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So 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'23. [Operator Instructions] 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 concern that you may be facing for your -- 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 5 working days.
To discuss the company's performance and outlook we have with us today the Biocon leadership team comprising of 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 concurrence 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.
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.
Business since 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 health care span. 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 health care. Policy support, such as the production-linked incentive scheme, and more recently, the proposed research-liked incentive scheme, will, I believe, boost investment in innovation. Inhibited 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 differentiate of global leadership in times of uncertainty is ESG. And 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 have been articulated in our recently published ESG report for FY'22.
Let me start with some organizational announcements. And 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 the second term of tenure with the company and have stepped down from the Board and will step down from the Board at the conclusion of -- rather they have stepped out from the Board and the conclusion of the company's Board meeting yesterday. On behalf of Biocon's Board of Directors and management, we expressed 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 Goettler 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 3 decades of experience 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'23 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%, and 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 9% to INR 166 crores during the same quarter last fiscal. And net profit for the quarter stood at INR 144 crores versus INR 84 crores in Q1 FY'21 -- '22, reflecting a growth of 71%.
During the quarter, we also recorded a ForEx loss of INR 38 crores, primarily due to restatement of Goldman Sachs OCD investment in Biocon Biologics as compared to a gain of INR 17 crores during the same fiscal -- same quarter last fiscal. Our gross R&D spend was at INR 223 crores versus INR 136 crores in the same period in the last fiscal, an increase of 64% corresponding to 50% of revenues [ ex NG ].
Of the INR 223 crores, INR 198 crores is expense in the P&L, while the balance amount has been capitalized. INR 120 crores were expensed in the P&L in Q1 FY'22. With this, the reported EBITDA for the quarter was INR 478 crores versus INR 437 crores, reflecting a 9% year-on-year growth, while margins stood at 22% against 24% reported in Q1 FY'22.
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 crores versus INR 29 crores during the same quarter last fiscal, a year-on-year growth of 116%. PBT margins were higher at 11% as against 6% in Q1 FY'22.
The year-on-year growth during the quarter was primarily due to ramp-up in API sales particularly our statin and immunosuppression portfolios and continued 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, an antimetabolite 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'23.
Growth in our Generics business in FY'23 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 crores, a year-on-year growth of 29%. Adjusting for the one-off COVID-19 related sales of itolizumab and Remdesivir 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 crores, 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 where in 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 for the full year FY'22. These R&D investments to secure our future growth, coupled with a noncash foreign currency translation loss of INR 43 crores on Goldman Sachs OCD Investment in BBL, led to a 12% year-over-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 351k 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'22, we had entered 44 new partnerships, which will drive growth in the coming quarters. After a pandemic linked haitus, 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 EU GMP certified. Our strategic deals with Viatris and Serum are progressive progressing towards closure as planned. And 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 biosimilar bevacizumab and aspart of 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 Novels. During the quarter, our partner Equillium initiated patient dosing for the pivotal Phase III clinical trial, clinical for itolizumab in patients with acute graft-versus-host disease. While recruitment continues for the pivotal Phase Ib clinical study of itolizumab for lupus nephritis, which will read out interim data this year.
Our Boston-based associated Bicara’s lead molecule BCA101 has demonstrated encouraging safety pharmacokinetic, pharmacodynamic and efficacy group trials based on the findings from the dose escalation phase of the ongoing Phase I/Ib trial, which was initiated in February this year. The recommended dose have been established at 1,500 milligrams weekly for BC101 as monotherapy and in combination with pembrolizumab.
The combination of BCA101 and pembrolizumab is currently being evaluated in frontline 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.
BC101 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, Viatris continues to secure funding from external investors to support its clinical development activities.
Now turning to Research Services or 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'22.
The first quarter results were against the strong quarter last year due to sales of core treatments where indeed in the midst of the second work 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 with the commercial manufacturing of the drug substrate for Librela, a first-of-its-kind injectable monoclonal antibodies to alleviate pain associated with osteoarthritis in dogs.
This deal is expected to start generating revenues in the second half of the fiscal, 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 variable change in the rupee-dollar exchange rate and, of course, the recent agreement with Zoetis.
I would like to conclude by saying that FY'23 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 transaction with Serum Institute and Viatris which are 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.
And with this, I would like to open the floor to questions. Thank you.
[Operator Instructions] The first question is from Damayanti Kerai from HSBC.
Ma'am, you mentioned that pickup in market share was simply will be one of the key near-term driver for biosimilars sales. So what we have seen in last few months that the market share seems to have saturated in low single-digit number. So what will be factors which will improve pick up in Semglee market share from current label? And also for other two launch biosimilars, Ogivri and Fulphila, again, we see some kind of saturation in the market share. So just wanted to understand what are the key hurdles which are stopping you to improve market share from current levels? So this is my first question.
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 a 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 see free to add to both the questions. I think, Damayanti, will let 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 the data point, we -- starting 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.
So when we started this fiscal, we have guided that towards -- the second half of the year, we'll be seeing this move towards the mid-teens. And the way we and Viatris has been progressing. We see that growth from 3% to 9%, moving to 10% and then towards the mid-teens in the direction that we had projected earlier.
So do you see that move happening in the direction that we had projected. Viatris has also recently added significant plans beyond the extra scripts prime therapeutics that we had talked about earlier on to move into regional pharmacies. We've also got original formularies. We've also got a significant addition towards the beginning of this month. And 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 talked about them in a bit. But starting with trastuzumab, there was a particular situation where in April, May, we've seen the market share kind of dip from that 10%, 11% to 7%, 8%. And that's because Viatris did lose a customer during the process. And they have gained that in June and July, and we're again starting to see those market shares move up towards 10% and back to where we are.
So I think these are normal course of business activities that you win a customer, you lose a customer or you do some share in a particular formulary or a particular account. And effectively, what we need to see is that they have been able to be resilient in the market and held down to its market share despite increased competition.
Likewise, [indiscernible], where market share has helped on that 8%, 9%, even though we've seen the innovator themselves lose market share as well as Coherus, which is a big market player at one time significantly lose market share to new competition. So 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. But anything else, Matt, that you may want to add, please go ahead.
Yes. 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. ebbs and flows, the team is rightfully situated to address those hurdles. And I think you're seeing that particularly in Tras. As you know, every company kind of goes through a potential pullback, but I think what is important here is you've seen a great comeback. So I would just say that, Shreehas, but everything else is exactly what I would say.
So we have -- do you believe that we have ample headroom to improve on market share from current level a 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 sort of draw your attention to the fact that we are in a very strong and bold position to actually drive growth because of all the capacity that we have put into place. And 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.
My second question is on R&D. So in last 2 quarters, we had seen a sharp jump in R&D expense purchase due to the and partner asset, which ma'am mentioned in the call previously. So once we are done with major trials for these two assets, should we see some moderation in R&D cost or should continue to improve -- continue to increase from this level also?
So 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.
So the pipeline is our -- is very fundamental and integral to growth and pipeline progression is what drives growth. So to cut back on R&D, I don't think would be prudent. And we should be -- at these kind of levels of R&D spends and it might even increase over the coming quarters, but I think for the investors and analyst 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 to 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. So R&D should remain in the 10% to 15% range, which you earlier indicated?
Absolutely. Absolutely. Anything lower than that actually is not something that we would prefer.
[Operator Instructions] Next question is from Surya Patra from PhillipCapital.
This is Surya from PhillipCapital. Now Ma'am, in fact, just two clarifications, first of all. One is that [indiscernible]
Surya, I think we lost you.
I think You should move on to the next till he gets back.
Sure. The next question is from Shyam Srinivasan from Goldman Sachs.
I think just first question on biosimilars, again. Kiran, and team, if you could just help us understand the of how this business is currently? Where are the growth rates are? I think a lot gets discussed about the U.S. market shares, but we know less about, say, Europe. Europe, I think you called out Canada in your opening remarks. So just help us understand geographically how the biosimilars 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.
Shyam. The emerging countries actually is the potential, very often we realize very good returns from the emerging countries. So 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 biosimilar.
So going forward, while we increase our number of countries that we operate in and the depth in the countries that we do businesses, the biosimilars business is quite 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 in many other countries, the prices that we get is much better than even Europe. So the emerging piece of the countries is quite big.
And maybe, Matt, you'd like to comment on the non-U.S. markets.
Yes, 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 going to see those continued launches of new products that we talked about in R&D. And also as we progress within our integration with Viatris. We're going to be looking at new markets and expansion there. So Europe is still a very key focus for our 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, I'll be brief, is on the pricing dynamics in these different. I think EMs briefly touched upon. But 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. So 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 be vary from -- two things. One is from the market, and other is on the product category that we are talking about. So we are to look at the oncology products in the U.S. We've typically seen -- if you were to take the pre biosimilar entry launches of products, you would see discounting anywhere in the region of about 50% to 60%, 62% from that pre-biosimilar days.
If you were to move that into Europe, you see that is counting to be much lower in the range of about 30% to 35% for the markets that we operate in. And that's also a factor of competition of the market, of the tenders, also the base pricing that these molecules are vis-a-vis where discounting would be.
You'd also see different categories of product attract different discounting, if you were to look at insulin, which is in the U.S. product, which is more a contracting cycle kind of a molecule and where the 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 have seen for the buy and build kind of category in the oncology space.
But if you really broadly across the category of products that we've launched in the oncology, biosimilar as well as the insulin, more or less, the pricing discounting has been reasonable. We've not seen any cliff despite the competition of oncology, you see about 4, 5 players per molecule, but there has been pricing strategy overall, so to say, and insulin in the U.S., particularly, as I said, in that 50, 60 range. And then in Europe, probably it's in that 30%, 35% range. So there has been some respect for the kind of work that has gone in developing the products, and it's reflecting in the stability that you've seen overall, that's prevailing.
The next question is from Harith Ahamed from Spark Capital.
On denosumab and ustekinumab, last quarter, you had talked about starting Phase III trials in the first quarter of FY'23. So can you update us on the status of those 2 trials? And trying to understand if the R&D spend for the quarter reflects the Phase III spend as well? And will there be a further step-up in spend R&D in the coming quarters?
Shreehas, do you want to take this?
Yes. I mean, Harith, the question wasn't very clear. I think you were pointing towards saying that we progress ustekinumab and denosumab into the clinic. I think you were looking for an update on where these products are headed. Is that what you were looking for?
Yes, whether we started Phase III trials already.
Yes. So 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 the filing towards the end of calendar year '23 for ustekinumab and end of calendar year '24 for denosumab. So 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.
Got it. My second question is on the fundraise at Bicara. So what's our stake -- we've talked about continuing to raise funds through the first quarter. So my question is on our current stake in this associated entity as of June.
Yes. So I think they have raised $26 million in the first round, and we expecting to raise a larger -- they've managed to raise about $6 million in the second, but they expect rates are even higher amount, which they believe they've taken deals by the middle of September.
But these amounts, as you know, are really requires to see the clinical trials get into a certain level, and we're very confident. We also have entered into various business development discussions because the data is trending in a very promising direction. So there's a lot happening at Bicara, and we will keep reporting it over the coming quarters.
Okay. So 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 we share of losses from the associate will decline further, there's been lower number in 1Q versus 4Q? Trying to understand if this will...
Siddharth will respond to this, but we -- Siddharth, you might want to respond to this.
Right, so stake in as of June was roughly 60%. And I think as the fund raise continues, we will see the stake further go down below 50%.
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. And this quarter, because of the fund raise, there was also a step-up in the valuation of the investment. And 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.
Okay. Okay. Last one with your permission. This INR 38 crores ForEx loss at the consolidated level, that includes the INR 43 crores loss at Biocon Biologics related to the Goldman Sachs OCD investment, right?
That's correct. So there were gains in other parts of the business.
And then the other income for the quarter at INR 78 crores, there's been a bit of a spike. Are there any NPL gains related to [ Adagio ] there?.
No, at Adagio I assume there's no gain. I think the main gain is that mark-to-market or the step-up of the Bicara investment. So that's the main flux compared to previous.
Next question from Neha Manpuria from Bank of America.
Siddharth, on the Viatris funding, have we decided on what would be the amount that Biocon would have to put in after the private equity and the data BBL?
Yes, Neha, we do have a commitment of $250 million to invest in Biocon Biologics, and we will invest that amount. And the rest, of course, Biologics will be increasing directly as a combination of debt and new private equity investments.
And this [ $250 million ] would be a combination of our subsidiary stake sale and debt?
Yes. There are various options we are working on and subsidiary remains only Syngene and we -- but we do have a couple of other structured options structure fundraise options that we are working on.
Understood. And second question, Shreehas to you, just wanted to understand from 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 Viatris deal completion. How should I look at cost structure for BBL, let's say, over the next few quarters other than the integration that would happen with the Viatris?
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 would be -- we are looking at R&D being a big ticket item, which we've talked about. We're also looking at the CapEx 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 budgeted that.
The integration costs that will come on as we get the platinum business coming on board and we sort strengthen our commercial infrastructure in various geographies. We are -- we could have -- typically we could have built it out organically now because that would be far muted because a lot of this will come in to us through the acquisition dimension this, I will let Chinni talk to you about and to see if you can give you a sense of what these investments would look like outside of R&D. Over to you Chinni.
Neha. The investments, there will be increased investment in people as we do the organization build that will be absorbed by the higher revenue base and in these profits that will come to post the merger. We have, as Shreehas mentioned, in terms of CapEx, while most of on 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 Malaysia capacities and possibly -- not possibly, and also the expansion of our drug product capacities for monoclonal antibodies. So these are the large investments going into the business on top of R&D.
Understood. Shreehas, one last question. Any additional update on aspart. Is there a chance we get the approval before the current contracting cycle? Or do you think the probability of that is lower now based on your conversation with the agency?
That's an important part. I think the -- we've been discussing with this group that the -- 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. So we are still hopeful that we -- all of this should be done and as part approval should be in the back was 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 will not be able to be in the middle of a contracting cycle, taking us away from that big chunk of the commercial business that is available for this asset, but we would certainly have the opportunity to look at any mid-cycle contracting as well as any additional businesses like we did with [indiscernible] and now that we've got presence with Semglee. I think there is an opportunity to see how we can quit pass the main commercial contracting national formularies into a more distributed phase. So I mean, yes, it's not the bad 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.
The next question is from Prakash Agarwal with Axis Capital.
Yes. Am I audible?
Yes.
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 the revenue is expanding. More from second half when we add the Serum deal, which is expected to go at 30%, 33% margin business, as well as Mylan consolidation. So how should we think about margins there? I mean, last year margin was good this quarter, little -- I mean, I would say it's softer. How do we see the margins rolling in? And this I'm saying reported margins, not the core margins because R&D has to be there. Expansion has to be there. So just a little color would help.
Chinni, you might want to comment.
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 softening compared in the sequential quarter, but it improved over last -- over Q1 last year. the softness in this quarter versus Q4 is because of, as Kiran mentioned, is an impact of the increased salary cost as the increments kick in, which levels off over the quarters, and the second one is it's been impacted by the eurodollar movement. So that reduced the profit and EBITDA margins during this quarter. If you look ahead for particularly post Serum and Platina and the Access acquisition. We expect to maintain core EBITDA margins in the mid- to high 30s. So there, 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 Viatris and Serum's gives us the ability to spend more -- invest more into R&D., and we have always guided for the 10% to 12% in terms of R&D costs. So we like to look at it from that range. Of course, it wouldn'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 the progress of the trial. But on an annual basis, particularly over the life cycle of the program. You would see the R&D cost to being 10% to 12% of the increased revenue increase. Of the increased revenue, which is indicating that we're investing more into R&D, which Biocon pipeline products moving into the state.
Okay, understood. And secondly, on updates on the vaccines you have put out COVID-related and mosquito bond-related so I mean, globally, we are seeing that volumes are coming down and mosquito-bond, apart from Africa, the volume has been coming down. So 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. So 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 [ beva ] inspection poised around August. So aspart, is there any update?
I think, Prakash, first and foremost, as you know, viral diseases are becoming very rapid, and there's a lot of concerns around viral diseases like -- which wasn't there in the past. So I think vaccines are going to become a very important segment. And I think [indiscernible] is well placed to basically develop new vaccines and cater to these global needs. So from that point of view, I think even though the corporate vaccine demand has come off, I don't think that it is completely come off because, as you can see, obits still very much in the air. And I think the annual COVID shots like all shots will become the norm. So I don't think it's going to completely fall off. And 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. So 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. So aspart also in August, that's what the clarification was?
Yes.
Okay. And on the vaccine, part of the question was on the future vaccines also. Is it covered in the deal?
The vaccine deal is covering all vaccines.
Next question is from Yash Tanna from ithought advisory.
So I went through the annual report, and I wanted to clarify a few things. So Biocon Pharma IMC USA, which is our U.S.-based facility for formulations of Biocon Pharma India. So 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. So 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?
Yes, [indiscernible], maybe you can answer that.
Sure, Siddharth. 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 and 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. And even on those accounts we are seeing that there is price erosion by we've held on to the market share.
And Yash, let me just add that I don't look at the profits of stand-alone entity because the profits are split between the Indian entity and the U.S. entity. But the revenues, what you reflected are the correct revenues for our U.S. business.
That's the U.S. formulations.
Okay. Got it. And just relating to that, so Biocon Pharma India sales were [ INR 630 crores ]. So does that mean that U.S.A. formed approximately 70% of the generic formulation sales. Is that right?
So the U.S. is 100%, there is also a certain portion of ABI business in Biocon Pharma Limited. So the delta between what's reported in Biocon Pharma Limited and Biocon Pharma Inc will be mostly the API business.
Almost the entire one is from U.S.?
Yes, 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 to [ $35 ] a month supply, and there are talks to cap the insulin prices as well in the U.S. So how does this impact us and our competition, like will this is the profitability in U.S.?
Well, I think Biocon Biologics is in a very good position to really play a key role in these market price expectations for insulins. And I think that's what we believe will really increase our presence and market share in the U.S. And maybe, Matt, you want to add to this.
Yes. Thanks, Ma'am. Look, the RHI, there's multifaceted channels. So 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. So we're well positioned within our diabetes therapeutic area as well as our RHI as we look at the full market within the U.S.
The next question is from Sameer Baisiwala from Morgan Stanley.
Just continuing with the previous question on RHI. Is it possible to discuss a bit more 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.
As we said earlier, the RHI franchise is not one product, but for multiple products, multiple SKUs. So you have the soluble you have the mix, which is the 70-30 and you have the end formulation as they call it. Now they are available as viles, they are available as pens, there is also the highest trend 500 IO formulation as well. So it's in all recognizant human insulin, but there are a whole bunch of products around it. So the whole insulin RHI is what we would call it a recombinant human insulin franchise is somewhere in that $1 billion range, give or take a little bit. And the dominant share of cost is [ Eli ]. So they've been running their matches. They have most of the market share. We've been working with the agency, bringing product from a PE perspective, starting with the soluble to the mix and then we would, of course, get the NPH, as they call it. We would do that as well and the high strength. So we are looking to progressively move into getting the full franchise in the U.S. somewhere in the next year.
We've already got the agency to agree that you may not need a full-blown Phase III trial because we characterize the product very well. So we are expecting a waiver of a Phase III because of the kind of characterization you've done for the asset and the agency has agreed with our assessment of scientific evaluation of the drug. And most importantly, they believe that we have confirmation from the agency to say that these can be eased interchangeably once launched. So we believe that the full opportunity that is there currently in the U.S. is available to us, Sameer. And as these products get approved, we intend to launch the full franchise towards 2024, where all of this should get available.
Does that answer your questions, Sameer?
Yes, it does. Thank you. I got muted again. Okay. And just on the shares, how is the capacity utilization in Malaysia right now? And related to that is, are we having any supply capacity constraints either for Malaysia or for drug substance antibody here in India for near-term growth?
Yes, so I think in Malaysia, if you remember, we had invested substantial capacity for drug substance for drug product. We've also added on additional pen assembly line. So 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 pens we finished. Obviously, we are targeting a much higher capacity and which is why we are looking to invest in the drug substance capacity which we shared with you in the previous quarter, and we are further building up capacity so that further 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. But beyond our in-house capital investments, we have developed external manufacturing strategy, which is an asset-light model with 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. And 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.
So that's really how we intend to meet the demand, which we expect to grow volumes. So [indiscernible] talk about it and Matt's having the same view. So we don't see a capacity constrained, Sameer, to summarize.
Okay. With your permission on one final question. What's the timeline to take Toujeo, which is glargine 300 into clinical trials?
Sameer, that's a very interesting question because Toujeo in a sense essentially the same drug substance as glargine so it's the same glargine drug substance. It's formulated differently in a higher strength, which is a 300 unit strength against 100 unit strength tend for Lantus. So it's not a new clinical trial per se from a Phase III perspective, but it's a new Phase I 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 cover 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.
And for pertu?
So pertuzumab, we are progressing well. It's certainly an asset that we have probably a partner with Viatris, we are developing that asset. We have a very good exchange going on in the agency. We have a position where we believe we can develop this in a very economical hidden.
It's echoing.
Okay. So we have the opportunity to be amongst a few players 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. And it will be very synergistic with our other nonquality portfolio. So very bullish about that.
The next question is from Nithya Balasubramanian from Bernstein.
One question on insulin aspart. So will you have the flexibility to launch two brands like you did in insulin glargine, one at a higher price point and at a lower price point. Because it's -- that is what I am checking.
Matt, would you like to respond? The high-level response first to that Nithya would be, yes. It's an established model in the U.S. to who will launch and authorize generic, so to say, an already broad way. So that model exists the precedent exists. There are other brands or other companies which have followed it. So that's an opportunity we could look at. But maybe, Matt, if you would want to comment on that.
Yes. Sure, Shreehas. 100%, I agree with you. I think you have to look at all those channels, branded, non-branded. And I think the single set a unique path and one in which we have great experience. So not ruling out any of those options. I think what we're looking at and always have at Biocon Biologics is accessibility and affordability and having those two types of situations drive that initiative for us in the U.S. .
My second question is on Europe. I think the biggest challenge in Europe biosimilars has actually been, say, the lower-than-anticipated price points for biosimilars because your starting price is already lower. And if I look at the data, your price erosions have been in the range of 70% to 75%. But 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. So should we -- 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 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 look forward.
As we've discussed previously, Europe is 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 trying to get those opportunities through realizing the retail opportunity in, say, Germany or in France, in products like the insulins or there could be oncology, which is largely a tender-driven market across Europe. And then there is, of course, the Nordics, where it's a federal tender, whether there be not 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.
So there are different 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. And 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.
The next question is from Surya Patra from PhillipCapital.
So just one clarification, just wanted, sir. Let's say, you mentioned about the margin impact for the Biologics business was largely led by the R&D spend. And also what we are indicating now that post Viatris integration, the intensity of our R&D spend is likely to continue. So by that, are we indicating even the margin profile of the integrated operation will be similar what we are currently seeing?
Surya, yes to clarify -- I mean, we have started core EBITDA margins. You see that the core EBITDA margins will be sustained post integration and after all the eliminations. And with data 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 the benefit of this the end-to-end integrated operation will not that be an incremental benefit -- benefiting kind of a theme for the integrated organization.
So as we have just put out guidance at the time of the acquisition, we had indicated that the Viatris business has a potential to deliver over $1.1 billion revenues in 2023 with a $250 million EBITDA. But as you go to all the eliminations, you look at the final core EBITDA margins, that's still pointing into the high 30s. When you combine the Serum business, the existing BPL business and acquired Viatris business.
Okay. Sure. Second question is on the biosimilar business, again, sir. So in the presentation, ma'am, you have mentioned that the growth of the biosimilar business, excluding the excluding the COVID-related contribution in the current spend in previous quarter, the growth would have been 46%. Otherwise, it is in -- the reported number is 23...
29.
29, yes. So I just wanted to know whether there was any correlated benefit that the biosimilar business had witnessed in the corresponding previous quarter.
No. So basically, what we're saying is that year-on-year, if you look at the growth, it could have been reported at 46% as opposed to 29% because last fiscal, we had the benefit of COVID-related products.
Okay. But what -- which product would have contributed? I believe that...
Itolizumab and remdesivir.
But 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, so I was relating itolizumab to the biologic -- novel biologic and remdesivir to Syngene business. So that's why.
No. So Syngene actually sold product that is the drug -- I mean they sold -- they make the drug substance and drug product. And Biocon Biologics through its [ bare ] formulations business, marketed the product in India and also exported the product to many of the emerging markets.
Okay, sure. Just last one question. So whether am I right that the contracting cycle for most of the biosimilars 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 [indiscernible]
It's still under the Surya, we should be able to talk to you in due course.
The next question is from Sheersh Jain from Apex Capital.
Just wanted to understand the double counting of revenues that might happen upon the integration of Viatris. So 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 whole year. So upon integration, what shall be the total ballpark range of revenue that might happen, eliminating the double accounting of revenue?
Chinni, you might want to answer this question?
Roughly about 30% would get eliminated in the intercompany [ culmination ]. 30% of the $1.1 billion.
Okay, understood. So the ballpark change would again come down to $1.1 billion, $1.2 billion for the combined entity. Is that correct?
Yes. Excluding -- so okay, on top of the Viatris business, what we have is our sales in the emerging markets that had -- last year, we ended with about $240 million. These are sales directly to the emerging markets and not through Viatris. You could model growth on that. And then you have the Serum business that we're acquiring, which has a partitional $300 million of [ revenue ].
The next question is from Tushar Manudhane from Motilal Oswal.
Just on the Generics side, while there has been some temporary shutdown for the quarter. Just like to hear your comment on the profitability, how much has been the impact of pricing from now? How much would come back with the revival in this [indiscernible]?
So 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. And in terms of the overall revenue guidance, I think we had couple of capacity -- brownfield capacity expansion projects going on, which are expected to complete in quarter 2 for our synthetic manufacturing blocks in Bangalore, and these would lead to incremental sales in the second half of the fiscal. So quarter 2 would be more or less at similar levels at like quarter 1 for the Generics business.
Next one is from Sameer Baisiwala, Morgan Stanley.
Just a quick clarification. Can you just [ participate ] back? Did you say $300 million from Serum deal? I thought it was more closer to $400 million.
300-plus, it's all dependent on the pricing of the vaccines.
Okay. But your initial communication and the deal happened was closer to $400 million. So you are sort of taking it down.
It's linked to the pricing of the vaccine, not taking anything down, which is -- I [indiscernible], which could go from $300 million to $400 million. We'd like to really see -- it's a mix of thing. There are products that are at the $3 range, which $100 million [indiscernible] $300 million, that are kind of minimum shared revenues. And there are products that are priced higher that will take up the average price.
Okay. And for both the -- both types of vaccines, your margin profile remains the same, which is 33%, 34%?
Yes, there's a minimum committed margins, which would give us at least 36.7% of EBITDA.
Next one Nithya from Bernstein.
A follow-up on the vaccine B. If you can help us understand in FY'23 and '24, what is the portfolio of vaccines that you will end up selling. Is it just the COVID vaccine, CoviShield and [indiscernible] understand the malaria, Dango, et cetera, still in the pipeline. Some color please.
This year, we are entering to sell any vaccine 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, in fact, announced the HPV vaccines. There are flu shots. There are pneumococcal vaccines. So there are a lot of options for the portfolio of vaccines.
Understood. So this will be -- you will take a call based on the demand, et cetera, to meet that $100 million [indiscernible].
Yes.
Prakash from Axis.
Question is on if there's any update on the Sandoz deal that we had done in 2018. We have heard from our unpartnered 2 molecules coming in, but nothing from the Sandoz side for long.
So the two Sandoz programs are in a preclinical stage of development.
Okay. Understood. And secondly, on the 2 R&D programs that you disclosed last quarter, and saying that Phase III has already started. So 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 II how are we different in terms of approval and launch timelines? Are we in the second wave or we still have a chance to be in the first wave?
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 [indiscernible], and yet we were the first to be approved. 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. So it's very difficult to predict or project what can happen.
Okay. Fair enough. And one more on the funding of $800 million, clearly mentioned $250 million from Biocon. But this $550 million -- remaining $550 million, is it largely the existing B guys or new B guys or Serum might also pitch in?
Yes. So it's a combination of both existing and new.
Okay. But Serum could add more?
Yes.
Thank you, Prakash. That was the last question. We thank you all again for joining us today. If you have any internal question, please feel free to reach out to Aishwarya or me. We're looking forward to seeing you again next quarter. Have a good day.