See 20% growth despite Re rise: Dr Reddy's

GV Prasad, Vice Chairman and CEO at Dr Reddy's Laboratories has said that a significant part of their business comes from the US but the rising Rupee is expected to hit margins. He said that if Rupee goes below 41 to the dollar, it will start impacting margins.

The company expects significant revenues in this quarter coming from their drug Ondansetron.

They are also experiencing a supply contraint in German markets coming from being hit by price cuts. He said that pricing in Germany is a challenge, and there may be a need to move manufacturing to India.

Though, he said that capex plans will remain on track, despite the Rupee impact. He sees a growth of 20%, excluding exclusivity and one-off revenues.

Excerpts from CNBC-TV18's exclusive interview with GV Prasad:

Q: How important is the rupee and dollar impact on pharmaceutical companies and how do you hedge yourself?

A: A short-term hedge is possible, but the Rupee is certainly going to put pressure on the margins, especially for companies like ours that have a large portion of our earnings from global markets. In the short-term, there is going to be some pressure, but our business is diversified in the international markets. Though, a significant portion is from the US and that will certainly be impacted in terms of margins.

Q: What had you factored in as the rupee-dollar rate and how much of an impact are you bracing yourself for, on margins?

A: We were looking at around 41, so anything below that will start impacting margins.

Q: Have you factored in the slip-by on your margin front?

A: We have not factored that in yet.

Q: To what extent will the exclusivity of Ondansetron impact the business in the Q1 earnings?

A: Significant portion of the earnings in this quarter will be from Ondansetron that has ended already. Going forward, that portion of the profits will not be in our books.

Q: Specifically with regards to Hexal, could you walk us through two aspects of it? How much pricing pressure are you facing from that part of the business and how are Betapharm’s margins as a result of the tie up with Hexal?

A: There are a couple of things happening in the German market, which have impacted our business. One is of course, the pricing environment. There has been a round of price cuts along with a change in the way business is being done with the insurers going directly to tenders, which has resulted in some kind of pricing pressure.

On top of that, we were hit a little bit by supply constraints from Salutas, which is now a part of Sandoz. That also created some problems with supplies to the market place. I think we have overcome that now, we have renegotiated our contract with them to a non-exclusive relationship, which will mean that we will start shifting production more rapidly into India and debottleneck supplies. That should happen from the second half of this year. The pricing front remains a challenge, but moving production into India will improve margins and we will re-adjust our business model to the new reality.

Q: How do you see the future performance of Betapharm? Is this a market you will now look at more aggressively because it focuses on Europe and that currency might help you better?

A: I do not think that we will refocus because of the currency, but we will focus on Germany. It is an important market for us, it is the largest generic market outside the US and we are focusing our energies into moving manufacturing into India, thus debottlenecking supplies and also lowering costs. We are also adding our internal pipeline onto Germany and this effort should start playing good dividends from the second half of this fiscal year and we certainly see Germany as a growth market.

Q: Update us on the situation with Aciphex and where the litigation process has reached?

A: On Aciphex, the lower court has denied our non-infringement position. But we are going to appeal. Teva and we will jointly appeal this case and we are in the process of preparing our appeal.

Q: There have been a couple of brokerages, which have voiced serious concern about the currency. How much of an impact does it make materially? How concerned are you about the appreciation we have seen from the start of the year?

A: Certainly currency is an important factor, given the large export earnings that we have. But we certainly can’t control currency, so the only way we can react to the situation is to look at our basket of billing in the various markets, as well as by taking currency hedges. Hedges can be taken only from a short-term perspective. In the long-term, the risk of taking a hedge is something that we have to consider.

Having said that, we also have significant import reliance and hopefully, the currency moving that way will provide us with some mitigation. Also, Euro being a large portion of our business, will impact our earnings in a positive way. But as with every other export business, I think the dollar moving down will impact our margins. There’s not much we can do about it.

Q: How much capex are you factoring-in capex for FY08? Outside that, will it impact any sort of inorganic growth that the company may be looking at?

A: I certainly don’t think it’ll impact our inorganic growth or our capex. Our capex plans continue as announced earlier. We are building an SEZ for finished dosages around Hyderabad. We are building a chemical SEZ on the east coast in Vizag and they are going as per plans, nothing has impacted them. In organic growth, we are always looking at attractive options to build our business and accelerate our growth and that effort continues.

Q: How much are you factoring-in, in terms of a core business growth for FY08, excluding Betapharm? How much do you expect Betapharm to contribute in terms of revenue?

A: If you exclude the one-time opportunities such as authorised generics, as well as exclusively driven revenues from last year, we should grow by a healthy 20% on top of that.

Q: By which quarter do you think you will be able to understand the impact of the rupee and how it impacts your margins?

A: I think we have to wait till the second half of this fiscal year to fully understand the impact of the rupee, as well as our actions in Germany.