwal - IDFC Securities

Kartik Mehta - Deutsche Bank

Operator

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, sir.

Kedar Upadhye

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 first quarter of fiscal 2017. 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 and the 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 annual report filing Form 20-F with the U.S. SEC for the year ended March 31, 2016 and the quarterly financial statements filed in Form 6-K with U.S. SEC 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.

Saumen Chakraborty

Thank you, Kedar. Greetings to everyone. Let me begin with key financial highlights. For this section, all the amounts are translated to U.S. dollars at the convenience translation rate of Rs. 67.51, which is the rate as of 30 June, 2016.

Consolidated revenues for the quarter are Rs. 3,235 crores or $479 million and declined by 14% year-on-year. Revenues from our Global Generics segment are $395 million and PSAI segment is $70 million. Overall, the decline in the revenue is largely impacted by the lower revenues from North America generics and API businesses as well as loss of sales from Venezuela. North America Generic business witnessed increased competitive intensity in some of the key molecules, primarily valganciclovir and azacitidine. Further, we also witnessed pricing pressure and moderation in the volumes uptake. As discussed earlier, the PSAI performance continues to be impacted by delay in this packet on account of the ongoing quality improvement initiatives.

Consolidated gross profit margin for the quarter is 56.2%, recording a year-on-year decline of around 490 bps. As discussed earlier, increased competitive intensity for our key assets in generic business impacted the decline. Gross margins for Global Generics and PSAI were at 61.3% and 24.1%, respectively.

SG&A spend, including amortization for the quarter, is $192 million, an increase by 12% year-on-year. As guided in our previous calls, we continue to incur expense towards ongoing quality improvement initiatives and also sizable outlay towards launch-related activities by our Proprietary Products business with respect to Zembrace and Sernivo. Normalized for these changes and also the decreased spend based on Venezuela operations, the balance net increase in SG&A is largely attributable to normal salary incremental account increase.

R&D expense for the quarter at $71 million, representing 14.8% of revenues. This spend is in line with the ongoing set of developmental activities as planned. During the coming quarter, we will initiate further development of the recently in-licensed IP R&D asset from XenoPort and Eisai. On Venezuela, we have not received any repatriations during the quarter to-date and hence we continue to measure the financial statements of the Venezuelan operations at the current Dicom rate.

EBITDA for the quarter stands at $59 million, which is 12.3% of the revenues. The effective tax rate for the quarter is at 26%. However, we expect the annual effective tax rate to be in the range of 21% to 22%.

Key balance sheet highlights are as follows. Our operating working capital further decreased by $58 million during the quarter. Capital expenditure for the quarter was at $48 million. During the quarter, we concluded our share buyback program and thereafter ended the quarter with a net debt-to-equity ratio of 0.11.

Foreign currency cash flow hedges for the next 9 months in the form of derivatives and loans for U.S. dollars are approximately $228 million largely hedged around the range of Rs. 66 to Rs. 71.1 to the $1. In addition, we have balance sheet hedges of $191 million. We also have foreign currency cash flow hedges of RUB825 million at the rate of Rs. 0.99 to the ruble; and €4.5 million, largely hedged around Rs. 75 to Rs. 82.05 to the euro, maturing over next 9 months.

Effective this quarter, we are presenting the consolidated financial information under IFRS and Ind AS and standalone financial information under Ind AS. You will notice that the PBT under IFRS is marginally lowered by Rs. 35 crores relative to that presented under Ind AS. This is primarily arising from higher depreciation and amortization expense under IFRS resulting from a differential fair value base and also the treatment of the gain arising on fair valuation of the mutual fund investments.

Before I conclude, as some of you are already aware, Kedar Upadhye, after his 12-year stint with us, has decided to pursue his career outside Dr. Reddy’s. So following this, [indiscernible] member of the Investor Relations team will now lead the IR function.

With this, I now request Abhijit to take us through the key business highlights.

Abhijit Mukherjee

Thank you, Saumen. Greetings to everybody and welcome on this earnings conference call. Overall, the performance of the quarter has been quite muted. It reflects the adverse impact of competitive dynamics on the U.S. business, impact of ongoing remediation activities on the API business and no contribution from Venezuela in the current quarter. Overall, this has been a challenging quarter and every steps have been taken to get back to growth momentum. I will dwell upon each of these businesses in details going ahead. We continue to focus on key priority areas of quality improvement initiatives, execution of launches and strengthening of the pipeline.

Now, let me take you through some of the business highlights for each of our key markets. Please note that in the section, all references to numbers are in respective local currencies. Our North America revenues are $237 million and declined 20% year-on-year. The decline captures the full quarter impact of competitive challenges in some of our key assets. Further pricing pressure as well as moderation in volume offtake was noticed across Rx and OTC products. Against this tide, we consolidated our market share position of esomeprazole. Recently, you would have noticed our approval and launch of omeprazole and sodium bicarbonate capsules. We hope to see further improvement in approval rates and launches in this year.

On the emerging market front, there has been a fair bit of stabilization in the macro situation. Crude is more stable and so is the impact on majority Indian currencies. Russia business in ruble terms grew by 23% year-on-year and was stable sequentially. Teams continued their efforts in terms of optimizing the productivity and meaningful additions to the portfolio. As for IMS YTD 2016, our volumes have grown by 6.5% versus the market growth of 0.5%. Consequent to the latest approval in Russia, we are working towards pricing approvals and preparation for tender participation. As explained earlier, we did not have any revenues in Venezuela. We will continue to actively engage with the Venezuelan government to provide affordable medicines to fulfill the needs of the people of Venezuela, but with an assurance of the on payments.

India business revenues are Rs. 522 crore and grew 10% year-on-year. This was primarily due to the prevalent confusion in the market consequent to frequent NPPA [ph] pricing notifications that were experienced in this quarter. As for IMS, MQ period June 2016, we grew by 11.6% versus market growth of 8.8%. Team continues to focus on increasing the productivity and augmenting the portfolio. PSAI business posted revenues of $71 million and declined 21% year-on-year. This decline is primarily attributable to the delayed distractions on account of ongoing remediation activities coupled with some amount of moderation in the off-take of key customers.

On the proprietary side, we have launched Zembrace and Sernivo. These brands are gradually getting the traction. On the ongoing remediation activities, we believe most of the commitments made by us to the agency have been duly addressed. And in this quarter, we wish to meet the agency to discuss the progress and request for a re-inspection.

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

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Neha Manpuria from JPMorgan. Please go ahead.

Neha Manpuria

Thank you for taking my questions. The first is it correct that all of the remediation cost is pretty much done in this quarter, as you are close to completion of the remediation and what was that amount?

Saumen Chakraborty

So it’s pretty much done. We – so far, we would have spend altogether around $36 million. And I think it could be a couple of million more in future.

Neha Manpuria

And secondly, you also mentioned launch related activity for the proprietary portfolio, the two products that you have launched, is this – will this be lumpy and therefore, a lot of it was in the first quarter, as we go – or is this recurring in nature, I understand that some of it would be recurring, but if you could give us a break up, that would be helpful?

Saumen Chakraborty

Yes. So we have Anil Namboodiripad from Proprietary Products business in the call. I will ask him to respond to this question.

Anil Namboodiripad

Yes. So as with any new launches with proprietary products in the U.S., there are some upfront costs that are associated with the launch. Most of the costs are associated with market conditioning, as well as building awareness, trial and usage of the product. So we have an upfront cost associated with the launch, but going forward once we have established the awareness trial and inculcated usage, then the costs are going to be significantly lower in coming years.

Neha Manpuria

So it is fair to believe that this amount will therefore continue for a couple of – for few more years, then, the one related to proprietary products?

Anil Namboodiripad

Part of it will continue for some more years, yes.

Neha Manpuria

Okay, got it. Thank you so much. I have more questions but I will get back in the queue. Thanks.

Operator

Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Anubhav Aggarwal

Yes. One question on the U.S. sales, can you explain your comment on lower volume off-take in the U.S. this quarter, is this particularly referring to oral solids or injectable portfolio?

Abhijit Mukherjee

So when I said see competitive challenge, there are two ways one deals with it. Either you match the competitive price and keep the account or you give up the account, right. So either way, you have either a price erosion or a volume erosion. And so the total financial difference, what you see is an outcome of both. But primarily, it is due to the competitive challenges.

Anubhav Aggarwal

Okay, so that’s clear. And just a clarity on the U.S. sales this quarter, is there any impact of [indiscernible] brand for sales book in previous quarter, an impact of lower – higher price erosion on those sales which is flowing through in fully in this quarter or is there...?

Saumen Chakraborty

There is no one-time big impact.

Anubhav Aggarwal

So you mean that, like $237 million sales, let’s say if there is no more approval, largely the subsequent quarter sales are going to be around – does it more like becomes a base number for us?

Saumen Chakraborty

Yes. Of course, with the new product launch, it is going to go up from here. That’s what we can hope.

Anubhav Aggarwal

There is some supply related adverse adjustment, but not a very big one to be – so...

Saumen Chakraborty

On this end you would like to talk about sales book?

Abhijit Mukherjee

And the other issue, which I would since you asked the question, there is also with – we have been working with McNeil when they had their problem for last 2 years and there have been some contract work which we had been doing for the last few years. So that contract is getting to an end, it’s tapering off. First quarter, we are still there and then it’s going to virtually tapering off from this quarter. The bottom line impact, give or take, will be in the range of about $25 million per year annualized. So just to sort of put that on record, yes. And base business broadly, you can take this, give or take a little bit here or there.

Anubhav Aggarwal

Sorry sir, I was – when you mentioned about this contract, you are mentioning about the Shreveport work that you do, include as part U.S. thing?

Saumen Chakraborty

Yes.

Abhijit Mukherjee

Yes.

Anubhav Aggarwal

But Shreveport sales for us were almost like $50 million, so are you saying that we will have no sales from this facility?

Abhijit Mukherjee

We have a lot of own productions from Shreveport, several. And those will be pretty much intact. But there was a contract with McNeil for the last few years. So that is getting to an end.

Anubhav Aggarwal

Okay, sure. And just a sub-question based on that with the number, you had higher market share in Nexium, would this quarter would have captured the almost the good part of the Nexium or this was only partly captured and we are going to see still some benefit in Nexium in subsequent quarters?

Abhijit Mukherjee

The current market share is 15% that is at least I think still an effort for a fair market share, a little bit more. The discussions are on, whether it will succeed or not, we don’t know, but active discussions around. But otherwise based on 15%, we are pretty much close to it.

Saumen Chakraborty

No, he is asking, the whole quarter was reflective of that or it was part?

Abhijit Mukherjee

More or less.

Anubhav Aggarwal

Okay, sure. Thank you.

Operator

Thank you. We have the next question from the line of Nimish Mehta from ResearchDelta Advisors. Please go ahead.

Nimish Mehta

Yes, hi. Thanks for taking my questions. First question is related to the foreign exchange loss that you have booked for the Venezuela translation, so if we adjust for the backlog within the other expenses line item, we see that other expenses have reduced drastically, is that a proper observation or I am missing something here and if yes, then what is the reason?

Saumen Chakraborty

You are talking about this quarter, what we have taken in Venezuela?

Nimish Mehta

This quarter, I guess it was about...?

Saumen Chakraborty

Quarter, the DICOM rate, which was 272 in the last quarter end, has become 630 during this quarter. So that corresponding impact of that is around Rs. 7.5 crore. So we had, after the provision that has been taken in Q4, we had roughly around Rs. 15 crore in our Venezuela subsidiary. So out of which, Rs. 7.5 crore is now done, so balance, Rs. 7.5 crore will be there.

Nimish Mehta

While referring to one of your notes which mentioned about Rs. 300-plus crores of impact because of translation losses due to Venezuela, which may be one-time?

Saumen Chakraborty

So basically, if you are looking sequentially, then last quarter Q4 FY 2016 we had this Venezuela related adjustment also on the ForEx line. So that was a quantum amount of around Rs. 400 plus crores. On similar lines, right now it is around Rs. 7.5 crores, Rs. 8 crores.

Nimish Mehta

Which is about Rs. 300 plus crore because that is what I read in the notes to account that you mentioned, Rs. 340, 80 or Rs. 384 crores you know for this quarter is what I saw.

Saumen Chakraborty

So that would be on a standalone basis, but when we look at the consolidated financial statements, the Q4 FY 2016 included around Rs. 430 crores of loss which on similar lines is around Rs. 7.5, Rs. 8 crores right now.

Nimish Mehta

Okay, that’s fine. The other question is related to our Shreveport facility. If you can let us know what is the status of this facility? Was it in OAI status or what is that that you can confirm or validate of that one?

Abhijit Mukherjee

No so, there was you know lot of questions in between. So we reached out to the inspector. She has confirmed in writing that it is a VAI that she had exactly communicated at the end of the audit. So I don’t think there is a concern at least based on the way we have received the mail from the inspector. [Technical Difficulty] Yes VAI, yes.

Nimish Mehta

Okay, thank you very much, yes.

Operator

Thank you. We have the next question from the line of Manoj Garg from HealthCo. Please go ahead.

Manoj Garg

Hi, good evening. First off, let me also express my congrats to Kedar as he transitions to his new role outside of the company and thank him for all of your help over the years. I have a couple of questions. I would like to start on North American pricing. You cite pricing pressure as the key source of weakness, some of your competitors that have already announced in the U.S. namely TEVA and Sandoz have pointed to about mid single-digit pricing erosion during the last quarter which is actually a moderation from previous quarters. So one, can you, so can you quantify your pricing pressure within your portfolio and I would imagine that this is largely being exacerbated by the inability to launch new price offsetting products but maybe if you could quantify the pricing erosion?

Abhijit Mukherjee

So the erosion in pricing will be different from company-to-company, quarter-to-quarter depending on what gets what fee, competitive you know own sort of ingress into the market. So this specific quarter, I mean the full impact of Valcyte going generic was the major impact and also VIDAZA saw some impact. Dacogen was little earlier but you know since there is some share consolidation as well. So quite a few of our important assets have seen the erosion in this quarter specifically in this quarter on the base business, it is in double digit for us. But having said that, you know, it will vary from company-to-company, quarter-to-quarter.

Manoj Garg

Okay, but, so you are not – so in this, within the 16% decline in the U.S., can you break that down in price versus volume?

Abhijit Mukherjee

All right, so let me again, I just was explaining that when you see competitive intelligence, you see, sorry, competitive pressure, you see in most of your accounts. So you retain some, you give up some. The ones you give up is the volume reduction, ones you retain is the price erosion. So you should see overall the impact and very large part of the quarter-on-quarter price decline is due to the North American reduction and you know the rest is emerging markets and India, NLEM and such and so on and so forth. But probably about 70%, 75% of the difference is from North American price volume erosion.

Manoj Garg

Okay, that’s helpful. And then on remediation, you said, so your remediation efforts or the cost associated with the remediation effort should start to decline from here on, I mean, I think you just alluded to that you received some sort of notice of a VAI, can you just expand on that? In terms of the timing of that notice and what you expect in terms of FDA interactions or FDA inspections in the near term here?

Abhijit Mukherjee

So let me clarify, the question asked previously was regarding a specific site and it has nothing to do with the three impacted site, so that was a independent question on the VAI which I answered. So let me clarify that was about Shreveport. Regarding remediation, so, I mean, I mentioned, you know, between $35 million to $40 million is the total expense. It has more or less tapered off this quarter and you know because we have completed most of the commitments, some of the long term commitments would be continuing, that would be internal. So for all practical purposes you know that amount which I said between the last three quarters have played out.

Manoj Garg

Okay and then I'll get back in the queue but lastly on the TEVA Allergan generics portfolio that you acquired, I think seven are pending ANDAs one is in approved. Can you provide any color here as to when we can start you know expecting some revenue contribution from the seven pending ANDAs, I mean are they – how far along are they in the review process?

Abhijit Mukherjee

Okay, so even the one approved is settled, it’s approved but settled. So it’s not going into launch immediately. But in overall basis from next financial year onwards, we are hopeful of seeing few approvals off the eight assets, two are very meaningful. And the rest are okay about five oral solids, one topical, one drug device and another a film type of a product, yes.

Manoj Garg

Okay, thank you.

Operator

Thank you. The next question is from the line of Chirag Talati from Kotak Securities. Please go ahead.

Chirag Talati

Yes, hi, thanks for taking my question. First question, when do you expect the TEVA deal to complete and post completion, should we expect an increase in amortization charge?

Abhijit Mukherjee

So it may get closed in next couple of weeks for subject to the FDP [ph] approval. In all probability it may get closed in next couple of weeks. Now, this will be in process, so it will be a – amortization will only happen once the revenue starts coming in.

Chirag Talati

Okay, fair enough. And secondly on the $25 million McNeil contract that you talked about, so were any revenues from McNeil contract booked in this quarter and when does it exactly expire?

Abhijit Mukherjee

Yes, we booked, you know something in this quarter but it more or less starts tapering off from now in the next two quarters, small part of it will continue but most of it is – first quarter was almost let’s say 70% off a full run rate which was booked and then here onwards it starts depleting.

Chirag Talati

Okay, thanks. I have more questions. I will join back the queue.

Operator

Thank you. We have the next question from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Sameer Baisiwala

Yes, thank you so much. Abhijit, your comments are little confusing to me, when you say that the quarter capture see full impact of the erosion in the key assets and I say that because to the best of my knowledge, I think VIDAZA competitive thing happened only by the middle of May, so it should be maybe just six weeks impact. Second, Sumatriptan autoinjector would actually happen in July, so that should be the new hit that you would see in the current quarter. So maybe you have not seen the worst of the hits, and at the same time when you talk of the benefits of generic Nexium and you said that the quarter captures the full quarter impact of 15% market share, again the IMS data says that you practically had negligible market share until middle of May and it’s only then that you ramped it up to double digits. So your comment seems to be quite incongruous to from a timing perspective?

Abhijit Mukherjee

Okay. So, let me sort of deal with each one of those. So yes, about when we are saying full quarter, full quarter for couple of assets which earlier played out. Some of it is part of it, yes, so some of it is, especially Imitrex, would – still to come. And we have seen some of it. So to that extent, you are right, some of it has played out, some more will happen. Although this month’s sale seemed to be a little higher than our expectations, so yes, mine was – my comment was more general. This – some overflow into the subsequent quarter will happen to that extent if we do what you are saying. The second point which you mentioned on – what are the points, Sameer? Esomeprazole, yes. Esomeprazole market share and revenues are not fully limited. When you get in, you tend to sort of lowered a little bit, that’s how the customers take. But yes, it could be a little higher, but I wouldn’t be able to exactly give you absolute, every breakup of every $1 million, but there wouldn’t be too much of upside on that, actually.

Sameer Baisiwala

Abhijit, the second question here is that you have loaded up the entire erosion in the U.S. to these two products saying a competitive risk. But if I see that sequentially, your U.S. revenues are down roughly $50 million. If I annualize it, it’s about $200 million. And if I am not wrong, then both these assets, Valcyte and Vidaza, full year sales for you, I think is roughly about give or take $100 million each. So, what you are in effect implying is that both these products have gone zero, or the story is actually a lot beyond these two?

Abhijit Mukherjee

The story is not a lot beyond these two. Valcyte is a big hit. It used to be more like $120 million, down to say $40 million. But if you exactly add asset per asset, you will probably get some part of it. There would be, in general, always some competitive pressure coming in the base businesses. We keep also gaining a few which sort of keep on nullifying some of these. It’s possible that there are a few additional hits this quarter, which may or may not play out to the fullest extent in the subsequent quarter. So beyond this, I wouldn’t be able to give you. This is a little dynamic, you know this market, so it’s little dynamic. So, I – so you take the biggest hits, those are irreversible. And I agree with you, Imitrex will probably come in to a certain extent. Injectables, it happens a little slowly, because the GPOs are contracted out for a longer period, especially for Vidaza and things of that sort. And hence, it will happen, but not happen the way it happens in oral solids. So between these, you will have to work your figures out.

Sameer Baisiwala

For the two R&D Phase 3 trials that you plan to file for XenoPort and Eisai, what do you think is going to be your, on a 12-month basis, cash burn to these – to do these two trials?

Saumen Chakraborty

Very early to make a complete estimate, but it could be anywhere between say $20 million to $25 million for the year, this year.

Sameer Baisiwala

For each asset?

Saumen Chakraborty

No, combined.

Sameer Baisiwala

Okay. Well, Abhijit, with your permission, one more question. It looks like your quarter, your EBITDA has almost halved and your profit – net profit has almost got decimated. And really speaking here, it’s the negative operating leverage which is in play, which is that you have lost sales, but your cost remains at the same level. So, just a comment that do you see your $32 billion – Rs. 32 billion sales going up back to $38 billion and you restore the net profits or b) do you think you have the flexibility in the short order of time to take your costs down so that you get back to Rs. 400 crore, Rs. 500 crore profit levels?

Abhijit Mukherjee

First would be on both sides. But in a company where it’s largely innovation-based business model to drastically cut anything would not be the right thing to do and we don’t intend to do that. While having said that, there is – to look at hygiene reduction of cost and as we now have programs on at the moment as we speak with the consultant as well and we are looking very seriously into it. Coming back to the increase in sales, broadly, the emerging markets, whatever had to play out has played out. So, each of – by quarter-on-quarter, those two, including India, will keep increasing. The launches in both North America and U.S. will define how we sort of claw back to the full level. And if we get – it all depends on if you are able to crack a couple of big assets, then the whole story turns very quickly to the other side, but we will see how it unfolds, but yes, focus on essentially launching, getting sales back, that will be the key thing.

Sameer Baisiwala

And which are the big assets that you have in mind?

Abhijit Mukherjee

You never fail to ask these questions. So, you know that I am not going to answer those. But yes, I mean, the same thing, some launches this quarter, midsized assets. The big ones in public domain, you know, there is litigation amongst one or two assets, that ones not in litigation, I wouldn’t be commenting on.

Sameer Baisiwala

Okay, thank you so much.

Operator

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

Prakash Agarwal

Yes, thanks for the opportunity. Sir, just more color on the U.S. FDA remediation measures and the cost that you just spoke about, I know total costs being $36 million. Last quarter, you commented about $20 million in the 4Q. So, incrementally, about $16 million has been spent and what’s the outlook for the cost and on the FDA remediation, sir?

Saumen Chakraborty

Approximately, you are right. And your other question was in terms of status of remediation?

Prakash Agarwal

No, sir. How do we look forward? So, this – you said around this quarter, we will be having...

Saumen Chakraborty

Going forward, it will be much lower as I said just a few million dollars more.

Prakash Agarwal

Yes. And on the U.S. FDA, so we are expecting the meeting this quarter?

Saumen Chakraborty

Yes.

Prakash Agarwal

And then any broad expectations in terms of resolving and getting back our U.S. approvals and API sales back?

Saumen Chakraborty

We can’t speculate on that. So, let’s have the meeting then we will have to tell you what is outcome of the meeting.

Prakash Agarwal

But from a percentage perspective, remediation measures done till what extent, sir?

Saumen Chakraborty

Very high, closer to 98%.

Abhijit Mukherjee

Almost done. And percentage will not give the rate there. So essentially, everything whatever is committed has been done. What – the institutionalizational activities, which are ongoing, which will always continue, right? I mean, so we are about to send out the letter with the request for re-inspection very soon.

Prakash Agarwal

Okay, thanks for that. And second question on India and RoW markets, so India, if I am not wrong, UCB assets closed out at the end of this – last year around June. So, would not have captured. So despite we have done about 10%, so ex of UCB, we will be, what, flat growth and how do we look going forward? Has any of it will hit us bad or if you could quantify, that would be helpful.

Abhijit Mukherjee

There was one month of UCB, if I recall, last year. And yes, so it’s not that good, it’s not there. And initially, the new launch. In branded markets, we have lost channels a little bit. So, there is some impact of that. So, if you net of that, maybe you can take about 5 or so as the net growth. Large part impacted by NLEM, as you know, the current IMS has dropped very substantially. And on the MQP basis, we are still leading the market as I just mentioned. So overall, I think attractiveness of the market is down, but we will have to be selective on launches and we will continue our journey. Yes.

Prakash Agarwal

So we remain confident of a double-digit growth for this year?

Abhijit Mukherjee

Well, it depends on see the NLEM, did we – 3, 4 months back, did we know that the series of notifications will come in the market, more than just price impact, which is one aspect that the whole channel got destabilized. The frequent changes, asking for immediate stamping, all [indiscernible] of people continuously stamping new prices etcetera some litigations in place, so all that has disturbed this quarter. Beyond that I think this will settle down. So yes, we are still hopeful, let’s see, we are still hopeful. Low double digit, double digit, yes.

Prakash Agarwal

Okay, thanks. I will be in the queue.

Operator

Thank you. The next question is from the line of Kumar Saurabh from Motilal Oswal Securities, please go ahead.

Kumar Saurabh

Yes, hi. Thanks for taking my question. Just wanted to understand, on normalized level as in ex of remediation cost as well as any one-time hit, how should we look at the base business margins? And by when do we expect to reach back to the normal levels of 20% plus kind of margins? Is it something that only after the TEVA approvals that we should go back or do we think that we have products in our pipeline which could take us back to the margin levels where we were?

Saumen Chakraborty

So normally we would be expecting north of 55% to be the margin of our base business and in terms of the recovery, we were expecting the recovery to be in the second half. As we alluded earlier, we were reconciled to a decline in performance in both Q1 and Q2.

Kumar Saurabh

So I was mainly talking about the EBITDA margins because you know even below the gross margin levels…

Saumen Chakraborty

The EBITDA margin mainly got impacted by the lower sales, if the sales are Rs. 500 crores more that is a very significant impact on and the EBITDA margin going up.

Kumar Saurabh

Yes and also are SG&A cost as a absolute number also has gone up?

Saumen Chakraborty

Yes, so that will – remediation cost adjusted it will be a little less and as what Anil has talked from Proprietary Products that the initial cost of new launch, it will also get normalized.

Kumar Saurabh

Sure, sir. By when do we expect these NDA products to deliver the margins which our base business used to deliver?

Saumen Chakraborty

You know, I will have to redirect this question to Anil. Would you like to take this?

Anil Namboodiripad

Yes, so again I refer back to my earlier statement that with new launches the initial period involves a lot of investment to build the market confidence and usage of a product. We actually expect to see a big ramp up, so a lot of these investments that we are making I think later this year and into the following year. So we expect to have to see the benefits of all this by late next fiscal.

Kumar Saurabh

Sure, sure. And sir, how should we look at you know U.S. sales for this year, as you said that our India business should, we are hoping that low double digit kind of growth you are expecting in India business, what kind of growth we should expect for the U.S. business or that decline rather we should expect for the U.S. business?

Abhijit Mukherjee

Yes, so the earlier – one of the questions I was answering you know those – expectation on the products will decide everything like for everyone expectation of the product will decide everything approval of the product, so you know can’t really answer, I don’t know, I mean, I can’t give you the budget because on principle we don’t give you guidance on all that but we will have to wait and watch.

Kumar Saurabh

Sure, sure, make sense. I will join back the queue.

Operator

Thank you. We have the next question in line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee

Yes, hi, thanks for taking my question. So just on – the numbers are actually a bit confusing, you know the U.S. decline, now if you look at Valcyte, you said like it’s going from $120 million to $40 million, so that’s a quarterly drop of $20 million, which is much lower than you know $50 million that we have seen. I don’t know but VIDAZA, we don’t see Mylan or Actavis in the market yet as per IMS. And you know, you would have taken some Valcyte correction last quarter itself. So you know that’s one thing and you know the second thing is if you look at the material cost to sales under the NDA [ph] in fact it has improved Q-o-Q and remain flat year-over-year, so if the impact is because of pricing, we should have seen a significant correction in the gross margins which hasn’t happened, so it’s very confusing you know as to what’s happening?

Abhijit Mukherjee

Okay. So Saion, I think repeatedly this question is coming up, let me give you little more details on this. So on the OTC business, one was some seasonal correction, this was not the Fexo [ph] season, number one. Number two, there was, you know, some drop in the store-brand omeprazole as well. Whether this is very permanent or not we will have to see but there is you know some bit of these things which are adding up. Divalproex ER, we saw some significant reduction but there is also positive new, that’s why I was hesitant to give you little bit. Divalproex ER, I think we have won – looks like we have won back some of it and it will come back. So, it’s a mix of some of these things. These things continue to happen in U.S. market, right and there are whole host of other things, I am not going through the details. So broadly what is more worrying is the big assets have got impacted. The oral solids will have – will see immediate impact. The injectables take a little bit of a time, although it will happen. And so, that’s the story in a nutshell.

Saion Mukherjee

Okay. And in terms of new launches, you know, particularly in the U.S. market, how should we think about it because that’s quite critical in terms of gaining back margins etcetera. So you have said it will be stronger in the second half, can you just indicate how many products we should think of and also next fiscal year, so how is the pipeline looking in terms of approval?

Abhijit Mukherjee

So I said first half which is another few months to go, we will see a few one mid-sized and a few small hopefully depending on how, you know, we are ready for launch, few are partnered. Some of these products are partnered and so that’s the first half story. Second half story is we have got a few bigger assets but whether it shows up in Q3, Q4 will – you know it’s not about the number of launches, number of launches will happen, you know, there are quite a few settlements in Q4. But they may or may not be very big but the bigger ones, if one or two click then the story changes very rapidly. But we will have to wait. And so, it’s not that the story is not just in numbers. Numbers we will see, it’s not like last year that we will not have launches, we will have launches, we will keep announcing those as we go along. But what is the – which are assets which finally go through is going to decide the destiny.

Saion Mukherjee

Right. So I mean, I was just referring to you know the big assets, so you expect something this year, next year and what’s the certainty there, is it all dependent on litigation or something which can, which you have enough visibility to say that it can happen this year?

Abhijit Mukherjee

One is in public domain which is in litigation. You know a lot of it’s in litigation. Barring that, the rest couple are not in litigation, these are difficult assets depends on how much time, what, how FDA looks at it etcetera. And so we will see.

Saion Mukherjee

And so any update on Copaxone 20 mg, you know how far we have reached North Star with it?

Abhijit Mukherjee

So you know trying to fast pace as much as possible. At least the DMF sort of here you know that with the new process or trail back is over, the validation starting. So DMF deficiency in about 2 months, 2.5 months or so, we will try to sort of respond. The ANDA is much easier because it’s just taking the batches and providing the stability but the main thing is DMF, at least the DMF will try and respond in that time frame, more in line with what I said earlier.

Saion Mukherjee

So once you respond, you know, given that there is new guidance, when do you expect an approval then?

Abhijit Mukherjee

This is – again, I mean [indiscernible], I mean this is guidance is there. We have done a lot of work. We could more or less assume that to the best of our capability, we have done a thorough job, beyond that is the agency to sort of look into.

Saion Mukherjee

Okay. Thanks a lot. And I will get back into queue.

Operator

Thank you. The next question is from the line of Prashant Nair from Citigroup. Please go ahead.

Prashant Nair

Yes. Hi, I just needed some clarifications, when you mentioned the McNeil contract going away, you said – you gave a $25 million number, is that the impact on revenues or the likely impact on revenues or on bottom line?

Abhijit Mukherjee

It’s the bottom line.

Prashant Nair

Okay. And can you give some sense on what the revenue would be from that contract which would go away?

Abhijit Mukherjee

No. We will not going into those details at the moment.

Prashant Nair

Okay, alright. And secondly on the R&D spend now, on a full year basis where do you see it settling as a percentage of sales?

Saumen Chakraborty

It all will depend on sales. So it will be higher than the previous year because of additional R&D for XenoPort and Eisai. That absolute amount will be more or less in the same line outside these two.

Prashant Nair

Okay. And finally on the remediation costs, so I understand a lot of this will go away, but is there any part of this that would be recurring or would all of it ease off once...?

Saumen Chakraborty

So whatever we have – whatever remediation cost I have been telling you, it is more in terms of the legal and professional. But if there are some and for increase, which happened as part of the remediation, it was there and that is already part of our...

Prashant Nair

Okay, yes. But the number you mentioned earlier in the call, that’s for legal and professional.

Saumen Chakraborty

Yes. That’s right.

Prashant Nair

Yes, that’s it for me. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, due to time constraints, we will take our last two questions. The next question is from the line of Nitin Agarwal from IDFC Securities. Please go ahead.

Nitin Agarwal

Thanks for taking my question. Can you help us understand a little bit more on how the Reditux launch commercialization in Russia is going to go forward. And in general, how do you look at the biosimilar programs for us, given that there is a lot of activity seems to be happening now both on the U.S. and the European front?

Abhijit Mukherjee

So the big quant – a big tender in this year is in November and we are more or less getting set to participate there. And overall, we are much more cost effective. The discussions with the health ministry and the government has gone very well. There is very appreciative of the fact that we have got them savings to the healthcare. It’s a large – it’s a big saving. So we are optimistic about the November – participation in the November tender. And the other markets also, very actively, we are moving ahead. We have – I have mentioned, we have launched in quite a few markets, small markets and there it’s growing. But there are other emerging markets where very actively with agency discussions are going on. I think we are seeing much more traction in the willingness to sort of let the file get in. So that’s the emerging markets story. And on the regulated markets, the journey with Merck Serono continues. As I mentioned last time, this is a little far away. So as far as the revenue impact is concerned, there is -- immediately, there is nothing which needs to be factored in. But we would try to scale up as quickly as possible in emerging markets over the next, let’s say, eight to ten quarters. We will try to slowly start ramping up more.

Nitin Agarwal

Okay. And what would be the size of our biologics business right now, I mean...?

Abhijit Mukherjee

If you know exactly, do you?

Saumen Chakraborty

Around $50 million.

Abhijit Mukherjee

Yes.

Nitin Agarwal

And bulk of it right now will be coming from India?

Saumen Chakraborty

No. In India – and also there are quite a few emerging markets where we are selling.

Nitin Agarwal

Okay. Thanks. Thank you.

Operator

Thank you. Next question is from the line of Kartik Mehta from Deutsche Bank. Please go ahead.

Kartik Mehta

Is there any update on the site transfer status of Gleevec and if you could just maybe refresh us on some of the date or the quarter in which we should build in the number as per the settlement? Thank you.

Abhijit Mukherjee

Gleevec, the site transferred and data submitted, so it’s in the process of review as we speak. There is a date given for what’s called DAD. And we are hopeful that it will get through. But probably, you must have heard Novartis’ Con Call, which they mentioned that there will be probably a few people after the 6 months are over. So, I don’t know what – your guess will be as good as mine, what that means.

Kartik Mehta

Yes. But in terms of, I just wanted to understand from you, Abhijit, in terms of the date of our – the launch, which would have been settled. We should expect that we should be in the market on that date in terms of the site transfer being successful, right?

Abhijit Mukherjee

Yes, I hope so. So far, so good. And we expect to launch in the financial year is what I said probably last time.

Kartik Mehta

Yes, okay. Thank you.

Operator

Thank you. Ladies and gentlemen, due to the paucity of time, that was the last question. I would now like to hand the floor over to Mr. [indiscernible] for closing comments. Thank you, and over to you.

Kedar Upadhye

Thank you all for joining the call. And in case if you have any additional clarifications, feel free to reach out to the Investor Relations team. Thank you.

Operator

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

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