Jan 20, 2010
Executives
Kedar Upadhye – Director, Corporate Finance & IR Umang Vohra – SVP & CFO Satish Reddy – Managing Director & COO GV Prasad – Vice Chairman & CEO
Analysts
William Kirby – Nevsky Capital Balaji Prasad – Goldman Sachs Krish Nandu [ph] – Quantum [ph] Surjit Pal [ph] – LRR Capital [ph] Anubhav Aggarwal – Credit Suisse Ranjit Kapadia – HDFC Ashraf Riyaz [ph] – MK Global Ritesh Shah – IDFC-SSKI Rahul Sharma – Karvy Stock Broking Sameer Baisiwala – Morgan Stanley Bhavin Shah – Dolat Capital Vikas Sonawane – Religare Sonal Gupta – UBS Securities Rajesh Vohra – ICICI Securities Bino Pathiparampil – IIFL Nishant Patel – Proactive Universal Group
Operator
Ladies and gentlemen, good morning and good evening. Welcome to the Dr.
Reddy's Q3 FY10 earnings call. As a reminder, for the duration of the presentation, all participants are in a listen-only mode, and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions. (Operator instructions) At this time, I would like to hand the proceedings over to Mr.
Kedar Upadhye of Dr. Reddy’s.
Thank you, and over to you, sir.
Kedar Upadhye
Thank you Rochelle. Good morning and good evening to all the participants and welcome to Dr.
Reddy’s earnings conference call for the third quarter ended December 31, 2009. We hope you have all had a chance to review our press release, which was issued earlier this afternoon.
The results are also posted on our Website on the homepage under the Quick Links icon. 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.
Additionally, the transcript of this call will be made available on our Website at www.drreddys.com. Please note that all discussions and comparisons during the call will be based on IFRS consolidated financials and the IR Desk will be available to answer any query relating to the Indian GAAP immediately after the conclusion.
To discuss the results and outlook, we have on the call today, GV Prasad, our Chief Executive Officer; Satish Reddy, our Chief Operating Officer; and Umang Vohra, our Chief Financial Officer. Please note that today’s call is copyrighted material of Dr.
Reddy’s and cannot be rebroadcast 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 that the Safe Harbor language contained in today’s press release also pertains to this conference call and the webcast.
I would now like to turn the call over to Umang Vohra.
Umang Vohra
Thanks Kedar. I welcome all of you on the call today.
Before I begin, I would like to mention that all the figures referred in the financial highlights section are translated at the convenience rate of 1 US dollar to 46.40 Rupees. The financial highlights for the quarter and YTD are as follows.
Revenues for this quarter are at $373 million, representing a year-on-year decline of 6%. Excluding the revenues from sumatriptan in the previous year, the growth is at 17%.
Revenues for the nine months at $1.2 billion represent a growth of 9%. Revenues from Global Generics business at $253 million declined by 14% for the quarter.
Excluding the revenues from sumatriptan in the previous year, the growth was at 16%. Revenues for the nine months at $807 million represent a growth of 7%.
In our PSAI business, revenues at $113 million for the quarter represented a growth of 17%. Revenues for the nine months at $334 million represented a growth of 11%.
Gross profit for the quarter at the company level is at 51% as against 56% in the previous year. The change in gross margins is on account of a favorable mix of high margin revenues from sumatriptan that occurred in the previous year.
Gross margins for our nine months are at 51%. With this segment, margins for Global Generics and PSAI segments are at 60% and 31% respectively.
EBITDA is at $79 million for the quarter. For the nine months this year, EBITDA at $255 million grew by 31% versus last year.
SG&A expenses excluding amortization for the quarter are at $109 million, and these are flat as compared to both the previous year and sequentially. This reflects a benefit of operating leverage and cost management initiatives carried out during the last several quarters.
In March of last year 2009, we had recorded an impairment of approximately 200 million Euros relating to the goodwill and intangibles of our Betapharm business in Germany, largely due to an expected gradual shift in the German generic market to a tender based model. In the last couple of months and particularly during the quarter, a number of insurance companies in Germany have announced their final results, indicating a higher pace of transition to the tender based model with an associated significant deterioration in prices from the previous year’s levels.
As a result of this, the company tested the carrying value of Betapharm’s goodwill and intangibles and recorded a non-cash write-down of intangible assets and the beta brand amounting to 48 million Euros, and a non-cash write-down of goodwill amounting to Euro 76 million. The overall net impact on the income statement was 109 million Euros, net of the deferred tax liability reversal.
Post these charges, the carrying value of Betapharm intangibles and beta brand in our books is approximately 93 million Euros, while the carrying value of goodwill is now zero. Loss for the quarter as a result of the impairment is at $112 million and the adjusted PAT adjusted for the impairment stands at $50 million.
Adjusted PAT for nine months this fiscal is at $158 million as against adjusted PAT of $110 million in the previous year, representing a growth of 43%. The adjusted effective tax rate for the nine months is at 19% and diluted EPS is at $0.29 for the quarter and $0.93 for nine months of this fiscal.
Moving on to the balance sheet, we reduced working capital by $10 million, as we continued to keep tight controls on our inventories and receivables. Capital expenditures for nine months this year is at $56 million.
Our foreign currency exposure of cash flow hedge options for the next 15 months is approximately $445 million hedged in the range of 47 to 52. Of this, $394 million pertained to hedges taken for next year.
Total net debt to equity is at 0.13. I will now hand over to Satish.
Satish Reddy
Thanks Umang. So for this quarter’s results, you will notice that we have continued to demonstrate our ability to grow our topline and bottom line consistently.
This is despite the actions of any large forward opportunity this financial year. Within the Global Generics business, the growth and revenues from branded markets has helped us offset the decline in revenues from the regulated generic markets.
Overall revenues from the Global Generics segment at $253 million grew by 16% year-on-year, excluding the sumatriptan revenues in the previous year. As most of you are aware, in November 2009, the US FDA conducted the scheduled audits at two of our finished dosage facilities.
But there was one minor observation at one of the dosage facilities, the existing open list of inspection in the Form 483 have been declared to be removed for the other unit, which is an injectable facility. The positive outcome from these audits reflect and reinforced our capabilities in maintaining robust quality and compliance processes.
Let me now take you through our key markets starting with North America. Revenues for the quarter at $64 million in North America represent a decline of 53% from the previous year.
Excluding the sales from sumatriptan in the previous year, the year-on-year growth was flat. In September of this fiscal year, one lot each of four of our products were voluntarily recalled by us.
This caused a temporary slowdown of production, resulting in the diversification of supply forces by a few of our customers. As a result, our base business revenues have been flat for this quarter.
We have filed our investigation with the US FDA, and we have addressed all the issues along with necessary, corrective and preventive measures to avoid such instances in the future. Post the successful US FDA inspection and clearing of back orders, we are now confident of growing our customer franchise in the US.
In December, we launched Omeprazole Magnesium OTC as a private label with one major customer. In the next few months, we will begin shipments to additional customers as part of our plan to ramp up our market shares gradually overtime.
This quarter, we received two ANDA approvals, including the tentative approval of Fexofenadine 180 and Pseudoephedrine 240 milligrams. We have filed one ANDA this quarter, and there are many more which are ready to file and we expect a ramp-up of filings in the next two quarters.
We now have 62 ANDAs pending approval at the US FDA of which 35 are Para IVs and 13 are first-to-file. We expect to see strong opportunities from our near-term launches such as Fondaparinux and Fexofenadine, Pseudoephedrine higher strength [ph].
We believe that we are well-positioned to capture the value from these and similar such opportunities while of course a long-standing subjective approval of regulatory review process and the outcome of any pending litigation. Moving on to India, we have begun implementing a supply chain initiative in the mid of last fiscal year.
During the initial quarters of that year, which resulted in de-stocking of inventories at our distributors and helped in lower level of primary sales. In the current quarter, our revenues of 2,632 million Rupees reflect a year-on-year growth of 34%.
Of this growth, 29% is driven by volumes and 7% by new product launches. A part of the volume growth is also due to the low base effect.
The growth momentum in India for the last nine months has enabled us to move one rank up to Number 12 as per (inaudible) for the year-to-date November 2009. Our secondary sales growth of 30% during the same period remains higher than the industry growth of 16%.
For the same period, we also continued to grow at a faster rate compared to the top 10 companies. Historically, our new product launches in India were lower as compared to our peers, and the last few quarters, we have begun to adjust this gap adequately.
For nine months this year, we have launched 56 new products across various therapeutic areas and the contribution to total revenue this year is at 4%. We also plan to launch one biosimilar in the last quarter of this year, which is contingent upon approval from the regulatory authorities in India.
On to Russia, we have seen a reversal of the declining trend in the market. Revenues at $49 million registered a growth of 52% in dollar terms over the previous year, and 28% quarter-on-quarter.
The growth is equally driven by both volumes and prices. The Pharmexpert prescription secondary sales trend for November 2009 year-to-date indicates a growth of 13% for Dr.
Reddy’s as against a growth of 2% for the Russian market. We also continue to pursue opportunities to expand our portfolio through OTC diversification, in-licensing deals and through other niche products where the competition is lower.
Coming to Germany, revenues this quarter are at 30 million Euros, which represent a decline of 4% over previous year. The market situation remains challenging, which led to our evaluation of impairment schedule in this quarter.
A number of insurance healthcare providers have awarded the final results during the quarter, while a few more results are awaited. These new tenders continue to cause pressure on the existing level of sales due to a steep decrease in the product prices.
Our goal of mitigating erosion of profitability through cost rationalization continues. As you aware, in June of this year, we had restructured our field force from levels of 120 people to now about 50.
We are in now discussions with the Works Council in Germany for another round of significant restructuring of the work force Betapharm. This restructuring we expect will get completed in the Q4 of this fiscal.
Talking about our PSAI business, our revenues in this segment are at $113 million for the quarter, a growth of 17% over previous year, but on a quarter-on-quarter basis, it pretty much remains flat. The growth of the API business is contingent to our generic customers launching their products.
For the CPS business, which was affected due to recessionary pressures, we are beginning to receive increased orders from our customers. The overall order books for PSAI as of December 2009 have improved from the levels of September 2009.
This quarter, we have filed 11 DMFs, including three in the US, eight in Europe and cumulatively we have filed 388 DMFs globally. With this, I now hand over to Prasad.
GV Prasad
Thank you Satish. I would like to begin my discussion by briefing you on some key senior management changes in the last few months.
To achieve our stated goal of $3 billion of revenue at an RoCE of 25% by fiscal ’13, we realized the need to strengthen our organization. As part of this process, we have made a few changes in our senior management team.
Saumen Chakraborty, who earlier headed Corporate and Global Generics Operations will henceforth function as President Corporate and will focus on the integration of people, processes and information across the organization to facilitate a culture of total quality, execution excellence and high performance. Abhijit Mukherjee, who you know as the Head of the PSAI business, the Pharmaceutical Services and Active Ingredients business, will now lead our Global Generics business end-to-end, and we believe that this dedication of a senior leader to integrating the entire business will make a big difference to our Global Generics business.
In addition to these, there have been few other changes in our North America and Proprietary Products organization. Moving on to other business highlights, you would observe from this quarter’s performance that PSAI as well as the key markets of India and Russia have contributed to significant growth.
Germany continues to remain a challenge, and we are of course initiating suitable measure to mitigate the impact to cash flow from their business. Based on our results for the first nine months, we now feel that our full-year revenues are expected to be lower due to the decline in Germany, delay of a few of our key launches in the US, and temporary loss of revenues in Europe due to recall related incidents.
In view of this, we now expect a lower single-digit growth in revenues for the full year as compared to our earlier 10% guidance given by us. However, in spite of such lower revenue growth, we are confident of meeting our RoCE guidance for the full year adjusted for non-recurring charges.
A strategic alliance with GSK has been progressing well. The first set of formulation products are expected to be launched in Mexico in early Q1 of the next fiscal year, and we continue to work with GSK team on the portfolio and product selection for our other segments of the business.
As announced recently, we are pleased to see encouraging results on the headline data from the first Phase III study for Balaglitazone. The trial met its primary endpoint of glycemic controls, and the next sets for additional Phase III study will be finalized after further discussions with regulators.
We will also explore possible partnerships to monetize this effect. We continue to reiterate our $3 billion revenue targets for FY ’13.
The growth trajectory for base business in our key markets is encouraging. In addition, in the next two or three years, the patent expiries in the US are worth more than $75 billion as compared to less than $50 billion in the last three years.
We are well positioned in terms of our portfolio, pipeline and infrastructure to maximize the value from this growth opportunity. I thank you all for your kind attention, and now open the forum for Q&A session.
Operator
(Operator instructions) The first question comes from the line of William Kirby from Nevsky Capital. Please go ahead.
William Kirby – Nevsky Capital
Thank you, yes. I have two questions, please.
Firstly, on Russian revenues, is the increase, how much of that is due to re-stocking or other effects or is that a clean level of underlying demand? And then secondly, inflation in general and administrative expenses seems to have come down quite a lot, how should we think about that as a percentage of revenues in future years plays?
Umang Vohra
So, in Russia, I think half of the growth is on account of pricing, which was related to the devaluation of the Ruble, and the other is due to the season effect. So, we probably will see, this is a maybe a very high quarter for Russia.
On SG&A, we have optimized the business model in Germany and certain other R&D units as a result of which the SG&A level has stabilized at the current level. So, we are not guiding to any future periods to our percentage, but because of the last two to three quarters, this number of what you are seeing in SG&A of about 5,000 million [ph] is maintained.
William Kirby – Nevsky Capital
Okay, great. Thanks very much.
Operator
Thanks you Mr. Kirby.
The next question comes from the line of Balaji Prasad from Goldman Sachs. Please go ahead.
Balaji Prasad – Goldman Sachs
Hi good evening everyone. I have two questions.
Firstly, on the US launches delay, any specific reason as to why that you can see about this, for this, and secondly, when do you expect each of these to come on to the market? And my second question is on Betapharm, do you see any further write-off in the beta brand coming to in the near future?
GV Prasad
With respect to the launches delay, this is a combination of both internal and external factors. I think the delay should result in our launching of Q1 next fiscal as opposed to this quarter.
Balaji Prasad – Goldman Sachs
Which of these products would be coming on to the market in Q1?
GV Prasad
Some of our products, I don’t want to name them right now, but a couple of products which should have been launched in this quarter have got pushed out to the next quarter.
Balaji Prasad – Goldman Sachs
Okay.
GV Prasad
So, with respect to Betapharm, now the carrying value is about 93 million Euros.
Balaji Prasad – Goldman Sachs
All right.
GV Prasad
At this level, we think we are comfortable that there should not be any further, you know, impairment if the level of performance remains at what we expected to be. But having said that, this is an evolving market, and I don’t want to make any categorical statements.
Balaji Prasad – Goldman Sachs
Fair enough. If I could just ask further on the GSK alliance, you are planning to enter the Mexican market with this, with this alliance, what is the rationale behind choosing this market and how are you going about choosing the products to launch this market, and what is the strategy encapsulate in total, as in one to two years, what could this mean in terms of revenues for year-end?
GV Prasad
Yes, so the alliance is aimed at us supplying products of GSK for all its emerging markets. It also preserves our right to enter these markets whenever we want.
But as a company, we decided that we would focus on five major markets and try to drive growth in these five markets before we really expand our geographic footprint. We of course have other Tier 2 markets, about another ten markets, but the primary focus is on these five markets.
This enables us to concentrate our resources, execute better and also prioritize better. So, the logic of working with GSK is that we would supply them product and they would do all the front-end in marketing.
And because of their global presence, for them the incremental cost of setting up front-end is very small. In addition, they have the advantage of having innovative products for any products based on which they can piggyback and sell branded generics.
So, this is basically the strategic rationale for the alliance. It started registering products in various markets.
The big markets are of course, Turkey, Brazil, and Mexico. There are few other markets, but these three will primarily derive the initial activity.
We are just launching products in Mexico later this year. It’s not going to be significant for the first year, even end of second year, I don’t think is very significant.
In third year onwards, we will see meaningful numbers.
Balaji Prasad – Goldman Sachs
Okay. Thank you very much.
Thank you.
GV Prasad
Thanks.
Operator
Thank you Mr. Prasad.
The next question comes from the line of Krish Nandu [ph] from Quantum [ph]. Please go ahead.
Krish Nandu – Quantum
Good evening. Hello?
Umang Vohra
Yes, good evening.
Krish Nandu – Quantum
Good evening. Just had two questions.
In reason to R&D expenditure, it is, correct me if I am wrong, it’s down from a QonQ basis. I am asking this question just because you had a change of agreement with your signs for this Balaglitazone expenditure.
GV Prasad
Yes.
Krish Nandu – Quantum
So, that’s one question, if you could put some light on that. And what would be the amount, what would be the breakup of the CPS and API in the PSAI, if you could just give me or help me out with this figure, please?
GV Prasad
Yes. So, I think R&D expense is not related to the Balaglitazone change, it is more related to phasing of our bio study.
You know, the cost of the bio study is a major component of our R&D budgets, and they come bunched up. So, part of that will be incurred in Q3, in Q4, and then Q1 later.
So, that’s nearly a phasing of expenditure. It doesn’t signal anything beyond that.
Krish Nandu – Quantum
Any guidance you can give us on what expenditure would be incurred in the Phase III, which are going to be conducted?
GV Prasad
We are not going to fund that. So, we have to wait and see, and I think we will only know once the regulator comes back and defines what kind of trial is necessary for approval of this product, and we are not even sure we will fund it ourselves or our partner, we may then get to a third party.
In terms of R&D spend as a percentage, I think it will be or it will hover around 5%.
Krish Nandu – Quantum
Okay. And say, about the breakup of CPS and API in the PSAI business, could you just –?
GV Prasad
We are not disclosing that level of detail.
Krish Nandu – Quantum
Okay, okay. Thank you.
I will get back in the queue.
GV Prasad
Thank you.
Operator
Thank you. The next question comes from the line of Surjit Pal [ph] from LRR Capital [ph].
Please go ahead.
Surjit Pal – LRR Capital
Yes, thanks for taking my question. My first thing is that, that you at least faced a de-growth of around 10% in the US market, even if I remove those, you know, Imitrex sales in this quarter?
GV Prasad
That was slightly below last year’s sales, a very marginal level.
Surjit Pal – LRR Capital
I mean, you see, last time you said that it was around $72 million of last year same quarter sales of Imitrex, out of 143, if you say 51 million that is for the base business, you have had 64 [ph], which is also inclusive of your business in Omeprazole OTC. So, at least around 10% kind of de-growth you are seeing in this quarter, right?
GV Prasad
Around 3%.
Umang Vohra
3% in Rupee terms and 1% in dollar terms.
GV Prasad
Yes.
Surjit Pal – LRR Capital
How much loss you have accounted for recall in US market?
GV Prasad
We are not sharing that level of detail. The loss of recall itself is not significant.
I think this had to say that more bigger impact is the slowdown in sales as a result of the various actions that we had to take. The actual recall is not very significant in terms of cost.
Surjit Pal – LRR Capital
Any particular reason for your particular growth in domestic glyceride [ph] market.
GV Prasad
Surjit Pal – LRR Capital
Any new customer additions?
GV Prasad
No, not really. I think also you must recognize that last year’s performance was a little at a lower base.
Surjit Pal – LRR Capital
Lower base, yes.
GV Prasad
As a result of destocking that happened as a result of our change in distribution.
Surjit Pal – LRR Capital
Thank you. I will get back in queue.
GV Prasad
Thank you.
Operator
Thank you Mr. Pal.
The next question comes from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.
Anubhav Aggarwal – Credit Suisse
Yes, this is a question on Omeprazole OTC sales. You did mention that, what was the reason for the delay in launch, and what was the reason for a very tentative beginning?
I mean, are we –?
GV Prasad
Yes, firstly, I think the OTC don’t behave in the same way as the generic products, because the OTC products have packaging and a few other artwork all of the visuals and switching sources is not as quick as you switch the generic product. Having said that, I think we have some internal issues in terms of equipment, delays in scale off and all of those.
So, that delayed, you know, the launch itself, but uptake also I think because of delay, somewhat, you know customers are a little more tentative, but now we see that picking up and we should start picking up share reasonably to deal that.
Anubhav Aggarwal – Credit Suisse
So, is this share that is going to come out of new customers or share within customers?
GV Prasad
It’s both.
Anubhav Aggarwal – Credit Suisse
Right. Now, what I am trying to understand is have you already entered the larger customers or are they still to be signed up?
GV Prasad
I think, you know, it’s a mix of both, existing as well as non-existing.
Anubhav Aggarwal – Credit Suisse
And trying my luck here, any share targets that you could disclose?
GV Prasad
No.
Anubhav Aggarwal – Credit Suisse
Any update on (inaudible)?
GV Prasad
No update as such. I think the regulatory review is going on.
So, we haven’t had any formal response on our application yet. But we are all geared up to, you know, quickly turn around any request that may come, and we believe that next fiscal year, we will launch this product.
Anubhav Aggarwal – Credit Suisse
Right. But there was this, under the give initiative, that FDA was required to process this within six months or something right?
GV Prasad
In an accelerated way. It is still in that process.
But it is a reasonably complex product, so.
Anubhav Aggarwal – Credit Suisse
It is, okay. I will jump back into queue, thanks.
Operator
Thank you Mr. Aggarwal.
The next question comes from the line of Ranjit Kapadia from HDFC. Please go ahead.
Ranjit Kapadia – HDFC
Good evening. And sir, my question relates to this Omeprazole Magnesium.
You said that we have already started with one of the customer, so going further, what are the plans, and how many more customers you are likely to add? Second question regarding domestic market, you have done a very good growth of 34% for the formulation and about 30% for the API segment.
So, going further, what are your plans to address this market?
GV Prasad
You know, the Omeprazole issue, I think we already answered that we are going to drive growth through both new customers and all other existing ones. On the Indian market, we have a few initiatives.
Would you like to talk about that, Satish, the rural initiatives?
Satish Reddy
Couple of things I see, one is the supply chain initiative that we have done earlier. So, that achieved, created a certain base on which you are seeing this kind of a growth.
So, it’s a low base on the growth what you see. Second thing is the rural markets initiative that we had commenced on a pilot basis last year, but now, this year we have the full benefit, because we have scale of the field force and that’s beginning to show the results.
The new products, it’s been the most prolific year of new product launches, already about 56 have been launched, right. So, all of the factors put together plus very close targeting of customers, expanding the base as well as very clear targeting for the marketing divisions all put together has given us this kind of a growth.
And on the API side, I don’t think we have disclosed any such numbers, or going to vary by the figure [ph] of 30%.
Ranjit Kapadia – HDFC
Sir, can you share how many MRs [ph] are there, field force, strength?
Satish Reddy
1,200 on our rolls and 800 on the contract field force.
Ranjit Kapadia – HDFC
800 and –?
GV Prasad
2,000 totally.
Satish Reddy
Totally 2,000.
Ranjit Kapadia – HDFC
Okay, 1,200 on the rolls and 800 contract.
Satish Reddy
Yes.
Ranjit Kapadia – HDFC
So,
Satish Reddy
Thank you.
GV Prasad
Thank you.
Operator
Thank you Mr. Kapadia.
The next question comes from the line of Ashraf Riyaz [ph] from MK Global. Please go ahead.
Ashraf Riyaz – MK Global
Yes, good evening. My question is regarding this operating margins.
We have seen significant improvement at Imitrex operating margins almost 50 to 60 bps, is this margins sustainable going forward?
Umang Vohra
Yes, we have seen two or three quarters in which the base business has improved quite dramatically and we believe that these margins are slightly sustainable going forward.
Ashraf Riyaz – MK Global
Okay. And the second thing like, you know, from early, talking about our growth in the Russian market, will you say that 15% growth came because of (inaudible) remaining growth was basically on the volume and the value?
Satish Reddy
I will just rephrase what I said. I said that linked through the devaluation, we took pricing increases, which accounts for more than 50% of the growth you have seen.
Ashraf Riyaz – MK Global
Okay. And what was the volume growth?
Satish Reddy
The volume growth is half of it, is about 25%.
Ashraf Riyaz – MK Global
25%. Thank you very much.
And that’s all from my side.
Operator
Thank you. The next question comes from the line of Ritesh Shah from IDFC-SSKI.
Please go ahead.
Ritesh Shah – IDFC-SSKI
Hi, good evening. Thanks for taking the question.
Two questions, one is, a, you know, with the Sanofi now planning to take Fexofenadine OTC, does it or how is this really paying out for us given that, you know, Fexofenadine still is a pretty relevant component product for us in the US?
GV Prasad
I think, you know, the OTC will only expand the market. I don’t think it will cannibalize the prescription market.
Ritesh Shah – IDFC-SSKI
So, in terms of our ability to hold on the industry, that won’t really, that won’t get impacted.
GV Prasad
I don’t think that will get impacted. It may even throw up some opportunities from the OTC perspective.
Ritesh Shah – IDFC-SSKI
And you mentioned early on in the opening comments about likely Fexofenadine combination launches, when do you see those happening?
GV Prasad
First quarter or second quarter.
Ritesh Shah – IDFC-SSKI
This would be both the combinations or –?
GV Prasad
One of them.
Ritesh Shah – IDFC-SSKI
Okay. And lastly, you know, you mentioned about injectable facility, the four of these kind of been revoked, have you started getting approvals for them, for this facility or when do you expect approvals?
GV Prasad
Yes, we are awaiting some approvals. I think the FDA inspection is over, now the inspection report us to go through the process and then we should see some approvals.
Ritesh Shah – IDFC-SSKI
This would be a cytotoxic facility?
GV Prasad
Yes.
Ritesh Shah – IDFC-SSKI
Thanks very much.
GV Prasad
Thank you.
Operator
Thank you Mr. Shah.
The next question comes from the line of Rahul Sharma from Rahul Sharma from Karvy Stock Broking. Please go ahead.
Rahul Sharma – Karvy Stock Broking
Hello. Just wanted to know, do you think the run rate what we are talking in, in the domestic formulation space is sustainable going forward?
Satish Reddy
Yes, I believe it’s sustainable, because if you see the pure month-on-month trend, right, consistently we have been growing above the market growth rates, which also I believe is going to grow, the industry will continue to grow on the back of new product launches and you know, expansion of the markets itself, right, into the country. So, we actually believe it’s substantial.
Rahul Sharma – Karvy Stock Broking
At around 250 to 260 [ph] for third quarter basically?
Umang Vohra
Yes.
Rahul Sharma – Karvy Stock Broking
And Europe has been in the PSAI segment. Europe has been doing particularly since the last two or three quarters.
What can you attribute this to and how did you foresee it going ahead?
Umang Vohra
So, there are a few products for which we have a very high market share due to the process-related issues in the sense that we have processes which is non-intrinsic. As a result of that product and one or two other such products, the Europe share is high.
Rahul Sharma – Karvy Stock Broking
So, how long do you think you will be able to sustain this type of traction?
Umang Vohra
We have several other products in the pipeline as well. So, we believe that, you know, there will be a moving traction could be sustained.
Rahul Sharma – Karvy Stock Broking
And just wanted a clarity on the forex hedges, what rates we have basically contracted the hedges?
Umang Vohra
We are in the range of, as an average, it could take 47 to 48, but our range is from 46 to 52.
Rahul Sharma – Karvy Stock Broking
Okay. And this would be on 394 million of forward covers?
Umang Vohra
This would be 394 million of options, primarily options, for options next year alone.
Rahul Sharma – Karvy Stock Broking
Okay. And what about forex loans would be, how much from books as of now?
Umang Vohra
We have a Euro loan of about 161 million Euros.
Rahul Sharma – Karvy Stock Broking
Okay.
Umang Vohra
Nothing more than that.
Rahul Sharma – Karvy Stock Broking
Okay. Thank you.
Operator
Thank you. The next question comes from the line of Sameer Baisiwala from Morgan Stanley.
Please go ahead.
Sameer Baisiwala – Morgan Stanley
Hi, good evening everyone. My question is about the German business that once AOK and non-AOK tender business are fully operational, what could be the level of business that we can expect in Germany versus say 200 crores [ph] that we did in the previous quarter?
GV Prasad
I don’t think we are giving precise numbers, but we expect this to shrink a little going forward.
Sameer Baisiwala – Morgan Stanley
Okay. I mean, when you say it shrink a little, it contrasts from the sharp of write-offs that we have been taking, I mean, if I –?
GV Prasad
When I say a little, it’s you know, I am not able to give you a range, but we expect some shrink.
Sameer Baisiwala – Morgan Stanley
Okay. I mean, if I were to ask more directly, would it be a significant shrinkage, like, I mean you may not give me a number, but –?
GV Prasad
I think it is significant, because we expect it to be significant and that is what has caused the write-off.
Sameer Baisiwala – Morgan Stanley
Okay.
GV Prasad
But it is not going to be material to the company and as a whole. That’s why I said little.
But for Germany, it may be significant.
Sameer Baisiwala – Morgan Stanley
Okay. And the other question is about the US business specifically fixed over there, it seems to be a very sharp, you know, collapse in the market share.
And you mentioned the context of US, there’s a temporary slowdown. Are they two correlated or fixed is going to remain –?
GV Prasad
I think it’s more a loss of a customer than a market shrinking. And that may be, you know, shrinking our market share.
But I don’t think it has anything to do with the OTC or anything else.
Sameer Baisiwala – Morgan Stanley
Okay. But do you think this much slower market share is going to go up or this is where it’s going to set back?
GV Prasad
We hope to recover it as we improve everything that we are doing here. We hope to recover it.
This is part of the collateral damage of the recall.
Sameer Baisiwala – Morgan Stanley
Okay. And just a very broad-level question, this quarter was –
Operator
This is the operator. Sir, would it be possible for you to come back with follow-up questions as there are other –?
Sameer Baisiwala – Morgan Stanley
Just one final question if you don’t mind.
GV Prasad
Yes.
Sameer Baisiwala – Morgan Stanley
Okay. I mean, this quarter was – the quarter gone by was rather free of any one-offs and stuff like that and we reported a net profit of roughly 2.3 billion Rupees.
Is this something that, that we should expect as an earnings power of the base business in a more normalized earnings?
GV Prasad
I certainly think so. While we didn’t have any one-offs, we did have some hits, especially Germany was lower than projected internally and US also suffered somewhat.
But it’s safe to assume this number as a base number.
Sameer Baisiwala – Morgan Stanley
Excellent, thank you so much.
GV Prasad
Thank you.
Operator
Thank you. The next question comes from the line of Bhavin Shah from Dolat Capital.
Please go ahead.
Bhavin Shah – Dolat Capital
Hi, thanks for taking my question. Sir, just one small question, will the work for the Betapharm currently and was the plan of cutting down, I mean, since you have mentioned in your presentation?
Umang Vohra
So, Betapharm currently has about 250 people, and we are in discussions with the Works Council to take this number closer to between 80 to 100.
Bhavin Shah – Dolat Capital
Okay. And this sharp cut down will happen by about, in another one-and-a-half years or timeframe roughly?
Umang Vohra
No, shorter than that. Maybe three to six months.
Bhavin Shah – Dolat Capital
Shorter than that, great. Okay, thanks a lot.
That was it.
Operator
Thank you Mr. Shah.
The next question comes from the line of Vikas Sonawane from Religare. Please go ahead.
Vikas Sonawane – Religare
Yes, hi, thanks for taking my question. My question is on balance sheet.
We have seen consistent improvement in balance sheet in terms of net debt over the period of last five quarters’ time, do we preside net debt has gone down by about 60%. So, going forward, you know, how do you intend to look at the net debt level or you could probably see stable number from here on?
Umang Vohra
The decrease in net debt is largely linked to repayment of our Euro loan that we have taken for acquisition of Betapharm. We had an agreed prepayment schedule, and in a period of next one to two years, this loan will get completely repaid.
Vikas Sonawane – Religare
Okay. So, let’s say in others, three or four quarters, we can probably be a net debt zero company?
GV Prasad
This has to be part in terms of the aggressive capital plan that we have. We are building two large facilities for API and (inaudible).
We are also investing in a bio central lab facility. Subject to this, I think capacity load still remain quite strongly.
Vikas Sonawane – Religare
Okay, great, that’s great. I mean, small question, I mean, UK market, I mean its’ a small market, but it was growing pretty well for the last two quarters, how has that growth been this quarter?
Satish Reddy
We will come back to you, you know.
Vikas Sonawane – Religare
Okay. Final question, what is the general timeline to take the biological drug from, let’s say Indian market to RoW market?
GV Prasad
Some of that has been happening already and in the process of registration in a few markets. So, we should see some revenue coming in or a small amount of revenue coming in this year, maybe increasing next year and more significantly in the following year.
Vikas Sonawane – Religare
Okay. Great, thanks.
Operator
Thank you. The next question comes from the line of Sonal Gupta from UBS Securities.
Please go ahead.
Sonal Gupta – UBS Securities
Question one, could you tell us the gross margins for the two divisions for this quarter?
Umang Vohra
Yes, gross margin for Global Generics is 60% and PSAI is 31%.
Sonal Gupta – UBS Securities
Okay. And just also wanted to understand post these write-offs, your RoCE target will remain at 25% or should we expect it to go up as and when you revise that?
Umang Vohra
We are guided to 25 basis the March value.
Sonal Gupta – UBS Securities
Right.
Umang Vohra
And therefore it could be expected to be slightly higher than 25, but it will not make too much of a difference because what we have written off is probably less than 10% of the staff we employed.
Sonal Gupta – UBS Securities
Right. And on Germany, just to understand, I mean, your sales have over the last few quarters sustained at sort of reasonable levels, given that you are saying that the market probably will move towards, completely towards tender, what percentage of this sales do you think will come from the tender business or is there still some business which will be non-tender based or do you think it will be totally tender based?
Umang Vohra
A significant portion of that will necessarily move towards the tender based business, right. So, however a small portion maybe, some of the OTC products and some portion of the business which is non-tender, that will continue to exist.
Sonal Gupta – UBS Securities
And do you intend to have a sales force, I mean post the –?
Umang Vohra
No, the sales force is gone.
Sonal Gupta – UBS Securities
Okay, thank you so much. I will get back in queue/
Operator
Thank you Mr. Gupta.
The next question comes from the line of Rajesh Vohra from ICICI Securities. Please go ahead.
Rajesh Vohra – ICICI Securities
Good evening gentlemen, congrats on a good set of number. Mr.
Prasad, the first – you mentioned about the full-year guidance of 10% will not be met and the topline growth will be low-single digits, which means that in the first nine months, you have grown at 9% to $1.2 billion. So, it has to be – are you saying that lower than that number, is that what you are indicating, implying a decline in the growth rate?
GV Prasad
For the fourth quarter of last year, it was significantly higher.
Rajesh Vohra – ICICI Securities
Sure.
GV Prasad
Because of the full effect of sumatriptan.
Rajesh Vohra – ICICI Securities
Sure.
GV Prasad
Relative to that, the growth will come down. So, the overall level, it will get impacted.
Rajesh Vohra – ICICI Securities
Okay. So, for the full year, it will be single digit wherever it comes up.
GV Prasad
Yes.
Rajesh Vohra – ICICI Securities
Yes. And you have mentioned about $3 billion number, you stick to that goal of doubling roughly in the next three years.
What would be the key drivers of growth, of course you have a pretty good set of pipeline for FTFs and interesting ANDA opportunities, beyond that, what are the growth drivers going to be?
GV Prasad
So, you know, it is difficult to give you in such specific level, but the large growth will come from our Global Generics market. And US will probably be the largest driver of growth, and after that, the RoW markets.
We are also seeing significant growth in our Pharmaceutical Services and Active Ingredients business.
Rajesh Vohra – ICICI Securities
Okay, and could you tell us on Allegra D-12, would it be two, three-player scenario or more player depending on what visibility you have today?
GV Prasad
I don’t think we can predict that very well.
Rajesh Vohra – ICICI Securities
Sure. And last question on, given what you have mentioned so far on the call on Germany business, what is the extent of price cut that we have seen far in the recent time, and you are saying significant drop further in the revenues potentially, what are we building that number, is it in excess of 20%, more or less?
GV Prasad
We can’t use a block percentage like that.
Rajesh Vohra – ICICI Securities
Sure.
GV Prasad
There are many variables in order, the tender, the competition, the molecule. Where you end up is a function of many things, I don’t want to hazard a guess and give you something.
Rajesh Vohra – ICICI Securities
Okay, thanks. All the best.
Operator
Thank you. The next question is a follow-up question from the line of Balaji Prasad from Goldman Sachs.
Please go ahead.
Balaji Prasad – Goldman Sachs
Hi. Thank you for taking my follow-up question gentlemen.
I just had a couple of queries on Balaglitazone. Firstly wanted to understand the level of glycemic control, which you had targeted and how does this compare versus other PPAR agonists?
Second question was, wanted to understand also which stage of patient recruitment is the study right now, and lastly just wanted to see if you had any side-effect profile which has been, which has come out at this point of time?
GV Prasad
Sure, we did a one Phase III study with 400 patients. Glycemic control is comparable to act those.
Balaji Prasad – Goldman Sachs
Okay.
GV Prasad
And the safety profile, again, it’s only based on this 400 patients. It shows some level of improvement, both in the weight gain as well as the bone density, but this has to be further studied in terms of clinical significance and statistical significance.
So, we have to do additional trials to demonstrate the safety. The positioning would be that similar to the existing glitazones in terms of efficacy, that we can improve safety profile.
And this needs to be demonstrated in safety.
Balaji Prasad – Goldman Sachs
Okay. Would you have any duration in how long this could take?
GV Prasad
We are going to meet the regulators this month, and we will get input into how their trial design has been. And after that, we will formulate our plans, right now, we don’t have.
Balaji Prasad – Goldman Sachs
Okay, great, and good luck on this. Thank you.
GV Prasad
Thank you so much.
Operator
Thank you. The next question comes from the line of Bino Pathiparampil from IIFL.
Please go ahead.
Bino Pathiparampil – IIFL
Hi, thanks for taking the question. Just to dig a little deeper into the issue in the US, we see that there is a significant decline over the previous quarter’s level of sale in the US.
So, when you said that you are working on some strategy to get back that business, is it over a few months’ period, or do you think it’s like two-week or three-week thing, which you can fix out of that then and back the customer?
GV Prasad
So, we don’t have any issue as such. It’s just that voluntary recall resulted in some slowdown on our side in terms of supplying the market, because we wanted to first be very sure of everything that we are doing in our operation.
So, we had to suspend shipments, we had to institute quality control checks and corrective actions. We did all of that and then subsequently we had an FDA inspection and it went off quite well.
But as a result, supply to the market got impacted and naturally customers hedged their position. Now, to recoup all of that, it will take more than a quarter, it will take a couple of quarters perhaps, and we are still in the process.
So, it’s not going to be a quick fix, but it will take a couple of quarters.
Bino Pathiparampil – IIFL
Okay. Right.
And second, in Russia, over the last couple of quarters, you had been saying that some of the price increases that you took originally will have to be reversed as the Ruble appreciated. So, we don’t see any of that happening, do you think you won’t need to do that or are we going to see that in the coming quarters?
Umang Vohra
We don’t see the need to reverse prices, no.
Bino Pathiparampil – IIFL
Okay. Right.
And quickly a housekeeping question, the amortization of this quarter about 37 Crores or so, is that going to be the run rate for the quarters ahead?
Umang Vohra
Yes, you can assume the same run rate for the subsequent quarters.
Bino Pathiparampil – IIFL
Okay. And the CapEx for the first nine months of 2.6 billion Rupees seems a little low based on your prior guidances, is that true?
GV Prasad
Yes, I think it will increase as we go forward.
Bino Pathiparampil – IIFL
Okay. So, for the full year, what would be your guidance?
GV Prasad
I don’t think we are giving guidance on CapEx.
Bino Pathiparampil – IIFL
Okay. Great, okay, thanks.
Operator
Thank you. The next question is a follow-up question from the line of Krish Nandu from Quantum.
Please go ahead.
Krish Nandu – Quantum
Just wanted one figure. So, how much was the insurance and UK be part of the business as a percentage of the total Betapharm right now?
GV Prasad
About half or so.
Krish Nandu – Quantum
50% right, hello?
GV Prasad
Roughly 50%, yes.
Krish Nandu – Quantum
Thank you.
Umang Vohra
We will take the last two questions, please.
Operator
Thank you. The next question comes from the line of Sonal Gupta from UBS Securities.
Please go ahead.
Sonal Gupta – UBS Securities
Yes, thanks. Just to understand on the GSK alliance, is this or are all the fields going to be implemental or are there some markets where you sort of looking at getting out and probably GSK and transferring basically the product registration that gets transferred to GSK and GSK gets the – so is there some cannibalization of existing revenues?
GV Prasad
There’s no major cannibalization, but there is a shift of existing dossiers and some very minor sales from one of the countries, we will probably shift to them. But it will be incremental, largely it will be incremental.
Sonal Gupta – UBS Securities
Okay, thank you.
Operator
Thank you Mr. Gupta.
The last question comes from the line of Nishant Patel from Proactive Universal Group. Please go ahead.
Nishant Patel – Proactive Universal Group
Hi, thanks for taking my question. Just a quick one, what’s been the growth in the European market ex-Germany?
Satish Reddy
Can we get back to you, Nishant, with that data because there are two or three markets, and we will try to get back to you, the IR Desk will get back to you with it.
Nishant Patel – Proactive Universal Group
Sure, sure, thanks.
GV Prasad
Thank you.
Satish Reddy
Thank you.
Operator
I would now like to hand the floor back to Mr. Upadhye and the management for closing comments.
Kedar Upadhye
Thank you all for joining Dr. Reddy’s management for the Q3 FY10 earnings call.
In case of any other queries, IR Desk is available, too for clarification. Thank you and good evening.
Operator
Thank you very much. On behalf of Dr.
Reddy’s Laboratories, that concludes this conference. Thank you for joining.