Good morning, everyone. I'm Aishwarya Sitharam from Biocon Investor Relations team, and I would like to welcome you to Biocon's earnings call for Q1 FY 2023. I would also like to indicate that all participants will be in the listen-only mode, and there'll be an opportunity for you to ask questions after the opening remarks conclude. Should you need to raise any questions, please select the Raise Hand option under the Reactions tab of your Zoom application. We will call out your name and unmute your line to enable you to ask a question. While asking, please begin with your name and your organization. Please note that we will not be monitoring questions on the chat box, but you can raise any technical concerns that you may be facing for our support team to help.
I would also like to bring to your attention that this conference is being recorded. The recording will be available on our website within a day, and the transcript for this call will be available within the next five working days. To discuss the company's performance and outlook, we have with us today the Biocon leadership team comprising Dr. Kiran Mazumdar-Shaw, our Executive Chairperson, and other senior management colleagues. I'd like to take this opportunity to remind everyone about Safe Harbor. Today's discussion may be forward-looking in nature based on management's current beliefs and expectations. It must be viewed in conjunction with the risks that our business faces that could cause our future results, performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements.
After the end of this call, if you need any further information or clarifications, please do get in touch with Nikunj or me. I would now like to turn the call over to Dr. Kiran Mazumdar-Shaw. Over to you, ma'am.
Thank you, Aishwarya, and good morning, everyone. I welcome you to Biocon's earnings call for the first quarter of fiscal 2023, and I'd like to start this earnings call on a note of optimism on the resilience displayed by India while a large part of the global economy is bracing itself for a potential slowdown next year. Businesses the world over are reshaping their supply chains at a time when the world is facing uncertainties due to various geopolitical tensions. Every economy is trying to offset the impact of pandemic spend by lowering healthcare spend. Backed by strong domestic demand and steady global investments, I do believe that India is on its way to becoming the world's fastest-growing economy in the years to come. As the pharmacy of the world, India has a key role to play in driving inclusive and equitable growth globally, particularly in healthcare.
Policy support such as the Production-Linked Incentive scheme and more recently, the proposed Research-Linked Incentive scheme, will, I believe, boost investment in innovation. Enabled by continued investments in capacities, capabilities and R&D over the last few years, the Biocon Group has a window of opportunity to surge ahead into a stronger leadership position in biopharmaceuticals. Another important differentiator of global leadership in times of uncertainty is ESG. As we transform into a future-ready leader, the Biocon Group is poised for strong and sustainable growth. Our vision towards environmental stewardship, diversity and inclusion and governance has been articulated in our recently published ESG report for FY 2022. Let me start with some organizational announcements. Before I discuss the business performance, I would like to make a few announcements.
Mary Harney and Daniel Bradbury, Independent Directors of Biocon, have completed their second term of tenure with the company and have stepped down from the board at the conclusion of the company's board meeting yesterday. On behalf of Biocon's Board of Directors and management, we express our deep appreciation and gratitude to both Mary and Dan for their extensive contribution and stewardship. I would like to share a management update. I'm pleased to announce that Michael Cutter has joined Biocon Biologics as the Chief Quality Officer. As part of the executive leadership team, Michael will be responsible for leading the global quality organization across all locations and will be based in Bangalore. Michael brings with him over three decades of experience occur...
Across quality control, quality assurance and pharmaceutical manufacturing, setting the right quality culture and building credibility with global regulatory agencies. I would now like to present the key financial highlights of the quarter. At a consolidated group level, revenues for Q1 FY 2023 were up 23% on a year-on-year basis at INR 2,217 crores. Revenues from our biosimilars business delivered a strong year-on-year growth of 29%, while that of our generics business grew at a healthy rate of 19%. Research services revenues grew by 8%. Core EBITDA, which is a very key part of our business performance, grew at 25% with a margin of 31% versus 30% in the same quarter last year. Profit before tax for the quarter stood at INR 197 crores, up 19% to INR 166 crores during the same quarter last fiscal.
Net profit for the quarter stood at INR 144 crore versus INR 84 crore in Q1 FY 2022, reflecting a growth of 71%. During the quarter, we also recorded a Forex loss of INR 38 crore, primarily due to restatement of Goldman Sachs OCD investment in Biocon Biologics, as compared to a gain of INR 17 crore during the same quarter last fiscal. Our gross R&D spend was at INR 223 crore versus INR 136 crore in the same period in the last fiscal, an increase of 64%, corresponding to 15% of revenues ex-Syngene. Of the INR 223 crore, INR 198 crore is expensed in the P&L, while the balance amount has been capitalized. INR 120 crore were expensed in the P&L in Q1 FY 2022.
The reported EBITDA for the quarter was INR 478 crores versus INR 437 crores, reflecting a 9% year-on-year growth, whereas margin stood at 22% against 24% reported in Q1 FY 2022. EBITDA was primarily impacted by the Forex loss, as mentioned earlier, higher operating costs, particularly due to the inflationary impact on raw materials and freight, as well as personnel costs linked to new hires and annual increments, which obviously will be at a higher level in Q1, but will get normalized over the year. Furthermore, R&D investments increased by INR 78 crores, reflecting pipeline progression for future growth. Now let me turn to segmental business performance during the quarter. Let me start with generics. The generics segment delivered revenues of INR 580 crores during the quarter, which is a year-on-year growth of 19%.
Profit before tax for the quarter was at INR 63 crore versus INR 29 crore during the same quarter last fiscal, a year-over-year growth of 116%. PBT margins were higher at 11% as against 6% in Q1 FY 2022. The year-over-year growth during the quarter was primarily due to ramp up in API sales, particularly our statins and immunosuppression portfolios, and continuing performance of recently launched generic formulations. The corresponding period last fiscal was significantly impacted by COVID-related operational and supply chain challenges, which are now behind us. However, the business does continue to encounter headwinds in the form of pricing pressure and rising input costs. Sequentially, revenues declined by 19%, largely due to temporary shutdowns undertaken during Q1 to facilitate capacity expansions, which will augment growth for the business in the second half of the fiscal.
During the quarter, we launched our vertically integrated formulation, mycophenolic acid delayed release tablet and anti-metabolite immunosuppressant indicated for the prophylaxis of organ rejection in adult patients receiving a kidney transplant. In line with our strategic priority to expand the generic formulations business beyond the U.S., we have received approvals for our oncology drug, Lenalidomide, in the EU, Fingolimod capsules in the UAE, and Rosuvastatin tablets in Singapore. During the quarter, we received a GMP certificate from MHRA U.K. following their on-site inspection of our oral solid dosage formulation facility located in Biocon Park in Bangalore. We continue to be on track to qualify and validate our greenfield fermentation-based immunosuppressant API manufacturing facility in Visakhapatnam in FY 2023. Growth in our generics business in FY 2023 is supported by a strong product pipeline, expanded manufacturing capacities, and continued efforts to digitize processes and optimize costs.
Let me now turn to biosimilars. Biocon Biologics recorded a revenue of INR 977 crore, a year-on-year growth of 29%. Adjusting for the one-off COVID-19 related sales of itolizumab and remdesivir in Q1 last year, the business witnessed an even stronger year-on-year growth of 46%. On a sequential basis, however, revenues were flat, impacted by lower realization of European profit share from the Viatris-led business due to the devaluation of the euro against the U.S. dollar. Core EBITDA, which excludes R&D, forex, licensing income, and mark-to-market movement on investments, stood at INR 361 crore, up 33% year-on-year. Core EBITDA margin remains healthy at 37% versus 36% last year, in line with our guidance of being in the mid to high 30s. It is also important to call out increased personnel costs this quarter.
We have made good progress on our R&D pipeline with biosimilars ustekinumab and denosumab in global clinical trials and advancements in other assets. These are unpartnered assets wherein the full R&D costs are borne by us as compared to the shared cost model that we have had in the past. Consequently, R&D investments for the quarter increased by 120% year-on-year to INR 130 crores, representing 13% of BBL's revenues versus 9% for the full- year FY 2022. These R&D investments to secure our future growth, coupled with a non-cash foreign currency translation loss of INR 43 crores on Goldman Sachs OCD investment in BBL, led to a 12% year-on-year decline in EBITDA for the quarter to INR 190 crores. Profit before tax stood at INR 71 crores.
The Viatris-led business has delivered strong year-on-year performance, underpinned by the successful launch of our 351(k) interchangeable biosimilar insulin glargine in the U.S. In Europe, the market share for our biosimilars pegfilgrastim and trastuzumab continues to grow. In Canada, following the launch of our biosimilar bevacizumab last year, Viatris will be launching biosimilar glargine and aspart later this year, opening new avenues of growth. The Biocon Biologics-led business continues to see strong demand. In FY 2022, we had entered 44 new partnerships which will drive growth in the coming quarters. After a pandemic-linked hiatus, we expect site inspections to be conducted by the U.S. FDA in August, which hopefully will pave the way for our biosimilars bevacizumab and aspart approvals later this year. Our new state-of-the-art B3 mAbs facility has recently been E.U. GMP certified.
Our strategic deals with Viatris and Serum are progressing towards closure as planned. On the operational front, efforts are underway to ensure a smooth integration and transition. In summary, the business fundamentals continue to be strong, enabling us to ramp up revenues and sustain core EBITDA margins in the mid-30s%. There are multiple near-term catalysts, including ramp-up of biosimilar glargine, potential approvals of biosimilars bevacizumab and aspart in the U.S., and approval of new manufacturing capacities. The strategic deals with Viatris and Serum will transform Biocon Biologics into a leading vertically integrated global biologics company. Now let me turn to novel.
During the quarter, our partner Equillium initiated patient dosing for the pivotal phase III clinical trial for itolizumab in patients with acute graft versus host disease, while recruitment continues for the pivotal phase I-B clinical study of itolizumab for lupus nephritis, which will read out interim data later this year. Our Boston-based associate Bicara's lead molecule BCA101 has demonstrated encouraging safety pharmacokinetic, pharmacodynamic, and efficacy profiles based on the findings from the dose escalation phase of the ongoing phase I/I-B trial, which was initiated in February this year. The recommended dose has been established at 1,500 mg weekly for BCA101 as monotherapy and in combination with pembrolizumab.
The combination of BCA101 and pembrolizumab is currently being evaluated in front line systemic patients with unresectable, recurrent, or metastatic head and neck squamous cell carcinoma and as a second-line therapy in patients with advanced squamous cell carcinoma of the anal canal who have received prior chemotherapy. BCA101 is also being evaluated as a monotherapy in patients with advanced or incurable cutaneous squamous cell carcinoma of the lung who have received previous anti-PD-1 therapy. Primary results for the dose expansion arm of this study are expected in the second half of calendar year 2022. Post the first round of seed funding, Bicara continues to secure funding from external investors to support its clinical development activities. Now turning to research services, our Syngene.
Revenue from operations stood at INR 645 crores for the quarter, indicating a year-on-year growth of 8%. Profit before tax for the quarter was at INR 93 crores as against INR 95 crores in Q1 FY 2022. The first quarter results were against a strong quarter last year due to sales of COVID treatments, where remdesivir, in the midst of the second wave of the pandemic, was a key product. No sales of remdesivir were recorded in the first quarter this year. Excluding the impact of remdesivir, the underlying revenue from operations growth in the quarter was around 30% year-on-year. The first quarter results reflect strong underlying performance across all our business divisions.
A recent highlight was the signing of a 10-year agreement with Zoetis for the commercial manufacturing of the drug substance for Librela, a first of its kind injectable monoclonal antibody to alleviate pain associated with osteoarthritis in dogs. This deal is expected to start generating revenues in the second half of the fiscal year and will be worth up to $500 million over its term of 10 years. This is a strategic move for Syngene's biologics business, providing a pathway towards the FDA and EMA regulatory approvals anticipated later this year. The company continued to invest in infrastructure, including a kilo lab in the development services division, as well as a lab housing over 150 scientists and analysts in Hyderabad dedicated to PROTACs, Syngene's novel cancer drug discovery strategy for its clients.
Syngene has raised its revenue guidance for the year from mid-teens to high teens, taking into account a favorable change in the rupee dollar exchange rate and of course, the recent agreement with Zoetis. I would like to conclude by saying that FY 2023 will unlock the potential of several of our investments across businesses, be it in capacities, pipeline or partnerships. New launches and enhanced capacities will drive growth for our API and generic formulation business. While the strategic transactions with Serum Institute and Viatris, which are on track towards closure, will accelerate growth of our biosimilars business. We see strong growth and contract extensions, and the new inflection point in contract manufacturing, catalyzed by the Zoetis biomanufacturing contract, will drive the growth momentum for Syngene.
In line with our focus on sustainable growth, we continue to invest in people, policies and processes to ensure value creation for all our stakeholders. With this, I would like to open the floor to questions. Thank you.
Thank you, ma'am. Should you need to raise question, please select the Raise Hand option under the Reaction tab of your Zoom application. We'll call out your name and unmute your line to ask the question. The first question is from Damayanti Kerai from HSBC.
Hi. Good morning. Ma'am, you mentioned that pickup in market share for Semglee will be one of the key near-term driver for biosimilar sales. What we have seen in last few months that the market share seems to have saturated in low single digit number. What will be factors which will improve pickup in Semglee market share from current level and also for other two launched biosimilars, Ogivri and Fulphila. Again, we see some kind of saturation in the market share. Just wanted to understand what are the key hurdles which are stopping you to improve market share from current levels?
Damayanti, thanks for your question. I will turn this over to both Shreehas and Matt to respond to, but all I can say is that we are seeing good pickup of all these products you mentioned. We are tracking in the right direction, and I think what we are really seeing is a strong performance in the second half of this fiscal.
Thanks, Kiran, and Matt, please feel free to add to most of the questions. I think, Damayanti, we'll just answer your question product by product in the U.S. I think starting with glargine, and I think your comment was saying the market share seems to have saturated. I think just to correct that data point, we started this year with a sub-3% market share and we've moved that towards 9%, just a shade of that 10% which we did in July. When we started this fiscal, we had guided that towards the second half of the year, we'll be seeing this move towards the mid-teens.
The way Viatris has been progressing, we see that, you know, growth from 3% to 9% moving to 10% and then towards the mid-teens in the direction that we had projected earlier. We've moved. We see that move happening in the direction that we had projected. Viatris has also recently added significant plans beyond the Express Scripts, Prime Therapeutics that we had talked about earlier on.
To be moving to regional pharmacies, we've also got regional formularies. We've also got a significant addition towards the beginning of this month. These are all the right steps which will help us get towards that mid-teens market share that we have guided towards at the beginning of the fiscal. Now, you talked about the other two products, which is trastuzumab and pegfilgrastim, and we talk about them in a bit. Starting with trastuzumab, there was a particular situation where in April, May, we'd seen the market share kind of dip from that 10%-11% to 7%-8%. And that's because, you know, Viatris did lose a customer, you know, during the process.
They've gained that in June and July, and we are again starting to see those market shares move up towards 10% and back to where we are. I think these are normal course of business activities where you win a customer, you lose a customer, you lose some share in a particular you know formulary or a particular account. Effectively what we need to see is that they've been able to be resilient in the market and held on to its market share despite increased competition. Likewise, with pegfilgrastim where our market share has held on that 8%, 9%, even though we've seen the innovator themselves lose market share, as well as Coherus, which was a big market player at one time significantly lose market share to new competition.
I think overall, if you look at it, we've held the market, and that market is steadily moving towards where we had guided at the beginning of the fiscal. Anything else, Matt, that you may want to add, please go ahead.
Yeah. Thank you, Shreehas. I think that was a really good explanation, and I would just call out the Viatris commercial team. As we continue to look at how this industry, especially within the U.S., ebb and flows, the team is rightfully situated to address those hurdles. I think you're seeing that particularly in trastuzumab. As you know, every company kinda goes through a potential pullback, but I think what is important there is you've seen a great comeback. I would just say that, Shreehas, but everything else is exactly what I would say.
Thanks. Do you believe that we have ample headroom to improve on market share from current level? The few factors which you mentioned should be helping from here on.
Yes, I certainly believe that this is the case. I'd also like to, you know, sort of draw your attention to the fact that we are in a very strong and pole position to actually drive growth because of all the capacities that we have put into place. I think that now that the worst of the pandemic challenges are behind us, I think growth is something that we will pursue very strongly.
Thank you, ma'am. My second question is on R&D. In last two quarters, we had seen a sharp jump in R&D spend, which is due to the unpartnered asset, which ma'am mentioned in the call previously. Once we are done with major trial for these two assets, should we see some moderation in R&D costs, or it should continue to improve, continue to increase from this level also?
Damayanti, if we want to future-proof our business and if we want to really attain global leadership, I think it would be not very prudent to cut back on R&D. R&D drives growth for us. What is important for us to drive EBITDA growth, which is what we are pursuing, and I think what you must also understand is that the Viatris' deal actually gives us the ability to invest more and faster in R&D pipeline. The pipeline is our you know is very fundamental and integral to growth. Pipeline progression is what drives growth. To cut back on R&D, I don't think would be prudent. We should be you know at these kind of levels of R&D spends, and it might even increase over the coming quarters.
I think for the investors and analysts to expect us to cut back on R&D, would not be, the right thing to expect. Because that is why we keep harping on, core EBITDA. Because I think core EBITDA is always, very, very important to really get you the understanding of where our business is heading. The fact that we are making such good clinical progression will actually tell you that our R&D is delivering very well for us.
Sure, ma'am. R&D should remain in this 10%-15% range which you earlier indicated.
Absolutely. Anything lower than that actually is not something that we would prefer.
Sure, ma'am. Thank you. I'll get back in the queue. Yeah.
Thanks, Damayanti. We request the team to only ask two questions so that everyone has the opportunity to go through. Next question is from Surya Patra from PhillipCapital.
Yeah. Thanks for this opportunity. This is Surya from PhillipCapital. Ma'am, in fact, just two clarifications, first of all. One is that...
Surya, I think we lost you.
I think we should move on to the next till he gets back.
Sure.
The next question is from Shyam Srinivasan from Goldman Sachs.
Yeah. Hi. Can you hear me?
Yeah.
Yeah. Good morning. Good morning, everyone. Thank you for the presentation. I think just first question are on biosimilars again. Kiran and team, if you could just help us understand the geographical split of how this business is currently. Where are the growth rates. I think a lot gets discussed about the U.S. market shares, but we know less about, say, Europe. I think you called out Canada in your opening remarks. Just help us understand geographically how the biosimilars. You used to give us a split of rest of the world and developed world, so any color there will be very helpful.
That's a very good question, Shyam, and I'll ask Susheel to really tell you about how well our emerging markets business is also tracking.
Yeah, thanks, Shyam. The emerging countries actually is a potential. Very often we realize very good returns from the emerging countries. The entire emerging country model for biosimilar is growing, and it's growing quite fast. That is mainly because of two reasons. One, patients and doctors both are getting aspirational, and they want to use the biosimilars more and more. Second, more and more tenders open up for our biosimilars. Going forward, while we increase our numbers of countries that we operate in and the depth in the countries that we do businesses, the biosimilar business is going to grow up significantly and to ramp up. Right now, it is much smaller than the U.S. and the European markets, but many of the places and many of the countries, the prices that we get is much better than even Europe.
The emerging piece of the countries is quite big.
Maybe Matt would like to comment on the non-U.S. markets.
Yeah, sure. Thank you for the question. I think we still see continued good growth within Europe, especially from the Viatris clusters, Germany as well as in France. You're gonna see those continued launches of new products that we talked about in R&D. As we progress within our integration with Viatris, we're gonna be looking at new markets and expansion there. Europe is still a very key focus for Biocon Biologics and has a tremendous amount of opportunity for us, as well as you know the U.S. and North America.
Got it. My second sub question on this, and I'll be brief, is on the pricing dynamics in these different I think EMs was briefly touched upon. If you can also help us understand, there is market share progress, but there is not value share progress, if I can use the term. Maybe the only data we have is U.S. What is happening to pricing in some of these markets, including the U.S.?
Shreehas, maybe you want to take this.
I think, Shyam, these things would vary from for two things. One is from the market and other is on the product category that we are talking about. Say if we were to look at the oncology products in the U.S., we've typically seen, you know, if you were to take the pre-biosimilar and pre-launches of products, you would see discounting anywhere in the region of about 50%-62% from that pre-biosimilar days. If you were to move that into Europe, you would see that discounting to be much lower in the range of about 30%-35% for the molecules that we operate in.
That's also a factor of the competition of the market, of the tenders, also of the base pricing that these molecules are vis-à-vis where the discounting would be. You'd also see different categories of product attract different discounting. Like if you were to look at insulin, which is in the U.S., a product which is more a contracting cycle kind of a molecule and where the way Biocon or say in this case Viatris was able to displace Lantus and move into a formulary position. Those discountings will be probably slightly sharper than what we've seen for the buy-and-bill kind of category in the oncology space.
If you really look broadly across the category of products that we've launched in the oncology biosimilars as well as the insulins, more or less the pricing discounting has been reasonable. We've not seen any cliff. Despite the competition of oncology, you see about four or five players per molecule. There has been pricing sanity overall, so to say, and it's been in the U.S. particularly, as I said, in that 50 or 60 range. Then in Europe probably it's in that 30-35% range. There has been some respect for the kind of work that has gone in in developing the products, and it's reflecting in the stability that you've seen overall that's prevailed.
Thank you, and all the best.
Thank you, Shyam. The next question is from Harith Ahamed from Spark Capital.
Hi. Good morning, and thanks for the opportunity. On denosumab and ustekinumab, last quarter you had talked about starting phase III trials in the first quarter of FY 2023. Can you update us on the status of those two trials? Trying to understand if the R&D spends for the quarter reflects the phase III spend as well. Will there be a further step-up in R&D spend, you know, in the coming quarters?
Shreehas, do you want to take this?
I mean, Harith, the question wasn't very clear. I think you were pointing towards saying that we've progressed ustekinumab and denosumab into the clinic. I think you were looking for an update on where these products are headed and
Yeah.
Is that what you were looking for?
Yeah. Whether we started phase III trials already?
Yeah. We have. I mean, I would like to confirm that those things are progressing as we announced and we would be looking to move these products further. We have started these global clinical trials, phase I and phase III, and we should be looking to get to filing towards the end of calendar year 2023 for ustekinumab and end of calendar year 2024 for denosumab. They are progressing as per plan and we expect them to move through the quarters. You'll see those R&D expenses come up as we progress these molecules.
Okay. Got it. My second question is on the fundraise at Bicara. What's our stake? I mean, we've talked about continuing to raise funds through the first quarter. My question is on our current stake in this associate entity as of June.
Yeah. I think they have raised $26 million in the first round, and they are expecting to raise a larger amount. They've managed to raise about $6 million in the second, but they expect to raise an even higher amount, which they believe that they can raise by the middle of September. These amounts, as you know, are really required to see the clinical trials get to a certain level, and they're very confident. They also have entered into various business development discussions because the data is trending in a very promising direction. There's a lot happening at Bicara, and we will keep reporting it over the coming quarters.
Okay. From the disclosed stake in Bicara, which was around 74% at the end of March, has there been a further reduction? I'm trying to understand if the share of losses from the associate will decline further. There's been a lower number in 1Q versus 4Q. Trying to understand if this will reduce further.
Well, Siddharth will respond to this. Siddharth, you might want to respond to this.
Right. The stake in, as of June was roughly 60%. I think as the fundraise continues, we will see the stake further go down below 60%.
Okay.
No, I think he wanted to ask you about share of loss.
Share of loss, of course, we are taking the 60% share of loss in our P&L. This quarter, because of the fundraise, there was also a step-up in the valuation of the investment. I think the P&L impact of the step-up of valuation, less the share of loss was not significant. It was a very low number.
Last one with your permission. The INR 38 crore forex loss at the consolidated level, that includes the INR 43 crore loss at Biocon Biologics related to the Goldman Sachs OCD instrument, right?
That's correct. There were gains in other parts of the business.
The other income for the quarter at INR 78 crores, there's been a bit of a spike. Are there any MTM gains related to Adagio there?
No, Adagio, there's no gain. I think the main gain is that mark- to- market or the step-up of the Bicara investment. That's the main flux compared to previous.
Okay. Got it. Thanks for taking my questions.
Thanks, Harith. Next question from Neha Manpuria from Bank of America.
Thank you so much for taking my question. Siddharth, on the Viatris funding, have we decided on what would be the amount that Biocon would have to put in, you know, after the private equity and the debt deal?
Yes, Neha. We do have a commitment of $250 million to invest in Biocon Biologics, and we will invest that amount. The rest, of course, Biocon Biologics will be raising directly as a combination of debt and new private equity investments.
This $250 million would be a combination of our subsidiary stake sale and debt.
Yes. There are various options we are working on. Subsidiary means not only Syngene,
Yeah.
but we do have couple of other structured fundraise options that we are working on.
Understood. Second question, you know, Shreehas or Chinni, just wanted to understand from, you know, here, while the R&D part of the investment is well understood, outside of R&D, is there any incremental investment or large investment that we would require in the business to get it ready for the, you know, Viatris deal completion? How should I look at the cost structure for BBL, let's say, over the next few quarters? You know, other than the integration that would happen with Viatris.
Chinni, do you want to respond to this?
Yeah. If you could talk to the organizational build, and I'll cover the expense part.
Neha, I think the overall from a big expense ticket perspective, there will be. We are looking at R&D being a big ticket item, which we've talked about. We're also looking at
The CapEx on investments that we've talked about in the past, that we've discussed, investments in capacity for our recombinant human insulin and the analogs, and that's something that we've discussed recently. We've talked about that, and we've budgeted that. The integration costs that will come on as we get the platinum business coming on board and we further strengthen our commercial infrastructure in various geographies. We could have typically built it out organically. Now, of course, that would be far muted because a lot of this will come in to us through the acquisition.
To dimension this, I will let Chinni talk to you about it to see if he can give you a sense of what these investments would look like outside of R&D. Over to you, Chinni.
They are high. Let's say the investments, there will be increased investments in people as we do the organization build that will be absorbed by the higher revenue base and the increased profits that will come through post the merger. We have, as Shreehas mentioned, in terms of CapEx, well, most of our monoclonal drug substance capacities will be up and running from this quarter, particularly the B3, which gets commissioned in this quarter. That's July to September. We have increased investments into expansion of our Malaysia capacities and possibly. Not possibly. Also expansion of our drug product capacities for monoclonal antibodies. These are the large investments going into the business on top of R&D.
Understood. Thank you so much. Shreehas, one last question. Any additional update on Aspart? Is there a chance we, you know, get the approval before the current contracting cycle, or do you think the probability of that is, you know, lower now, based on your conversation with the agency?
Thanks, Neha. That's an important part. I think we've been discussing with this group that we've responded to the agency on the CRL that we've received, and the agency has indicated that they will visit us in this quarter, and there will be an inspection. We are quite confident that we should be able to get the approval once they've visited us. We are still hopeful that we, you know, all of this should be done, and aspart approval should be in the bag towards the end of the year, the calendar year.
Yes, there is, of course, the contracting cycle, which runs through July through, I would say, September, October, and there is that risk that we may not be able to be in the middle of that contracting cycle, taking us away from that big chunk of the commercial business that is available for this asset. We would certainly have then the opportunity to look at any mid-cycle contracting as well as any regional businesses like we did with glargine. Now that we've got presence with Sandoz, I think there is an opportunity to see how we can bypass the main commercial contracting national formularies into a more distributed phase.
I mean, yes, it's not the best situation that we could have been in, but we don't also see that as a complete lost opportunity. The focus right now, of course, is getting the approval in place.
Thanks, Neha. The next question is from Prakash Agarwal from Axis Capital.
Yeah. Hi. Am I audible?
Yeah.
Yeah. Thanks for the opportunity and good morning. I just wanted to understand a little bit on the margins better. I do understand R&D, you're already guided it will go up. Commercials, obviously it will expand, and so are the revenues expanding. More from second half when we add the Serum deal, which is expected to be about 30%, 33% margin business as well as Mylan consolidation. So how should we think about margins there? I mean Last year margins was good. This quarter, I mean, I would say softer. How do we see the margins rolling in? This I'm saying, reported margins not the core margins because R&D has to be there, expansion has to be there. Just a little color would help.
Chinni, you might want to comment.
Morning, Prakash. A couple of things. One, in terms of, let's start with the core EBITDA margin. The core EBITDA margins this quarter is slightly soft when you compare against the sequential quarter, but it improved over last, over Q1 of last year. The softness in this quarter versus Q4 is because of, as Shreehas mentioned, there's a impact of the increased, salary cost as increments kick in, which levels off over the quarters. The second one is the, we've been impacted by the euro-dollar movement, so that reduced the profit share and hit our margins, during this quarter. If you look ahead for particularly post Serum and Platinum and, the Atlas acquisition, we expect to re-maintain core EBITDA margins in the mid to high 30s.
As a consolidated, as you look across the three businesses, the core EBITDA margins remain the same, and we expect to remain in the mid to high 30s. Coming to R&D costs, of course, the increased revenues coming both from, you know, Viatris and Serum, gives us the ability to spend more or invest more into R&D. We have always guided for the 10%-12% in terms of R&D cost. We'll have to look at it from that range. Of course, it won't be quarterly. It's just more on an annual basis or across the program. On a quarterly basis, things could go up or down, depending on, you know, the progress of the trial.
On an annual basis, particularly over the life cycle of the program, you would see the R&D cost then to being 10%-12% of the increased revenue base.
Of the increased revenue.
Which is indicating that we're investing more into R&D with more bios of the pipeline products moving into the clinic.
Okay, understood. Secondly, on updates on the vaccines you put out, you know, COVID related and mosquito borne related. I mean, globally we are seeing that volumes are coming down and mosquito borne, apart from Africa, the volume has been coming down. Is the deal includes the new range of vaccines, maybe the monkeypox or a lot of new things are happening globally on the vaccine side. Is the vaccine deal with old and new portfolio? How should we think about this? As well as, the second part to this is, you mentioned about bevacizumab inspection twice around August. Aspart is there any update? Thank you.
I think Prakash, first and foremost, as you know, viral diseases are becoming very rampant and there's a lot of concerns around viral diseases like, you know, which wasn't there in the past. I think vaccines are going to become a very important segment. I think, you know, Serum Institute is well placed to basically develop new vaccines and cater to these global needs. From that point of view, I think even though the COVID vaccine demand has come off, I don't think that it is completely come off because as you can see, COVID is still very much in the air. I think annual, you know, COVID shots like annual flu shots will become the norm. I don't think it's going to completely fall off. Then you have many other viral diseases that are being looked at.
Now, when it comes to the bevacizumab and aspart, I think we mentioned that we are anticipating inspections in August. Both these will undergo inspections and that's why we are hopeful that we will get approval for both these products by the end of this calendar year.
Okay, perfect. As part also in August, that's what the clarification was.
Yeah.
Okay, perfect. On vaccine, part of the question was on the future vaccines also. Is it covered in the deal or it?
Yeah, yeah. The vaccine deal is covering all vaccines.
Okay, perfect. Thank you and all the best.
Thanks, Prakash. The next question is from Yash Tanna from ithought Advisory.
Yeah. Hi, good morning. I hope I'm audible.
Yeah.
Yeah. I went through the annual report, and I wanted to clarify a few things. Biocon Pharma Inc., USA, which is our U.S.-based subsidiary for the formulations of Biocon Pharma India. It had revenues of INR 472 crores and a PBT of INR 30 crores for the year, while last year it had revenues of INR 442 crores and a similar PBT levels. Is it the right understanding from my side that the U.S. generic formulations portfolio has just grown 7% year-on-year despite we launched everolimus?
Siddharth, you might want to take that.
Yeah. Abhi, maybe you can answer that.
Sure, Siddharth. Thanks. Yes, we've seen, we mentioned this before also. We've seen some headwinds on the base business that we had, but the growth will come from new product launches. One of them was everolimus. While there has been headwinds on the base business, pricing pressure with everolimus, the revenue growth has been based on the market share we are seeing. We've also seen more launches on everolimus coming in. Even on those accounts, we are seeing that there is price erosion, but we've held on to the market share.
Yash, let me just add that, don't look at the profits of standalone entity because the profits are split between the Indian entity and the U.S. entity. The revenues, what you reflected are the correct revenues for our U.S. business.
That's the U.S. formulations one, right?
That's right.
Okay, got it. Just relating to that. Biocon Pharma India sales was INR 630 crores. Does that mean that USA formed approximately 75% of the generic formulation sales? Is that a right-
Actually, U.S. is 100%. There is also a certain portion of API business in Biocon Pharma Limited. The delta between what's reported in Biocon Pharma Limited and Biocon Pharma Inc. will be mostly the API business.
Okay. The almost entire one is from U.S.
Yes.
Okay.
I mean, our emerging market revenues and European revenues would start in this fiscal year.
Okay. Got it. That's helpful. My second question was, so there was this media article relating that Sanofi has reduced prices for insulin for uninsured patients, so $30 a month supply. There are talks to cap the insulin prices as well in the U.S. How does this impact us and our competition? Like, will this hit the profitability in U.S.?
For the insulin business.
Well, I think Biocon Biologics is in a very good position to really play a key role in these market price expectations for insulins. I think that's what we believe will really increase our presence and market share in the U.S. Maybe, Matt, you'd want to add to this.
Yes. Thanks, Kiran , the rHIs, there's multifaceted channels. You have your payer channel, you have your cash channel, you have even long-term care hospital. Being vertically integrated and well-positioned, we're able to play within all those channels and then also, what Viatris has already done and now moving over to Biocon Biologics allows us to continue to play on that leverage. We're well-positioned within our diabetes therapeutic area as well are our rHIs as we look at the full market within the U.S.
Got it. Thank you. Those are my questions.
Thanks, Yash. The next question is from Sameer Baisiwala from Morgan Stanley.
Yeah. Thank you so much. Good morning, everyone. Just continuing with the previous question on rHI. Is it possible to discuss a bit more, you know, what's the addressable market and when do you see the approval cycle begins for you? When can this be a meaningful product?
Shreehas, you might want to take this.
Thanks, Sameer. I think as we said earlier, the rHI franchise is not one product, but for multiple products, multiple SKUs. You have the soluble, you have the mix, which is the 70/30, and you have the N formulation, as they call it. Now, they are available as vials, and they're available as pens. There's also the highest-end, 500 IU formulation as well. It's all recombinant human insulin, but there are a whole bunch of products around it. The whole insulin rHI, what you would call it, a recombinant human insulin franchise is somewhere in that $1 billion range, you know, give or take a little bit. The dominant player, of course, is Eli Lilly. They've been running that franchise.
They have most of the market share. We've been, you know, working with the agency, bringing product from a filing perspective, starting with the soluble to the mix. Then we would, of course, get the NPH, as they call it. We would do that as well, and the high strength. We are looking to progressively move into getting the full franchise to the U.S. somewhere in the next year. We've already got the agency to agree that we may not need a full-blown phase three trial because we've characterized the product very well, so we are expecting a waiver of a phase three because of the kind of characterization we've done for the asset. The agency has agreed with our assessment, our scientific evaluation of the drug.
Most importantly, they believe that we have confirmation from the agency to say that these can be used interchangeably once launched. We believe that the full opportunity that is there currently in the U.S. is available to us, Sameer. As these products get approved, we intend to launch the full franchise towards 2024, when all of this should get available. Does that answer your question, Sameer?
Yeah, it does. Thank you. I got muted again. Okay. Just on this, Shreehas, how is the capacity utilization in Malaysia right now? And related to that, are we having any, you know, supply capacity constraints either for Malaysia or for drug substance antibody here in India for near-term growth?
Yeah. I think in Malaysia, if you remember, we had invested substantial capacity for drug substance, for drug product. We had also added on additional pen assembly line. We don't have a capacity challenge at all because we had also planned for the upcoming Aspart launch, coming up, which we were expecting this year. And we don't believe that there's an issue on either the drug substance or the pen assembly or the pen fill finish. Obviously, we are targeting a much higher capacity, and which is why we're looking to invest in the drug substance capacity, which we have shared with you the previous quarter, and we are further building up capacity so that further, you know, ahead into the decade, we should be able to launch more capacity across the world.
On the non-insulin side, we've been making investments progressively in drug substance facility, which was recently approved. Beyond our in-house capital investments, we have developed an external manufacturing strategy, which is an asset-light model, which is not necessarily something where we invest in, but we partner in such a way that our manufacturing is then closer to the market that we supply in. That's a conscious strategy which has begun from India, but then we will of course expand it to other geographies so that we don't necessarily have to ship glass and water across the oceans. That's really how we intend to meet the demand, which we expect to grow sevenfold. Susheel will talk about it, and Matt's having the same view. We don't see a capacity constraint, Sameer, to summarize.
Okay, thank you so much. With your permission, one final question. What's the timeline to take Toujeo, which is glargine 300 and pertuzumab into clinical trials?
That's a very interesting question because Toujeo is essentially the same drug substance as glargine. It's the same glargine drug substance. It's formulated differently in a higher strength, which is a 300 unit strength against a 100 unit strength for Lantus. It's not a new clinical trial per se from a phase three perspective, but it's a new phase one study that will need to be done. But there's a different device which is very unique, and we are making sure that we have that new device covered so that we can be prepared for a potential approval. Now, this product currently has an IP which runs towards the latter half of the decade.
Now we will have to see what IP strategies that we come up with which will allow us to decide what our launch strategies would be which would be different than the approval strategies.
For pertuzumab?
Pertuzumab, we are progressing well. It's certainly an asset that we have partnered with Viatris, and we are developing that asset. We have a very good exchange going on with the agency. We have a position where we believe we can develop this in a very economically. Sorry, Sameer, you're saying something?
No, it's echoing. That's all.
Oh, okay. We have the opportunity to be amongst the few players who are developing this asset. There are not very many players, and we have the opportunity of probably being there at market formation with this asset. It'll be very synergistic with our larger oncology portfolio. Very bullish about that as well. Sameer, I think you're muted again, but maybe Nikunj can-
Yeah, okay. That's fine. Thank you. Thank you so much. Yeah.
Thanks, Sameer. The next question is from Nithya Balasubramanian from Bernstein.
Thank you so much for the opportunity. One question on insulin aspart. Will you have the flexibility to launch two brands like you did in insulin glargine, one at a higher price point and one at a lower price point? Because it's a file that's sitting for checking.
Matt, would you like to respond? The high-level response first to that, Nitya, would be, yes. It's an established model in the U.S. to launch an authorized generic, so to say, in a very broad way. That model exists. The precedent exists. There are other brands or other companies which have followed it. That's an opportunity we could look at. Maybe, Matt, if you would want to comment on that.
Yeah, sure, Shreehas. 100% I agree with you. I think we have to look at all those channels, both branded and non-branded. I think the Semglee set a unique path and one in which we have great experience. Not ruling out any of those options. I think what we're looking at and always have at Biocon Biologics is accessibility and affordability. Having those two types of situations drives that initiative for us in the U.S.
Thank you so much. My second question is on Europe. I think the biggest challenge in European biosimilars has actually been, let's say, the lower than anticipated price points for biosimilars because your starting price is already lower. If I look at the data, your price erosions have been in the range of 70%-75%. Now that Biocon is fully integrated and that you don't have to share economics with Viatris, should we expect you to? I mean, I'm seeing very low market shares for your current in-market products. Can we expect you to get a bit more aggressive about price discounting now that you have room in order to gain market share?
Again, if I can respond to that, Nithya, I think we can look at the data points one more time, but I think that you're right in the sense that the way Viatris has currently looked at Europe, there is certainly headroom for improvement and we are collectively looking at what are the strategies that could help us move forward. As we've discussed previously, Europe's not a monolith. There are several different market archetypes, and the therapy areas that we operate in are also vastly different in terms of how you realize these opportunities. Some of those could be, you know, trying to get those opportunities through realizing a retail opportunity in, say, Germany or in France in products like the insulins.
They could be oncology, which is largely a tender-driven market across Europe. Then there's, of course, the Nordics, where it's a federal tender, where it's a winner-take-all kind of a model, where I think you referred to the 70% discounting, which even the originator companies have kind of subscribed to. There are, you know, different kind, you know, models, different therapy area models. The integrated option now with us that we will be one company will certainly allow us more headroom to look deeper and closer into this. Matt and his team are closely connected into this to see how we can move this forward. Certainly agree with you, there's a lot of headroom there, yeah.
Thank you so much, and all the best.
Thanks, Nitya. The next question is from Surya Patra from PhillipCapital.
Surya, are you able to unmute?
Yeah. Hi. Hello. Am I audible?
Yes.
Yeah. Sorry for that delay. Just one clarification I wanted, sir. Let's say you mentioned about the margin impact for the biologics business was largely led by the R&D spend. Also what we are indicating now that post-Viatris's integration, the intensity of R&D spend is likely to continue. By that, are we indicating even the margin profile of integrated operation will be similar, what we are currently seeing?
Surya, yes, to clarify, I mean, as again started core EBITDA margins.
Yeah.
We see that the core EBITDA margins will be sustained post-integration and after all the eliminations. With the increased revenue base, we will look to increase our investments in the R&D to fund our future growth.
Okay. Sir, in the initial period, is it like that the benefit of this, the end-to-end integrated operation, will not that be an incremental benefit, benefiting kind of thing for the integrated organization?
I mean, as we had just put out the guidance at the time of the acquisition.
Sure.
We had indicated that Viatris's business has the potential to deliver $ 1.1 billion revenues in 2023, with a $ 250 million EBITDA. As you go through all the eliminations.
Mm-hmm.
You look at the final core EBITDA margins, it's still pointing into the high 30s. When you combine the Serum business, the existing BBL business and the acquired Viatris business.
Okay. Sure. Second question is on the biosimilar business again, sir. In the presentation, ma'am, you have mentioned that the growth of the biosimilar business, excluding the COVID- related contribution in the corresponding previous quarter, the growth could have been 46%, otherwise it is, in the reported number is 23%. Here I-
29%.
29%, yes. I just wanted to know whether there was any COVID related benefit that the biosimilar business had witnessed in the corresponding previous quarter.
No. Basically what we're saying is that year-on-year, if you look at the growth, it could have been reported as 46% as opposed to 29%.
Mm-hmm.
Because last fiscal we had the benefit of COVID-related products.
Which product would have contributed? I believe that itolizumab-
Itolizumab and remdesivir.
whether that was part of the biosimilar sales, no.
It's a part of our branded formulations business. We have an India business, and that was part of that business.
Okay. I was relating itolizumab to the novel biologic and remdesivir to Syngene business.
No.
That's why.
No. Syngene actually, you know, Mark, sold a product that is the drugs. I mean, they made the drug substance and drug product and Biocon Biologics through Viatris, its branded formulations business, marketed the product in India and also exported the product to many of their emerging markets.
Okay. Sure. Just last one question. Whether am I right that the contracting cycle for most of the biosimilar for the current season has been done? If that is so, then could we have some clarity about the progress in terms of market share for interchangeable insulin and at least pegs?
It's still underway, Surya. We should be able to talk to you in due course.
Sure. Okay. Yeah. Thank you. Wish you all the best.
Thanks, Surya. The next question is from Sheersh Jain from Apex Capital.
Yeah. Hi, good morning, everyone. Just wanted to understand the double counting of revenues that might happen upon the integration of Viatris. Currently, based on Q1 numbers, Biocon Biologics run rate is roughly $400 million, and Viatris has guided for $1.1 billion, $1.2 billion of revenue for the whole year. Upon integration, what shall be the total ballpark range of revenue that might happen, eliminating the double counting of revenue?
Chinni, you might want to answer this question.
Sheersh, hi. Roughly about 30% would get eliminated in the intercompany elimination. 30% of the $ 1.1 billion.
Okay, understood now. The ballpark range would again come down to $1.1 billion, $1.2 billion for the combined entity. Is that correct?
Yes. Okay, on top of the Viatris's business, what we have is our sales in the emerging markets. Last year we ended with about $240 million. These are sales directly to the emerging markets and not through Viatris.
Based on your,
You could model growth on that, and then you have the serum business that we're acquiring, which has a potential $300 million of revenues.
Understood. Thank you so much.
Thanks, Sheersh. The next question is from Tushar Manudhane from Motilal Oswal.
Yeah, thanks for the opportunity. Just on the generic side, while there has been some temporary shutdown for the quarter, but just would like to have your comment on the profitability. I mean, how much has been the impact of pricing erosion and how much would come back, with the revival in this function?
Price erosion, I mean, is of course a continuing thing. We've seen our gross margins at still decent levels. We have seen increase in operating costs during the quarter, including the salary increments which were given in the first quarter. In terms of the overall revenue guidance, I think, we had a couple of brownfield capacity expansion projects going on which are expected to complete in quarter two for our synthetic manufacturing blocks in Bangalore. These would lead to incremental sales in the second half of the fiscal. Quarter two would be more or less at similar levels like quarter one for the generics business.
Got you. That's it from me. Thank you.
Thanks, Tushar. Next one is from Sameer Baisiwala, Morgan Stanley .
Yeah. Just a quick clarification. Chinni, just participating back. Did you say $ 300 million from Serum deal? I thought it was more closer to $ 400 million.
$300+ million. It's all dependent on the pricing of the vaccines.
Your initial, I mean, communication when the deal happened was closer to $ 400 million, so you are sort of taking it down, is it?
Yeah. It's linked to the pricing of the vaccines. We're not taking anything down. We just, I meant, really meant was $300+ million, which could go from $300 million to $400 million. Yeah, we'll have to really see. It's a mix of things. There are products that are at the $3 range, which $100 million into three gives you $300 million. That's our kind of minimum assured revenues. There are products that are priced higher that will take up your average price.
Okay. For both the you know, both types of you know, vaccines, your margin profile remains same, which is 33%, 34%?
Yes, there's a minimum committed margins which will give us at least 36.67% of revenues.
Okay. All right. Thank you, sir.
Thanks, Sameer. Next one, Nithya from Bernstein.
Yeah, hi. A follow-up on the vaccine deal. If you can help us understand in FY 2023 and 2024, what is the portfolio of vaccines that you will end up selling? Is it just the COVID vaccines, Covishield and COVAX? I understand the malaria, dengue, et cetera, are still in the pipeline. Some color, please.
Nithya, we are entitled to sell any vaccines that are offered or produced by Serum Institute, and it goes beyond COVID vaccines. As you know, there are many other vaccines. In fact, recently they announced the HPV vaccines, there are flu shots, there are pneumococcal vaccines, so there are a lot of options for, you know, the portfolio of vaccines.
Understood. This will be. You will take a call based on the demand, et cetera, to meet that 100 million doses number?
Yeah.
Okay. Thank you so much.
Thanks, Nitya. Prakash from Axis.
Yeah, hi. Thanks for the opportunity again. Question is on if there's any update on the Sandoz deal that we had done 2018. We have heard from our partners two molecules coming in, but nothing from the Sandoz side for long.
The two Sandoz programs are in a preclinical stage of development.
Okay. Understood. Secondly, on the two R&D programs that you know disclosed last quarter, and saying that phase III has already started. These are simultaneous studies, which I understand, phase I and phase III, but when we see the competition who already started phase I and then now entered phase III, how are we different in terms of approval and launch timelines? Are we in the second wave or should we still have chance to be in the first wave?
You know, it all depends on the review process and it depends on how the others are being reviewed and how strong their programs are. I'll just give you one example. For instance, Biocon was probably the third or fourth company developing pegfilgrastim, and yet we were the first to be approved. A similar case was in the case of trastuzumab. Again, we didn't think we would be the first company to be approved, but we were. It's very difficult to predict or project what can happen.
Okay, fair enough. One more on the, you know, the funding of $800 million, clearly mentioned $250 from Biocon. But this $550, remaining $550, is it largely the existing PE guys or new PE guys or Serum might also pitch in?
Yeah. It's a combination of both existing and new.
Okay. Serum could add more?
Yeah.
Okay, lovely. What else? No. Thank you so much and all the best.
Thank you.
Thank you, Prakash. That was the last question. We thank you all again for joining us today. If you have any additional question, please feel free to just reach out to Aishwarya or me. We're looking forward to seeing you again next quarter. Have a good day.
Thank you.
Thank you.
Thank you.
See you.