Q3 2004 Dr. Reddy's Laboratories Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good evening, ladies and gentlemen. Welcome to (indiscernible) Q3 (indiscernible) '05 results conference call. For the duration of the presentation all participant lines will be in a listen-only mode. After the presentation the question-and-answer session will be conducted for participants connected to (indiscernible); after that there will be a Q&A session for participants connected to (indiscernible) international bridge followed by a Q&A session for participants connected to (indiscernible) India. I would now like to hand over to Mr. Nikhil Shah of Dr. Reddy's Laboratories. Thank you and over to Mr. Shah.

NIKHIL SHAH, IR, DR. REDDY'S LABORATORIES, LTD.: Good morning and good evening to all of you. I'm Nikhil Shah, the investor relations officer at Dr. Reddy's. Thank you for joining us to discuss Dr. Reddy's financial results for the third quarter of fiscal 2005.

By now you should have seen the press release as well as the additional financial disclosure that we released earlier this evening. The results are also posted on our website on the homepage under the QuickLink's icon. To discuss the results we have on the call today, G.V. Prasad, our Chief Executive Officer; Satish Reddy, Chief Operating Officer of the Company; and V. Vasudavan, our Chief Financial Officer.

Please note that all the discussions and comparisons during the call will be based on U.S. GAAP numbers and the IR desk will be available to answer any queries relating to the Indian GAAP immediately after the conclusion of the call. To ensure full disclosure we are conducting a live webcast of this call and a replay of the call will also be available on our website soon after the conclusion of the call.

Additionally the transcript of this call will be available on our website at www.Dr.Reddy's.com under the QuickLink icon soon after the conclusion of the call. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or (indiscernible) on media outlets without the Company's express written consent.

Now the Safe Harbor statement. I would like to remind you that the discussions and analysis during the duration of the call might include forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and predictions about future events. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially.

Such factors include but are not limited to changes in local and global economic conditions; our ability to successfully implement our strategy; the market acceptance and demand for our products; our growth and expansion; technologies and change; and our exposure to market risk. By their nature expectations and predictions are only estimates and could be materially different from the actual results in the future.

And now to get started, let me turn the call over to G.V. Prasad, our Chief Executive Officer.

G.V. PRASAD, VICE CHAIRMAN, CEO, DR. REDDY'S LABORATORIES, LTD.: Thank you, Nikhil. Good evening to those of you in Asia; good afternoon to the people in Europe; and to those of you in the U.S. a very good morning. I wish to thank you all for joining us on this call today. By now most of you may have read the results and the note that we released earlier this evening. As you can see, revenues are lower by about $11 million resulting in a decline in gross results by about $5 million. It has definitely been a challenging quarter and I will discuss the individual business dynamics shortly.

Coupled with (indiscernible) our increased investments in pipeline expansion and business building activities has resulted in the profit after tax being significantly lower at about $1 million compared to $13.7 million in profit for the same period last year. As you are aware, all of last year we (indiscernible) we have made a significant in R&D. And as many of you will agree, it is important to fuel the R&D engine that provides for future growth even though our profitability would have been much better without these investments.

A strong emphasis on pipeline expansion helped us to build a pipeline that now includes 39 pending ANDAs in the U.S. with 63 BMFs (ph) and with more than 30 projects under development. Of the 39 ANDAs, 13 include non patent challenge and about 26 include patent challenges addressing innovator sales of $22 billion.

As we go forward we are now focused on building a balanced portfolio that will help us deliver consistent year-on-year revenue growth. In our innovation lead businesses of discovery and specialty we now have six (indiscernible) at various stages of development and a niche dermatology specialty portfolio. We believe that it is the strength of our expanding pipeline that will enable us to deliver significant value in the long-term.

Coming back to the third quarter, while Vasu will cover the financials in detail I'd like to discuss the revenue performance of the individual businesses in greater detail. Let me start with API where the decline has been quite steep. Revenues at $33 million are down by 27 percent; this decline, of course, is not a trend and we will see improvements as we continue to expand our portfolio and drive new product launches across markets in the coming quarters.

Revenues from India are down by over 25 percent. Our revenue this quarter reflects a higher level of competition and pricing pressure. Having said this, while this market has its own challenges, it (indiscernible) us with a strategic platform for product development and cost improvements which will benefit the other markets.

Let me now talk about Europe. This quarter our revenues in API -- or in Europe are down by 60 percent to about $5 million. Much of this decline is due to ramipril which, as you are already aware, achieved close to $29 million in revenues in the whole of last year. As we indicated earlier, the volumes and pricing have normalized this year following the completion of initial launch of (indiscernible) last January. Despite lower prices we have maintained our margins on this product through continuous process improvements. However, excluding ramipril our revenues from Europe or up by 21 percent driven by growth in our product portfolio.

In North America our revenues declined by 18 percent for API this quarter. However, if you look at the performance in the first 9 months, we've been able to grow volume growth in all our key products. This helped sustain revenues despite no significant product launches with an overall marginal decline of 3 percent over last year. We remain confident of the long-term potential of the API business in the U.S. as well as Europe as we continue to expand our portfolio and deepen our pipeline and relationships with our customers.

In the rest of the world markets we recorded a growth of 6 percent. Interestingly these markets now (indiscernible) opportunities to leverage our (indiscernible) and strength and the product development work done for the regulated market. One such opportunity was Amlodipine Maleate in Korea in the second quarter. In our global generics business our revenues this quarter are at $22 million, down by over 9 percent.

Let me now does discuss the revenue split between North America and Europe separately. Europe has been growing consistently this year and, in fact, this quarter we reported a growth of about 50 percent. (indiscernible) revenue are expected to be in the range of $25 to $28 million and (indiscernible) that most of this revenue is from Europe/UK.

During this quarter Alan Sheppard joined our management team as the head of our European genetics business. Alan has been associated with several European Pharma companies and brings to Dr. Reddy's a wealth of experience in building generic businesses in Europe. Under his leadership we intend to drive forward several of our growth initiatives in UK as well as the other European markets.

As far as North America is concerned, while we have launched three new products this year the competition in our key products of Fluoxetine and Tizanidine have intensified and offset much of the gains from these new product launches. Particularly this quarter we witnessed a sharp decline combined revenues from these two products at $4.8 …