Q4 to be lean qtr for US biz due to delayed launches: Dr Reddy's

The fourth quarter of the current fiscal is going to be lean for the US business due to a price erosion and delays in launch of new products, says Dr Reddy's Laboratories COO Abhijit Mukherjee. The effect of a US Border Tax under consideration by the Republicans to promote manufacturing and industries in the country, cannot be speculated right now, Mukherjee says. Indian exporters, especially from the pharma space, could face serious troubles if this turns into reality. However, "Europe is growing strong, emerging markets are doing well and India coming back. So we will see where it takes us," he says.Demonetisation affected the company's local business but Mukherjee says the company has tried to save many costs following a slowdown in approvals post warning letters to three of its plants.The pharma major reported third quarter earnings of the current fiscal on saturday. While revenues declined, the drop was in-line with expectations and was overall an operationally strong quarter for the drug firm.Below is the verbatim transcript of Abhijit Mukherjee's interview to Ekta Batra on CNBC-TV18. Q: I wanted to start with three units, which will be inspected by the USFDA. Can you give us more details in terms of the re-inspection for February and March if you could start by apprising us of that? A: The rest of the quarter of Q4, all three sites would be re-audited. That is all we can say for now. We have done preparations for long time and we believe that we are prepared to go through the audit. Q: The Srikakulam facility was cleared by Health Canada, what about Japan? We understand it was inspected by them as well. What was the outcome of the inspection? A: Went well. We have gone through the qualification of Pharmaceuticals and Medical Devices Agency (PMDA) as well. Q: So the Japanese authorities have cleared the facility as well? A: That is right. Q: Which other regulators have inspected the plants and an update on the same if you could provide that for us? A: There are several. Between the three plants, it keeps getting audited. Specifically, I wouldn’t be able to provide right away but all the recent audits by the various agencies have all gone well. But every agency would have their own expectations so there is no need to draw conclusions from one audit to another. It is important that we prepare ourselves well, which we believe we have done and let us brace up to the USFDA audits which are coming up in the next seven weeks or so. Q: Coming to the numbers now, it was definitely an operational beat for the company. What led to the SG&A and R&D cost declining and what are you guiding for in terms of margins as well? A: Overall post the warning letters, we had a slowdown in approvals as we had spoken about in the last few quarters. So it was important that we calibrate cost. So as a part of that whole exercise, we have been trying to curtail costs on many fronts and I think it was a good thing. I think always there should be an effort to be leaner and what you see in some of those operational costs is as an outcome of that effort. Going ahead, what is more important than cost is approvals. Q4 some of the approvals which we were expecting is slightly pushed out into subsequent quarters but overall, portfolio remains healthy and we remain optimistic going ahead. Q: North America continues to be weak, what is the pricing pressure trends that you are facing and the guidance that you can provide at least for the US business? A: Pricing pressures are quite intense for the last couple of quarters we have been seeing pretty deep cuts in pricing. It is not surprising, the channels have consolidated. Four channels account for more than 80 percent of the share of the market and hence that is on the face of more competitors coming in, it is showing up in deep price erosion. The only way to position good results from North America is to have robust series of launches and we haven’t been having heavy launches -- the one would be value accretive in the last few quarters. We have been having launches, we have launched about 5 but not enough to compensate for the price erosion. It will take couple of quarters more by the time we get back to a healthy level of launch pattern. Q: How worried are you about Trump’s statements on healthcare, how are you reading them for Indian generic firms? A: The statistics and the value generics industry created for US healthcare is a lot – not just speaking of Indian generic industry but generics as a whole account for nearly 90 percent of the prescriptions and between 2005 to 2016 about USD 1.5 trillion of healthcare savings have been brought in by generic. So the focus for the industry as well as the government should be that what value generics industry brings in and I think we would stay focus on that. Beyond that, policies and other announcements would be certainly government interrogative but we continue to request government to take cognisance of the value created by generics industry as a whole in US healthcare. Q: Is there a chance of a border tax according to you and if so, how much would it possibly impact your operations by? A: At this juncture, your guess is as good as mine. It will not be proper to speculate anything. These are just discussions. I think we leave it at that. These are all public domain sort of data, which one can easily calculate what would the impact on the industry. Maybe in my view, it is premature to discuss this. Q: What about guidance for the US business? Can you guide us in terms of how the US would possibly perform cum Q4? A: Q4 is a little lean because some of the launches, which we are expecting is getting pushed out to subsequent quarters a little lean and while erosion is in progress, there will be some impact but we will see what else we can do. Europe is growing strong, emerging markets are growing strong, India coming back. So we will see where it takes us but yes, US is going to be a little lean in Q4.