Biocon Ltd

NSE:BIOCON

Earnings Call Transcript 2023-Q2

[Saurabh Paliwal, executive]

Good morning, everyone. I'm Saurabh Paliwal from Biocon's Investor Relations team, and I would like to welcome you to this earnings call for the second quarter of fiscal '23. [Operator Instructions] Please note that the chat box in the Zoom application is disabled, but you can raise any technical concerns by sending us an e-mail to [e-mail]. Please note that this conference is being recorded. A recording will be made available on our website within a day and the transcript of the call shall be made available subsequently.

Today, to discuss the company's business performance and outlook for the quarter we have Dr. Kiran Mazumdar-Shaw, our Executive Chairperson; Mr. Siddharth Mittal, CEO and MD of Biocon Limited; along with other senior management colleagues across the business segments, including Generics, Biosimilars and Research Services.

Before we begin, I want to remind everyone about the safe harbor related to today's earnings call. Comments made during the call may be forward-looking in nature based on management's current beliefs and expectations. It must be viewed in relation to 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 me.

Now I'd like to turn the call over to our Chairperson for her opening remarks. Over to you, Kiran.

[Kiran Shaw, executive]

Thank you, Saurabh. Good morning, everyone. I welcome you to Biocon's earnings call for the second quarter FY '23. I would like to spend a minute to pay tribute to my late husband, John McCallum Marshall Shaw, former Vice Chairman of the Biocon Group. John passed away on October 24 in Bengaluru. As a key member of the Board and management of Biocon since 1999, John Shaw has contributed majorly to the transformation of Biocon into a globally recognized innovation-led biopharmaceutical company. In his 22 years with Biocon, he played a very important role in building the company, ensuring the highest levels of corporate governance as well as contributing to the financial and strategic development of the Biocon Group. He retired from the Board of Directors of a Biocon on July 23, 2021, due to health reasons.

John Shaw was a man who stood tall with his values and inspired many. He was a benevolent erudite and compassionate person truly believed in philanthropy and believed that it would make this world a better place. He was my greatest mentor and my trusted business partner. John's vision for Biocon will continue to guide us towards our purpose of enabling equitable access to health care worldwide and for Biocon to become a global leader in its chosen areas.

With that, let me now turn to the earnings call. Let me start by commenting on some macroeconomic dynamics. The global economy is in its deepest slowdown since 1970. The IMF has forecast that global economic growth will slow to 3.2% in 2022 and is likely to slide further to 2.9% in 2023 from the 6.1% that we saw in 2021. However, India is an outlier in the current geopolitical scenario. The continued war in Ukraine, which seems to be now receding, the alienation of China and other trade alignments are compelling a shift of manufacturing to countries like India. I, therefore, believe that India is uniquely poised for strong export-led growth in coming times.

While high inflation continues to make headlines across the globe, spiraling health care costs do need to be addressed. Adoption of both Generics and more particularly Biosimilars is a necessity and not an option anymore. The Biocon Group, with its export-led business profile, is well poised to break out of the economic challenges of both recession and inflation. Research services, manufacturing and the increasing demand for both Generics and Biosimilars offer attractive growth opportunities for the group.

While growth is critical, sustainability is amongst Biocon's topmost priorities and the company is committed to build a sustainable future. On the back of key initiatives undertaken during the past year, I'm pleased to share that in 2022, S&P Global Corporate Sustainability Assessment released in October '22 that Biocon has improved its ESG score to 52 from the previous year's score of 45.

Let me now turn to some Board updates. I would like to start by welcoming Peter Bains as an additional Director on the Board of Biocon Limited. With over 3 decades of experience in biopharmaceuticals and a successful track record of building brands, businesses and companies, we believe that Peter's thought leadership will add tremendous value to the Biocon Board.

Before I turn to key financial highlights of the quarter, I would like to give you an update on the Viatris acquisition. The acquisition of Viatris' biosimilars business is expected to close shortly. Biocon Biologics will issue $1 billion of convertible securities and make an upfront payment of $2 billion to Viatris on closing the transaction. Biocon Biologics has secured the $1.2 billion of debt. And the balance amount of $800 million will be funded through $650 million of equity infusion by Biocon and $150 million equity infusion by Serum.

With regulatory approvals that are required to close the Viatris transaction being in place, it is, we believe, imperative to close the transaction expeditiously in order to realize and recognize the benefits of the deal. This will allow us to start transition and integration of the business at the earliest. The equity infusion of $650 million from Biocon will be funded from $230 million from its existing reserves including the stake sale in Syngene, and the remaining $420 million through mezzanine funding. We are in the process of securing investments to retire the mezzanine finance post-deal closure. Biocon stake in Biocon Biologics will be 68% post the Viatris and Serum transactions.

In terms of integration and commercial success, Biocon Biologics will accrue revenue and profits emanating from the Viatris acquisition. The deal also incorporates a 2-year transition services agreement, or TSA, to ensure seamless business continuity. Under the agreement, Viatris will transfer key commercial teams to Biocon Biologics.

In the meanwhile, key leadership hires have been made at BBL to ensure smooth integration as well as commercial success, particularly in advanced markets, which include, of course, North America, Europe and other advanced markets. Key leadership hires include Mr. Matthew Erick, Chief Commercial Officer, Advanced Markets; Stephen Fecho Jr, Global Head of Supply Chain Management; Stephen Manzano, General Counsel Advanced Markets. And we also have onboarded key talents in our advanced market commercial teams to build market access and pricing, U.S. policy and advocacy capabilities. We believe that this team that we have now hired puts us in a good position to address the integration and transition requirements of the deal in a very efficient manner.

Let me now turn to financial highlights. At a -- group level, revenues for Q2 FY '23 were up 23% on a year-on-year basis at INR 2,384 crores. Revenues from our biosimilars business and Research Services delivered strong year-on-year growth of 34% and 26%, respectively, while our Generics business grew at a healthy 18%. Core EBITDA grew 34% to INR 816 crores, representing healthy core operating margins of 35% compared to 33% in the same quarter last fiscal.

Our gross R&D spend was at INR 252 crores versus INR 165 crores in the same period in the last fiscal, an increase of INR 52 crores year-on-year. This, of course, reflects our advancing pipeline that will drive our future growth. This spend corresponds to 16% of revenues ex-Syngene. Of the INR 252 crores, INR 242 crores is expanded in the P&L while the balance amount has been capitalized. This is a INR 96 crore increase in R&D expenses over Q2 FY '22.

During the quarter, we also recorded a ForEx loss of approx. INR 82 crores as compared to a gain of INR 20 crores during Q2 FY '22. This includes INR 35 crores of foreign currency translation loss on account of the Goldman Sachs OCD investment in Biocon Biologics. With this, the reported EBITDA for the quarter was INR 535 crores versus INR 551 crores in the same period with the EBITDA margin at 22%.

Profit before tax and exceptional items stood at INR 246 crores compared to INR 276 crores during the same quarter last fiscal. The net profit for the quarter, excluding exceptional items, stood at INR 168 crores versus INR 188 crores in Q2 FY '22.

When it comes to exceptional items this quarter, I would like to basically focus on the fact that a MAT credit balance charge of INR 107 crores has been incorporated as an exceptional loss -- exceptional item. The company has decided to adopt the new tax regime of 25%, which helps Biocon to reduce its tax outflow and P&L charges on a go-forward basis. We believe this is an important step that we are taking. And this is, of course, a charge to our P&L. Professional fees, net of taxes of INR 14 crores towards the Viatris deal also comprises part of the exceptional items. And therefore, reported net profit for the quarter is at INR 47 crores.

Let me now turn to segmental performance discussions, and I will start with Generics. The Generics segment delivered revenues of INR 623 crores during the quarter, which is a year-on-year growth of 18%. Profit before tax for the quarter was at INR 54 crores versus INR 50 crores on a year-on-year basis, which is a growth of 9%. Sequentially, as well, revenues grew by 7%.

This quarter, we had two important API launches of Sitagliptin and Vildagliptin in the EU, that were supplied from brownfield capacity expansion at Bengaluru and Visakhapatnam plants. The Generics Formulations business also secured several important approvals for our vertically integrated products in the EU and rest of the world markets, providing further impetus to our geographical expansion in the quarters ahead.

In terms of the pricing environment, we are seeing some moderation in raw material and logistic costs. However, the environment continues to remain challenging, especially in the U.S.

On the CapEx front, the Generics business made progress on two important projects in the completion of commissioning and qualification of our Visakhapatnam immunosuppressant facility and our Bengaluru peptides facility. Process validation batches are scheduled to commence at both sites in Q3 of this fiscal.

Now turning to Biosimilars. Biocon Biologics recorded revenues of INR 997 crores, a year-on-year growth of 34%, fueled by the growth of insulin glargine in the U.S. Core EBITDA stood at INR 449 crores, which is up 48% year-on-year. And core EBITDA margin improved to 46% versus 42%, primarily on account of the rupee depreciation and accrual of PLI benefits.

We continue to make good progress on our R&D pipeline spearheaded by Denosumab and Ustekinumab, our biosimilar programs, which are in the global Phase I and Phase III clinical trials. Consequently, R&D investment for the quarter increased by 142% year-on-year to INR 184 crores or 18% of BBL revenues. While this is higher than our guidance of 12% to 15% of sales, we believe it will normalize once we accrue revenues from Serum's vaccines and Viatris biosimilars businesses.

This quarter's EBITDA reflects an increase of INR 108 crores in R&D investments and a noncash foreign currency translation loss of INR 35 crores pertaining to Goldman Sach's OCD investment in DBL, which I referred to a little earlier. On a comparative basis, last year's EBITDA included a one-off gain of INR 55 crores from a mark-to-market movement on our Adagio investment. Therefore, adjusting for the foreign currency translational loss and mark-to-market gains, EBITDA is at the similar level to last fiscal.

Profit before tax and exceptions stood at INR 78 crores. The Viatris-led business continues to demonstrate a strong year-on-year performance underpinned by increasing penetration of our interchangeable insulin glargine in the U.S. Our glargine's total prescription market share is trending around 12%, while new prescriptions are at 14%. We are seeing an increased uptake of our fulfiller or Pegfilgrastim in the U.S. and its market share has now surpassed 10%. Ogivri's market share has also started to recover following a temporary dip in Q1 and is now around 10%.

In Europe, Hulio continues its strong performance in key markets such as Germany and France, where it's an 18% and 9% market share, respectively. We entered into a strategic out-licensing agreement with Yoshindo in Japan for commercializing of our pipeline assets Ustekinumab and Denosumab in Japan.

In summary, the existing business continues to see healthy and profitable performance with an opportunity to ramp up revenues. The conclusion of the strategic deals with Viatris and Serum will transform Biocon Biologics into a leading vertically integrated global biologics enterprise, driving value for all our stakeholders.

Now a short commentary on Novels. Equillium, our U.S.-based partner, announced encouraging interlude data from the E.coli study evaluating itolizumab in patients with lupus nephritis. The study continues to enroll patients with topline data expected in mid-2023. An application for conducting Phase II clinical trials with itolizumab for ulcerative colitis was approved by DCGI in October 2022.

Our Boston-based associated Bicara Therapeutics lead molecule BCA101 in combination with pembrolizumab was evaluated in frontline systemic patients with unresectable recurrent or metastatic head and neck squamous cell carcinoma with very encouraging response rates. During this quarter, BCA101 as a mono therapy was also evaluated in patients with advanced or incurable cutaneous squamous cell carcinoma who have received previous anti-PD-1 therapy. Investor interest in Bicara has greatly increased following positive outcomes of the various clinical trials.

I will now turn to Research Services, or Syngene International. Revenues from operations grew 26% to INR 768 crores over the corresponding quarter last year. Reported EBITDA was up 22% to INR 232 crores. Profit before tax and exceptional item was INR 130 crores, up 15% over the corresponding quarter last year. The second quarter results reflect positive performances across all divisions. Discovery Services experienced sustained demand. And during the quarter, the proprietary integrated drug discovery platform, Synvent, continue to gain traction with 18 integrated programs. Development Services benefited from repeat orders of existing clients as well as an increase in the number of collaborations with emerging biopharma companies.

In manufacturing services, the long-term biologics manufacturing agreement signed with Zoetis in the first quarter is expected to be transformational for the manufacturing services division in the years to come. The agreement has the potential to be worth up to $500 million over the next 10 years.

I would like to conclude by saying that our performance during the first half has demonstrated the resilience of Biocon's business model as we build the company of the future with all segments delivering strong revenue growth. We believe that the second half of this fiscal is on a firm footing as we approach the closure of the acquisition of Viatris' biosimilars business and the vaccine alliance with Serum. Enhanced capacities and new launches will drive growth for our API Generics Formulations business, while continued business momentum should help Syngene achieve its guidance for the full year.

With this, I would like to open the floor to questions.

[Saurabh Paliwal, executive]

[Operator Instructions] The first question is from Prakash Agarwal.

[Prakash Agarwal, analyst]

Am I audible?

[Saurabh Paliwal, executive]

Yes.

[Prakash Agarwal, analyst]

Okay. Just wanting to understand the mezzanine point funding that you spoke about. When is it expected to reverse? Last, we have talked about that we are looking for private equity investors to come in. What is the reason for the delay if you would elaborate it?

[Siddharth Mittal, executive]

So Prakash, we are in discussions with various private equity investors. But as Kiran mentioned in the opening remark that we want to close the transaction very quickly so that we can realize the benefits of this acquisition and start the transition. And within the next few months, we expect the retiring the short-term debt we'll be taking to fund this payout immediately and would be closing -- raising the funds from private equity to square off the mezzanine finance.

[Prakash Agarwal, analyst]

Okay. And these are rupee debt? Or...

[Siddharth Mittal, executive]

Yes, rupee debt.

[Prakash Agarwal, analyst]

And around coupon? Or...

[Siddharth Mittal, executive]

Around 7% -- 7%, 7.5%.

[Prakash Agarwal, analyst]

Okay, understood. And secondly if there is an update on beva and aspart approval timelines? I read in the presentation that the CAPA plan is already submitted, but what is our internal thought process in terms of the goals?

[Siddharth Mittal, executive]

Shreehas, if you can take that.

[Shreehas Tambe, executive]

Yes. Thanks, Sid. You are right, Prakash. We have post the inspection, responded to the agency with a comprehensive CAPA plan for bevacizumab, and we are awaiting the response from the agency to see that we get that approval so that we can commercialize bevacizumab in the U.S. as quickly as it's possible. You know that we already have approval from the EU for bevacizumab for that facility and that site.

[Prakash Agarwal, analyst]

But sir, any timelines that we think so that we can paint in the borders?

[Shreehas Tambe, executive]

At this stage, we have no indication on the timeline, but we are engaging with them to see how we can expedite. Typically, post submission of response, it takes anywhere between 45 to 60 working days for them to respond, but that's usually our past experience because we can't comment on behalf of the agency as to when they will come back to us.

[Prakash Agarwal, analyst]

And other products from Malaysia as well?

[Shreehas Tambe, executive]

Per aspart as you know, we responded to the inspection with the CAPA plan. We did receive a CRM, a complete response letter in October. The agency did point out that there is no pending or a repeat thing from the previous CRM. There's also nothing that we see on the scientific aspect of the dossier or the science of the development of the product. They wanted to see the completion of the actions that we have committed to in the CAPA plan. They've invited us for a conversation. That is currently scheduled with the agency and post having that dialogue with the agency, we should be able to get clarity as to how we will be able to get that product to approval.

Again, it's important to note that it's not a matter of if, it's a matter of when, and we should be able to provide more clarity once we have an engagement with the agency.

[Prakash Agarwal, analyst]

Okay. Okay. That helps. And lastly, on the timelines, like so Serum deal just the vaccines, that start effective 1st October. So is that understanding correct?

[Siddharth Mittal, executive]

Yes.

[Prakash Agarwal, analyst]

Okay. And the Mylan Viatris deal once the payments are done probably before December, so would the financials be added in the October to December quarter itself? Or it would go to the next quarter?

[Siddharth Mittal, executive]

It would be from the date of closure. So let's assume if the closure happens by end of this month, it'll be from December 1.

[Saurabh Paliwal, executive]

[Operator Instructions] The next question is from the line of Shyam Srinivasan from Goldman Sachs.

[Shyam Srinivasan, analyst]

Just the first one on the operational performance at Biocon Biologics. So if you could help us understand, I think you talked about glargine market shares reaching on NRx about 14%. So are we on track for the high teens kind of market share? What are some of the dynamics that is leading us to continue the market share gains that we are seeing right now?

[Shreehas Tambe, executive]

Let me respond to that, Shyam, and maybe Matt can add further color on that. We've seen a very positive growth in the way the U.S. market has responded to our interchangeable glargine. And while we've seen the uptick over a period of time where we started the year with a little under 3% to move into that mid -- closer to the mid-teens that you've talked about, it's trending in the right direction.

We see Viatris gathering more customers with almost on a weekly basis. We see them adding more customers to the list. And we believe we're trending in the right direction towards that mid- to high teens market share in the U.S. that we've targeted. But I'll let Matt talk a little bit more about that. Matt, over to you. You're probably on mute, Matt.

[Matthew Erick, executive]

Sorry about that. Thank you, Shreehas. In addition to what Shreehas was saying, we continue to onboard new customers weekly in our government business. So that's trending nicely, and we continue to look to secure additional business. And as we go into next quarter, we have some opportunities in which we are pursuing aggressively. That could add nicely to the growth that you're seeing in the NRx, which then will translate into the pull-through you see in TRxs.

[Shyam Srinivasan, analyst]

Got it. Just the second sub-question is on pricing. There have been some concerns by market participants around biosimilar pricing. Not -- U.S. pricing seems to be also kind of Q-o-Q seen deterioration. So just your comments on how pricing is trending relative to your expectations? Is that the only lever for market share? Or do you think there are other ways to gain market share?

[Shreehas Tambe, executive]

Again, to respond to that, of course, pricing is an important element. It's something that has to be looked at. There's no going away from that discussion. But beyond that, I think most customers are looking at reliability of supply to make sure that you have a complete portfolio. They're looking at customers -- looking at suppliers who have the ability to stain the market with an end-to-end capability to be there in the long run. So clearly, there are several levers, not just pricing.

Pricing is important. But it's also important that the supplier to these customers have a track record, credibility of high-quality products that they are developing, and the supply ability for these demands that they are creating. So I think it's a combination of this.

In terms of the discounting that you talked about, it's again a factor of competition and market forces. It's been a very reasonable price decline, I would say. It's trended from that 50% to 60% in most markets globally. Even in the U.S., it's been in that range. We've not seen a cliff in the moment you have a biosimilar entry or even if there have been 4 or 5 players in a particular asset, we haven't seen erosion in pricing in a particular asset. So I think there is pricing sanity overall, and we believe that this is likely to be a reflection of the biosimilars marketplace at least in the near term.

[Shyam Srinivasan, analyst]

Got it. And if I may, my last question is on the generic business. So this quarter has been very mixed for the players. You have seen growth. I mean maybe of a smaller base related to some of the larger incumbents. So Siddharth, what are you seeing in terms of both API and formulation trends for your business for the Generics?

[Siddharth Mittal, executive]

So we should continue to see some growth coming in, in our API business as we have the newer capacities both from brownfield and greenfield in the coming quarters. Of course, the brownfield capacity expansion will give immediate boost to our growth and greenfield capacity addition would take some time.

When it comes to Generic Formulations, we -- as we said, we have got a few approvals in emerging markets. We also have a few launches coming up in the U.S. and the combination of these launches, plus the growing -- the growth in our base business should generate growth in the coming quarters. So overall, the second half of this fiscal, we do expect high single-digit growth compared to second half of last year.

[Saurabh Paliwal, executive]

Our next question is from Neha Manpuria from Bank of America.

[Neha Manpuria, analyst]

My first question is on the biosimilar business. Now we've gained market share in all of our products in the last few quarters. Glargine has particularly been good. Despite that, we've seen flat revenues, which does seem to indicate either pricing pressure, not only in U.S. but in the other markets. So just wanted to get a sense on when do you see the next step-up in the revenue traction that we're seeing? That's my first question.

And second, we've heard a fair bit of discussion on Humira from -- biosimilar for Humira from competitors. I know this is a partnered product for us, but if you could give any color on how we stand as second set of entrants for this product?

[Shreehas Tambe, executive]

So Neha, maybe I'll take the first question, and I'll let Matt talk about what adalimumab subsequent to that. So in terms of what we had said on the revenue numbers, we had in the past said that the first two quarters of this year will be around that INR 1,000 crore mark and then we will see it break away from that to a higher level. We'll go up with steps, and we've moved up from that INR 750 crores average to about INR 850-ish crores and then towards the INR 1,000 crores mark. We see that changing in the current quarter and moving to an upward trend.

And specifically to the market shares and the revenue correlation that you just talked about. Two things to discuss there. One is you're right. Most of our products have recovered in market share, specifically our trastuzumab franchise in the advanced markets, which had undergone a dip in the beginning of the calendar year, has recovered very strongly, and we see that trending back towards the double digits. So it's certainly been up a positive trend and glargine too with the NRx Matt just described, are trending towards the mid-teens. And pegfilgrastim, we continue to hold that 10% market share, which is a significant threshold that we maintain.

In Europe, we have continued to also grow trastuzumab in particular, and adalimumab continues to grow there in certain markets, Germany and France, in particular. But we have seen that the euro-denominated business that we've seen there has faced pressure on the currency side with the euro depreciation to the dollar, and that has had an impact on some of those numbers that you see from a correlation perspective.

We see a strong growth in the product but unless you correct these currency impact, which we believe are transient, and we could see the business continue to grow in the current quarter and going forward as well. But maybe, Matt, you can now talk about the adalimumab reputations for the U.S.

[Matthew Erick, executive]

Yes. Thanks, Shreehas. So comments on our Hulio product, which is our product to Humira. Some key things we're seeing is that no product or no manufacturer has everything to the innovator. But we believe we're in a very good position as we meet with our payer customers and talk with our partner, with Viatris, that we have history, we have a lot of European history within our product in that supply, which is key to payers. And we've been able to demonstrate that with our launch of products in Europe, especially with our Hulio product and the nice gains that we've seen in that market share.

The other thing we believe, as we look at launching and the timing is that we believe we're in a very good position. As you see what's going on with the payers now, there seems to be a wait and see with most of them as they're waiting to see what's coming with all the different suppliers at the same time. We also have a uniqueness in our device itself, which we believe will be an advantage because it's very similar to the innovator. So patients will get familiar with how to use the device.

We've been having nice discussions, preliminary discussions with payers. And we believe we're in a good position because most of the payers are not going to have exclusivity. They will have a NF1 or NF2. So that means innovator plus 2 biosimilars or innovator plus 1 biosimilar. And with our history that we've demonstrated with our partner, with Viatris and how we've already been in the market with other products the payers are familiar with, we believe it puts us in a very good position as we get ready to launch our Hulio product.

[Neha Manpuria, analyst]

Yes. Sorry, just one follow-up on the Shreehas question. Shreehas, on emerging market, how has that been trending quarter-on-quarter? Are we seeing growth in the ex-regulated market business on the biosimilar side?

[Shreehas Tambe, executive]

Yes Neha, I think the emerging markets have also been doing very well for us in all the three franchises that we talked about but I'll let Susheel comment specifically on it and why we believe second half will be stronger given that we're starting to see the tenders, which have moved to the later part of the year moving in the positive direction. But Susheel, maybe you want to talk?

[Susheel Umesh, executive]

Thank you, Shreehas. In the emerging countries, I think that we have been doing very well over not just quarter, but over the years. If you see in FY '21, we were trending at around INR 200 crores per quarter. FY '22, about INR 250 crores. And this year, we'll be trending at about INR 300 crores per quarter.

Overall, the business of the emerging countries is largely tender dependent. So sometimes, it gets a little lumpy in terms of the nature of the business. But overall, we are relatively confident that many of the tender, which were delayed in the quarter 2 will get on to quarter 3, which we will win. So that way, the overall trend of the B2B business, as we call it in the emerging countries is very strong for the products that we are in, especially with insulins and with trastuzumab and now with the [indiscernible].

[Saurabh Paliwal, executive]

The next question is from Damayanti Kerai from HSBC.

[Damayanti Kerai, analyst]

I hope I'm audible.

[Saurabh Paliwal, executive]

Yes.

[Damayanti Kerai, analyst]

Okay. My first question is simply, so can you talk like how the current prescription is split between commercial and Medicare -- Medicaid patient? And how this trend has been moving in recent time? Because you have seen good pickup. So that's my first question.

[Shreehas Tambe, executive]

Matt, do you want to take that question?

[Matthew Erick, executive]

Yes. Look, I'll try. That's a very high-level question, but I think it's one of channels and how you're maximizing this. There's not a traditional shift in the way people are put on the plans in the U.S. It's how we're taking advantage of optimizing the channels within the payers as well as the price points. So you're seeing some of these shifts, and you could see it shift back and forth. It's really taking a look at -- is Medicare Part B, Part D, Medicare Advantage, where the commercial plans and how we go to market and strategically look at that. So you see some shifts, but we are taking advantage where the opportunity lends itself. And so you might be seeing some of that grow in some areas versus others.

[Damayanti Kerai, analyst]

Sure, Matt. And in recent contracting cycle for next year ,[indiscernible] simply gained a meaningful contract compared to where we were last year?

[Matthew Erick, executive]

Yes. I think you'll see -- you definitely are seeing those market share growth in the channel. Some of the things we'll have to look at is, as we look at acquiring or partnering with additional customers, some of that data is not in IQVIA, but we'll see nice growth. And I think more that revenue piece is one to continue to watch because of the way people report information. But I do see additional partnerships as well as additional pull-through, which you're seeing that with the NRx's in existing business coming in the future.

[Damayanti Kerai, analyst]

Sure. And my last question is both your advanced market as well as emerging market biosimilars have picked up. So that's a good update. So can you just know like -- can you just tell us what is the split right now in terms of biosimilar sales between advanced and emerging market?

[Shreehas Tambe, executive]

Chinni, do you want to give a split, roughly, it's at a little around that 50% mark, just a little over 50% in advanced markets, but maybe you have a little more data on that?

[M. Chinappa, executive]

For the quarterly amount, it's just under 60%, advanced markets.

[Damayanti Kerai, analyst]

Sorry, under 60% for advanced market?

[M. Chinappa, executive]

Advanced markets, and just about 40% for emerging markets.

[Saurabh Paliwal, executive]

The next question is from Harith Ahamed Spark Capital.

[Harith Mohammed, analyst]

So on insulin, as part of previous year 2019, the FDA had some queries on the diluent you were using, and I believe you had provided information on the same. So does the recent CRL mention anything related to the diluent? Or is it just pertaining to the inspection and the GMP status?

[Shreehas Tambe, executive]

Harith, we've been able to respond to the agency on the diluent that they had asked for and we do not see any inquiry, any further points or comments on that. The current CRL only talks about us completing the CAPA actions to their satisfaction. And there are, of course, some labeling, packaging queries which are standard whenever you have to close an application in the pre-approval process. So we don't see anything beyond just the facility inspection closure in terms of the CAPA actions.

[Harith Mohammed, analyst]

And then how should we think of the next goal date? I missed that in case you mentioned earlier.

[Shreehas Tambe, executive]

So the agency has asked us to engage with them. They want to take us through what really is needed to close this because there is no outstanding item from the previous CRL as well. So we closed those observations as well. So I think it's important right now to see what is it that the agency is looking for before we can look at the resubmission for a new goal date at this stage.

[Harith Mohammed, analyst]

Okay. And then regarding the licensing of two biosimilar assets, ustekinumab and denosumab to Yoshindo in Japan. Just trying to understand how biosimilar penetration has been in that market? We've had our glargine product since 2016 under a partnership with Fujifilm. So how has the experience been? How has the product ramp-up been? And what share do we have in the glargine market over there?

[Shreehas Tambe, executive]

Yes, absolutely. I think very fair question. Japan continues to be a very important market. It's still the third largest pharmaceutical market in the world and for biosimilars as well.

One of the key things about Japan and [indiscernible] why to get familiar with this. We've been in Japan since 2015 when we've got that approval for insulin glargine through our partner, Fujifilm. One of the key things in Japan is that a lot of the prices there are regulated through an NHI pricing index. And in terms of that, the order of entry and the discounting of biosimilars is becoming extremely critical as products are launched and institutions go through contracting for a longer period of time. So there's clearly been a lot of learning for us in the glargine commercialization process in Japan.

What Japan did for us was establish our scientific credibility that we can develop products of high quality for developed markets. So back in 2015, that was a big credibility mark for Biocon overall. And at this stage, I think while we've been able to understand how that market operates and having a strong local partner like Yoshindo whose already commercialized products like these biosimilars in the past in that competitive space and knowing what is required to be successful in terms of the order of entry, I think we've -- we believe we have a very good opportunity here with these two assets, which between them have an opportunity of almost $700 million, split roughly equally $50 million each between ustekinumab and denosumab. So clearly, we are very excited about this, and we see that we should meet the material success of this in Japan, Harith.

[Harith Mohammed, analyst]

And one on the balance sheet. There's a decline in the tangible CWIP in the consolidated balance sheet by around INR 1,300 crores. So this is related to which facilities? And then just a corresponding increase in the red block. So which are these facilities contributing to this?

[Siddharth Mittal, executive]

Indranil, go ahead and answer that.

[M. Chinappa, executive]

Maybe Sid, I'll answer that. This pertains to capitalization of one of the drug substance facilities that has gone online in the quarter July to September.

[Harith Mohammed, analyst]

Okay. And Chinni, will you be able to quantify the benefit from PLI scheme, and you mentioned that in the context of improvement in margins at Biocon Biologics. Was it material? Is what I'm trying to understand?

[M. Chinappa, executive]

It is, as you are aware, we've been selected under the PLI scheme. The Biocon Group has been selected under the PLS scheme, which entitles us to INR 250 crores benefits over a 5- to 6-year period. So this will accrue over time. It will be now a standard in [API] going forward.

[Saurabh Paliwal, executive]

And the next question is from Masira Vasanwala from FSSA Investment Managers.

[Masira Vasanwala, analyst]

Just looking back at the history of the company, the company hasn't usually taken on too much debt or done very large M&A transactions. What's different this time that gives you so much confidence to take on the debt you are taking on or the M&A? What are you worried about as you do this?

[Kiran Shaw, executive]

So let me start with that -- your question by saying I think this is a unique opportunity for the company to basically become a global leader in biosimilars. I think this is an inflection point and a huge opportunity for us in a business segment that is very, very differentiated. I do not think that this opportunity is something that we can ignore or even feel cautious about because we are very confident about the opportunity and the opportunity to grow.

We have products in the market, we have products in the pipeline, and we have products which are to be approved very shortly. I think with all this in place, I think we have a huge opportunity to be enormously successful. So I do believe that this is a debt that we have to take on to basically transform the business to the next level.

We also feel very confident that this is not an unserviceable debt. It is not hugely the -- over-leveraging the company. And we are also in the process of looking at investments that can even further reduce the debts that we originally have taken on. So overall, I believe that this is a unique opportunity for the company and for very, very breakaway growth that we have never been able to see before.

[Masira Vasanwala, analyst]

And just one more question. The mezzanine financing that we're taking, is there any collateral or cash flows against which this is secured?

[Siddharth Mittal, executive]

No. So it would be secured debt against the underlying assets of Biocon Limited. So there will be no other collateral that will be done.

[Saurabh Paliwal, executive]

The next question is from Sameer Baisiwala from Morgan Stanley.

[Sameer Baisiwala, analyst]

Shreehas, you must have been through with the contracting cycle for calendar 2023. So if you can just share your market share outlook, especially for glargine and the other two as well.

[Shreehas Tambe, executive]

Thanks, Sameer. Over 2023, if you're referring to the U.S. insulin glargine, I think what we can indicate is that our current customers that we had contracted with, we will continue to detail those. So we will stay with those markets and -- which is why we'd be confident about that growth from where we are. Today you heard Matt talk about [DNRs]. We will trend towards those mid- to high teens that we've guided, and that seems to be moving in the right direction.

[Sameer Baisiwala, analyst]

Okay. That's great. And for pegfil and trastu as well if you can share your thoughts?

[Shreehas Tambe, executive]

So for trastuzumab, we just talk about that franchise first. I think we did go through that dip of around 7.5%, 8% early part of the year. And as you see, we've clawed that back. So the Viatris oncology team has really been chipping away and making sure that we gain those accounts. We've got approvals to supplement that market. So we really believe there's a -- there's that 10%, 12% market share. We continue to build that going forward. I think there's a lot of focus. We are hoping bevacizumab gets approved soon. So we see that happening.

We're looking at pegfilgrastim being a very resilient product. We've been in that space long. We had an early mover advantage. The response overwhelmed us. Now we have significant capacity, which should allow us to play whichever segment or channel that is available to us. It's a matter of what commercial strategy are Viatris and Matt and the other teams come up with, but we would have the ability to supply far greater than what it is today.

But beyond the U.S., Sameer, what the team is really looking at this stage is to see how we can expand our market shares in Europe as well. And over last year, if I can point out, trastuzumab has increased its presence in Europe significantly. So that's been a good positive, and we see pegfilgrastim also headed in a similar direction in Europe where the market shares will continue to grow. Overall, we see this trending in the right direction. And the team is quite excited about the oncology franchise now. And with Matt and team, we feel very confident there.

[Sameer Baisiwala, analyst]

Okay. And I just wanted to revisit a couple of key numbers for Viatris. So $1 billion CCPS is being issued at what valuations? And post the transaction, the earlier understanding was that BBL will have $1.5 billion net debt. So is there any change to that?

[M. Chinappa, executive]

Sameer, the CCPS, as we meant that indicated previously was is valued at -- is based on equity value of $7.7 billion. So the $1 billion CCPS will convert to 12.9% equity stake in BBL. There is, of course, a capital flow. So it contains between 12.9% to 14.9%, and this is really dependent on the IPO valuation. The debt levels, which we see $1.2 billion of debt on top of the existing $300 million of debt on BBL's books. The debt target is $1.5 billion, which we expect to pay down, [improved] cash flows going forward and of course, for the equity raise from time to time.

[Sameer Baisiwala, analyst]

Okay. Great, Chinni and also, you had earlier indicated that Viatris most likely will close this year with $875 million topline and $200 million EBITDA. So any color you can share on that? Are we on track for that?

[M. Chinappa, executive]

Yes, Sameer, Viatris did released their Q3, that's July to September numbers. They're at $185 million for the quarter. That gives a run rate of $740 million. We see improvement in the last quarter, which it should take us closer. And keep in mind that this year, the overall, like Shreehas has also mentioned, the European revenues have been impacted by depreciation of the dollar -- or the euro to the dollar, sorry, and some depreciation in emerging markets, in emerging currencies. We also have a moderate impacted by the delayed launch of [indiscernible].

[Sameer Baisiwala, analyst]

And one final question for the mezzanine financing. Will this -- over next few months, will this be then be fully be replaced by private equity? Or how will it work?

[Siddharth Mittal, executive]

Yes. So the intent is to replace it partially or fully with the private equity [ run ], but we also do have an option to raise additional funds by divesting a few more stake in Syngene. But we, of course, don't want to keep too much of mezzanine finance for long on the balance sheet.

[Sameer Baisiwala, analyst]

Okay. And quite obvious that it would be secondary sales of your stake to...

[Siddharth Mittal, executive]

That's correct.

[Saurabh Paliwal, executive]

The next question is from [indiscernible].

[Unknown Analyst]

I just wanted to ask about the potential timeline for the IPO Biologics? And if we can expect a demerger of Syngene and Biologics eventually in the future?

[Siddharth Mittal, executive]

I think it would be a bit premature to comment on the timeline. But what we have said in the past, it will not be for the next 12 months or so. And at this stage, we are evaluating various options, including demerger, but again, all these things would take some time before we come out with a plan for our shareholders. Does that answer your question?

[Saurabh Paliwal, executive]

The next question is from Tarang Agrawal from Old Bridge Capital.

[Tarang Agrawal, analyst]

Just a couple of questions from me. It's actually sort of a repeat of what's already been asked. If I look at the Biocon Biologics business for this quarter, on a Q-on-Q basis, the revenue has been largely flattish and the core EBITDA has moved up quite nicely. So just referring to the comments explained, euro is probably depreciated about 2% on a quarter-on-quarter basis. And given the market share gains that we've made and the fact that emerging markets is roughly 40%. I'm just not able to connect the dots in terms of why the Q-on-Q revenues have been flat. That's number one.

Number two, when I juxtapose it with how the EBITDA is actually moved up on a quarter-on-quarter basis. I'm just finding it a little difficult to understand what's [ been the build a year].

[M. Chinappa, executive]

Just to clarify. As Susheel indicated that the emerging markets performance is strong overall but for the quarter, it has been lower than the previous quarter. So sequentially, emerging -- though the underlying business is strong, the revenues booked in Q2 is lower than Q1, and that impacted the -- or sequential growth numbers. So that is one. And as we -- as Susheel also indicated that we expect a pickup of this business in the second half.

Moving to the improvement in the core EBITDA, as we indicated in the opening commentary, we had the benefit of the exchange that reflects in the core EBITDA, but gets a return up or neutralized by the retranslation of our Goldman Sachs investments. So while we had INR 56 crores gain on the top, we've had INR 59 crores loss at the bottom and that why it's not reflected in our [PPT] numbers.

[Tarang Agrawal, analyst]

Yes. The second is on the Viatris acquisition. So you suggested that the mezzanine financing is going to be appealing and the financing at Biologics, would that be -- I guess it will be dollar-linked, right?

[Siddharth Mittal, executive]

The bank debt, Chinni, is rupee-linked as well or dollar-linked? I think that's the question. But in the mezzanine finance, which we come at Biocon level will be rupee-linked.

[Tarang Agrawal, analyst]

And both will be indexed to a particular benchmark in terms of how it's being priced.

[Siddharth Mittal, executive]

Well, it's all the commercial or the market rates, the lending rates, whether it's an NCD or ICD, it's all linked to the current prevailing rates.

[M. Chinappa, executive]

Tarang, just to clarify, the debt and the BBL books will be dollar-denominated debt. And as you appreciate that the revenue that's coming in from the acquisition will also be dollar denominated. And is benchmark to [SOFA] index.

[Saurabh Paliwal, executive]

Next question is [ Dinesh ].

[Unknown Analyst]

I would like to ask two questions. First one is pertaining to Insulin glargine. What market share we have in the long-acting insulin market in India? Any number you can provide on the Basalog sales in India? And insulin glargine coming under price control in India, should it impact our margins? Or can it help us gain more market share in India?

[Susheel Umesh, executive]

Thanks for that question. Glargine in India -- Basalog is doing extremely well compared versus last year. We are growing at more than 25% in a market that's sort of -- and growing at about 3%. So most of the market changes that's happening is a switch that is happening from the leader to our brand. And that's a very good sign.

In terms of market share, we used to be at 11% market share before. Now, we are reaching about 13% market share, and that's a very good trend going forward for glargine.

So second question, which you asked was on the pricing. Most of the discussion that we have in the marketplace is not really about the price. It's about the services that you offer to our doctor. Because in India, as you are aware, Dinesh, this is not a tender-based market. This is largely a retail market. And doctors prescribe this product to patients. So out there in the market, it is offering your services to the doctor being present for the patient, helping the doctor treat his patient to target. And I believe we did that quite well, and that is why we are growing the market shares of Basalog.

Though we are very unique in the fact that we have got some SKUs with doctors prefer which is [ while ] in 10 ml, 5 ml and 3 ml, which gives significant pricing advantage to the patients as well. So that's the differential we bring on the table to the patients and the doctors in the country. So I would see that going forward, we would continue to grow market share, continue to be dominant with Basalog in this market.

[Unknown Analyst]

Okay. Now you highlighted that in the Indian market, the procurement is less via tendering. But if you observe a procurement in CGH, Central Government Health Scheme or procurement by various state government health ministries is becoming more and more tendered. So are we addressing that part of the market aggressively?

[Susheel Umesh, executive]

If you look at this market is growing, you're right, but it's still about 10% or 12% of the total market, which is largely a retail market. I know there are sources like the ESIC, The Army, The Defense, The Railways who procure insulins, and we have got a separate team to handle this kind of institutional business as well.

[Unknown Analyst]

Okay. Okay. Okay. Yes. My next question is pertaining to the U.S. market. Now with the Viatris acquisition, we -- soon, we'll be rubbing our shoulders with big corporations like Amgen, [Elli] and Sanofis of the world. Now what are the key hurdles that we face in increasing the market share of our quality products, be it oncology segment or be it Semglee or insulin aspart which we'll be launching in the U.S. market? Like is it -- there is more resistance from medical consultants to ship to biosimilars? Or it is because of the high rebates, which are being offered by the innovator companies to the pharmacies. And how do we plan to address it?

[Matthew Erick, executive]

Yes, sure. I'll start here. Thanks for the question. Really appreciate it. Look, as we look at the competition, we see them as any other competition. We feel with the platform and the foundation that's coming over, particularly in oncology, we have a robust platform that has these advantages in relationships already established with the physician or physician clinics your oncology clinics, your oncology distribution. So we are a known entity and those folks that are coming from the Viatris over to Biocon are maintaining those relationships. We do understand how ASP works. So we know those advantages. We know those hurdles in which we can compete very competitively against any innovator.

We also are known. We've been around for quite some time, even though it is through Viatris. The payers understand this. And also in the oncology side, the physicians are very comfortable with biosimilars.

To answer your question on how we look at key winning in these markets, of course, you have to have the economics. That's a starting point. But you also have to have the payer contracts, meaning you have to land the formularies. And what's nice that we have the foundation that we've built in the partnership together with Viatris is then we have the pull-through apparatus with the sales force. The other thing that will be successful in competing against the innovators, we have the patient services, patient education and hub services. So we'll have the formulary coverage, we'll have the ability to pull-through, and we have a ability for patients to be able to afford and pay the medications. That's how we'll compete very aggressively.

[Unknown Analyst]

Okay. Okay. Coming to insulin aspart launch in India, is the launch like related to the state of the court case? Or it's a separate thing and the DGCI trial thing should continue forward?

[Shreehas Tambe, executive]

Yes. At this stage, we are still awaiting regulatory approval. We do not have approval of that product. So unless the authorities approve that product, we are very eager to launch that, but we are awaiting the approval of that.

[Saurabh Paliwal, executive]

The next question is from [indiscernible].

[Unknown Analyst]

Yes. So my question is [indiscernible]. So biosimilar sales is like 60% -- regulated markets. So can you split it between U.S. And Euro region?

[M. Chinappa, executive]

Your audio is not too good, but I suspect that you asked for the split of the developed markets between U.S. and EU, right?

[Unknown Analyst]

Yes, that's correct.

[M. Chinappa, executive]

I don't have that exact breakup, but just develop markets, actually -- I mean, one where Viatris funds sit, we recognize 1/3 of that in our profit share. They've largely sell -- there's U.S., there's Europe, there's Japan or Canada, Australia and New Zealand and also emerging markets. So the sales are distributed over a much larger geography. But I don't have the exact split to give you -- for you to [indiscernible].

[Unknown Analyst]

My second question relates to our Malaysia [vaccine]. Are we breaking even at EBITDA level? Or [ Malaysian facility ] Can you share some financials of [indiscernible] facility?

[M. Chinappa, executive]

We have had profits for the last three quarters. From Q4 of last fiscal, Malaysia has been reporting profit at the [BT PAT] line.

[Unknown Analyst]

Can you share the figure for the last quarter if that is possible?

[M. Chinappa, executive]

$5 million profits for the quarter, July to September.

[Unknown Analyst]

[ EBITDA ] or net?

[M. Chinappa, executive]

In dollars, PPT. PAP.

[Unknown Analyst]

PAP?

[M. Chinappa, executive]

Yes.

[Saurabh Paliwal, executive]

The next question is from Tushar Manudhane from Motilal Oswal.

[Tushar Manudhane, analyst]

Just if you could refresh on the outlook for the Serum alliance-led vaccine business in terms of how do we look at it over the next 12 months?

[Shreehas Tambe, executive]

Sorry, Saurabh, I didn't follow the question. Was that -- what is the question outlook of what? I didn't understand.

[Saurabh Paliwal, executive]

I think they're asking about the serum transaction, the visibility on that, Shreehas.

[Shreehas Tambe, executive]

Okay. Chinni, do you want to give some visibility on that?

[M. Chinappa, executive]

Tushar, so as you're aware, we have a contractual arrangement with the Serum Institute to commercialize $100 million -- 100 million doses of vaccines per annum. Underlying, there is a minimum commitment of revenues and profits, which is on a full year basis. As I have indicated, we could expect revenues in the range of $300 million per annum and with the EBITDA close to our core EBITDA margin, which is the mid- to high 30s. So that's the projections for the business. They will accrue on a full year basis on these lines. Can't give you a quarter-by-quarter comment or guidance.

[Saurabh Paliwal, executive]

We have the next question from Alankar Garude from Kotak Securities.

[Alankar Garude, analyst]

My question is on the immunosuppressant facility. Can you share some details on the capacity, which are the key products being targeted, opportunity size, focus in terms of developed versus emerging markets?

[Siddharth Mittal, executive]

Alankar, we do not give capacities of our facilities, but it's a very large facility. It's a greenfield facility in Vizag, where we'll be manufacturing products like Tacrolimus, Sirolimus, Pemicrolimus and various other products, which are under development, will also be manufactured there in the future. And of course, we have our existing facility in Bangalore, which has been running completely at capacity. So the growth would come in from this new facility, and it will be across emerging and developed markets.

[Alankar Garude, analyst]

Yes, sorry. I got mute. So on that side, if I look at Sirolimus, Tacrolimus, the overall global market growth itself has been in that 7% to 8% range. I understand we have been capacity constrained because of Bangalore. But going forward, you expect a somewhat similar growth with this new capacity coming in? Or you expect to gain further market share across your existing markets in some of these products?

[Siddharth Mittal, executive]

Yes. I think it will be both. We will gain additional market share. We have been in discussions with various customers who we have not been able to lock in or supply in the recent years because we did not have capacities to service these customers. But -- plus, we also expect our existing base business to grow as in and more and more transplant patients are enrolled by our customers. So our base business, both in formulations and EPI is also expected to grow.

[Alankar Garude, analyst]

All right. And maybe one final question there. So we have been present in this space for a very long time what would be our key competitive advantages compared to some of our global peers.

[Siddharth Mittal, executive]

I think the immunosuppressant space is less competitive when you look at the global landscape. A few of our products like Tacrolimus, Everolimus, Sirolimus, we have of large market share globally in the generic space. And of course, it's the quality, it's the science behind these drugs, which makes us differentiated compared to others.

[Saurabh Paliwal, executive]

The next question is from Nitin Agarwal from DAM Capital.

[Nitin Agarwal, analyst]

I just had one question on [indiscernible] A, have we decided to take on that molecule? And two, with the recent sort of patent litigation outcomes in the PTAB, how should we look at -- maybe taking the molecule on how we look at the commercialization opportunity there?

[Shreehas Tambe, executive]

So Nitin, we have as a part of the Viatris acquisition, we have the option to look at the acquisition of that asset, and we are proceeding with doing that. So we are exercising that right to acquire EYLEA.

With regards to the ongoing litigation, I think it's in the public domain. Viatris is in litigation with Regeneron. Right now, it's a restricted patent litigation. The court has decided to litigate only on six patents. And as you've seen, the IPRs that have recently been announced, have certainly validated Viatris' view on the IP. So Viatris is quite confident about its position on these patents and we -- Viatris believes that it will move in the direction that it has approached it with. So we're very confident in it.

[Nitin Agarwal, analyst]

And just following up on that. If I recall reading somewhere correctly, the goal date for the product was somewhere in the recent past. Is it correct? And where are we on the approval for the product? Any timelines for approval? Because the filing was done some time back, I guess.

[Shreehas Tambe, executive]

So as a part of the regulatory process, I think it will go through the current patent dance before it can be granted approval. So currently, we are in that -- or not we, but at this stage, it is Viatris until the closure of the deal, it's Viatris which is in that current patent dance regulatory process. And once that is completed, only then will we have -- will Viatris have that.

[Saurabh Paliwal, executive]

If you ask a question, we have the last few minutes. Please raise your hand. Since we do not have any more questions, I'll take this opportunity to thank everyone for joining us in this earnings call. If you need any further taxation or have questions, please do continue to touch with me. With this, I thank you very much, and have a [indiscernible] rest of the day. Bye-bye.

[Siddharth Mittal, executive]

Thank you.