Dr Reddy’s Laboratories has posted a 17 percent decline in its second quarter consolidated net profit at Rs 574 crore compared to Rs 690.2 crore in the year-ago period.
Though the profit was slightly above estimates, topline and operational performance missed street expectations. Even net sales grew by 6.9 percent to Rs 3,588 crore in the quarter ended September 2014 compared to Rs 3,357 crore in same quarter last year.
Discussing the company’s results, GV Prasad, co-chairman and CEO, DRL, said the quarter has been a flattish one on the back of high R&D expenses. He expects growth to return once launches start happening.
The company is expect to file two new drug applications (NDA) soon, worth around USD 100 million each, Prasad said, adding that he sees second half of the fiscal to be better than H1.
Below is the transcript of GV Prasad’s interview with CNBC-TV18’s Menaka Doshi and Senthil Chengalvarayan.
Menaka: It has been a difficult quarter especially because your main market of North America hasn’t done very well and because Russia you have had to face a big currency headwind. What is the outlook going forward?
A: It has not been a great quarter but it has not been too bad either. It has been flattish on the back of increased R&D spending as well as lack of any major launches in the US and some price compression in the US. The results have been a little flat. Going forward as we launch new products as the approvals come through I think we should see return to growth. All the other geographies have done well. Of course the devaluation hit us somewhat but we can’t help in externality like that but otherwise all geographies have been doing reasonably well except Europe.
Menaka: Talk us through both the R&D expenditure, why it has moved up, what the potential outcome of that will be and the SG&A expense increase if you can break that out for us as well?
A: R&D has increased due to the increased activity in all the three areas, area of complex generics including external development where we are working on non traditional dose forms such as topical, patches, complex injectibles which require not only development but also clinical end points or PK studies or Pharmacokinetic studies, all this costs a lot of money so we have been investing in that.
The second reason is that some of our biosimilars we have been doing trials which are required in the large markets, early stage trials but still quite largish trials. So, that has consumed some amount of investment. Finally a couple of our products are entering into late phase clinical development in proprietary products and that is also added to the R&D costs.
Menaka: Can you share more details on some of these late phase trials and what the time to market is like?
A: Time to market instead of that let me say that we should file at least one NDA before the end of this year. We should have another one in the next few months after that. So, we are looking at filing at least 2 new drug applications in the next year or so.
Menaka: You can’t talk to us about anymore detail on those or what the potential of those is?
A: They are not very large products. We are doing work in the area of formulation innovation in two therapeutic areas, one is dermatology, the other one is neurology. The products range in USD 50-100 million in size at peak revenue each one of them.
Menaka: That is roughly USD 200 million thanks to those two NDA between now and the end of the fiscal?
A: Not USD 200 million, somewhere in the range of USD 100 million.
Menaka: So, USD 200 million for both between now and the end of the fiscal right?
A: Not end of the fiscal. By end of the fiscal we will file at least one NDA and a few months later we will file another one. In next 12 months we should file at least two NDAs.
Menaka: SG&A expense, most of it is marketing or is it also because of wages?
A: SG&A is primarily wages otherwise it has been relatively flat.
Menaka: I would imagine SG&A is a one time thing then?
A: SG&A will remain at this level. It is the annual inflation of wages and certain other costs.
Menaka: Besides the R&D pipeline is there anything else that you can talk us through in terms of pipeline and what we can expect in the months to come in terms of revenue boosters?
A: It is largely going to be driven by the unfolding of the US pipeline. There has been a backlog at the USFDA and we are awaiting approvals. Approvals are not coming as fast as we anticipated and hence we are seeing some challenges in that market.
Menaka: So, you are awaiting how many approvals at this stage and do you have any even a broad estimate of when you think some of those approvals might come through?
A: I don’t want to speculate on that.
Menaka: Let us talk a little bit about some of your other markets besides just North America, how are you seeing Europe as well as India what the outlook is?
A: In India we have grown higher than the market around 14 percent. We are quite happy that in spite of the NLEM and all of that we are maintaining growth. Growth is largely driven by volume growth and some new launches. So, we are optimistic about India. The other market which has been a very positive surprise is Venezuela. I think the market has a lot of challenges in terms of currency, in terms of the volatility there and the political environment. So, we see a lot of the competition not sustaining their presence there. As a company we are committed to this market and as a result we are seeing very good growth there. In fact this year we grew by over 100 percent. In the first six months we actually grew more than the whole of last year.
Menaka: It is a very small market right?
A: I think it is sizeable.
Menaka: How big is the Venezuelan market?
A: For us I think it will cross USD 100 million this year overall.
Menaka: It can sustain 80-100 percent growth for the next few years to come?
A: I wouldn’t say that. Their economy is in a state of significant transition and that has posed challenges as well as opportunities to those to stay committed. The growth rate will be high but not at this level. This is not a sustainable growth rate. However I think the sales should sustain at this level.
Menaka: Since we are talking geographies will you also comment on Europe which is may be not as strong as you would have liked it?
A: Europe has been not a very strong point for us and it is continuing to decline. I don’t see a lot of optimism there unless the pipeline of special projects of differentiated assets come out I don’t see that happening in the next few months.
Menaka: If my information is correct both the global generics business was down 19 percent year on year in Europe and the PSAI segment was down 37 percent in Europe and you expect these declines to continue from hereon?
A: I don’t expect the declines to continue at this level. Actually the API business will turnaround in the second half and it should show a significant growth but the generics part of the business is not going to grow in the short term.
Menaka: Non-geographywise on an overall cumulative basis global generics is up 8.7 percent, your API business was up 6 percent, correct?
Menaka: You expect that this will be the growth rate to be maintained over the next few quarters?
A: I would expect the growth to increase not actually maintain.
Menaka: Increase substantially if you can give me a qualitative assessment of whether you expect the next two quarters will be better?
A: It will be better than the last two quarters.
Menaka: Much better or little better, somewhat better?
A: I don’t to qualify in that way.
Menaka: You have also entered into an agreement with Novartis to buy rights to a nicotine therapy drug which is Habitrol, is this going to be a big product?
A: It is a modest size it is not a very big product but it is an important aspect of the OTC market. We also see that smoking cessation as a category is growing and with Obamacare giving reasonable incentives to people to give up smoking I think we see a growth in this market and so it was a good opportunity for us.
Menaka: How big is the size because you are still awaiting FDC approval aren’t you? It is not yet a in sale product.
A: The transaction has not closed, we are awaiting FDC approval.
Menaka: Give us a sense of what size of market this product has?
A: I don’t have the exact numbers but it is in the region of USD 50 million.
Menaka: A quick detailed question on tax. You had a higher tax outflow in the quarter gone by, higher by about 51 percent because it is a big jump I am asking you the question as to why and if you can talk us through what this means for the next few quarters?
A: You shouldn’t look at the tax quarter to quarter but full year I think we should remain at the 19-20 percent range.
Menaka: What is your view on where the business stands right now and what you expect the second half of this year will bring, you have given us some indication geographywise and business segmentwise but a slightly more macro big picture view on what this year is going to mean for DRL?
A: This year is a modest year it is not a high growth year but the second half should be better than first half.