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Biocon Ltd
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Good day, ladies and gentlemen, and welcome to the Biocon Limited's Q3 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saurabh Paliwal from Biocon Investor Relations. Thank you, and over to you, sir.
Thank you, Margaret, and good morning, everybody. I welcome you to today's earnings call for the third quarter of fiscal '18. Before we proceed with the call, let me remind you on the safe harbor. The discussion today may contain forward-looking statements that involve known and unknown risks, uncertainties and other factors. I would like to take this opportunity to remind everyone about the safe harbor. Therefore, please refer to our conference call invite for the same.A replay of today's discussion will be available for the next few days post the conclusion of this conference call. So in case you need to have a look at it, it is available. On the call today, we have Dr. Kiran Mazumdar Shaw, our Chairperson and Managing Director; along with the senior management team, to discuss this quarter's performance and future business outlook. At the conclusion of this call, if there are any further clarifications or information needed from us, please do get in touch with me. Now I'd like to hand the call over to Dr. Kiran Mazumdar Shaw. Over to you, ma'am.
Thank you, Saurabh. Good morning, everyone. I welcome you to Biocon's earnings call for the third quarter of fiscal '18. Let me start with key business highlights for this quarter.I'm very proud to say that the U.S. FDA accorded approval for Ogivri, our partner biosimilar trastuzumab with Mylan. We, thus, became the first company from India to get this biosimilar approved by the U.S. FDA. Biocon also received approval from the Brazilian regulatory agency, ANVISA, for biosimilar trastuzumab, to its partner Libbs Farmaceutica. It is the first biosimilar trastuzumab to be approved in Brazil. ANVISA also approved Biocon's recombinant human insulin drug product under the new non-originator biologicals pathway which will help us compete in the country's Ministry of Health tender market in addition to the retail market where our partner has significant presence. Biocon launched bevacizumab, the biosimilar product under its brand name KRABEVA in India, for the treatment of patients with metastatic colorectal cancer and other types of lung, kidney, cervical, ovarian and brain cancers. Last week, we announced our global collaboration with Sandoz, a Novartis division and a global leader in biosimilars, for developing a set of next-generation biosimilar product.The collaboration aims to help patients worldwide gain access to a range of high-quality, affordable immunology and oncology biologics, which complement our existing portfolio. It will certainly bolster Biocon's existing global Biosimilars portfolio comprising biosimilars, antibodies and insulin analogs, which we are developing in our global partnership with Mylan. We are targeting opportunities that are expected to open up in the next decade, thereby addressing some of the biosimilar opportunities beyond the near-term opportunities being addressed with a very successful global partnership with Mylan.Syngene expanded its ongoing collaboration with Bristol-Myers Squibb through 2026 that will see the addition of a new facility to support Bristol-Myers Squibb's future R&D operation and allow for expansion of the team of scientists working exclusively for them in Syngene. Syngene operates the largest research and development facility for Bristol-Myers Squibb outside the United States. It is certainly playing a very integral role within the global research and development network of Bristol-Myers Squibb.I would now like to move on to financial highlights. Our consolidated revenue this quarter were INR 1,092 crores, revenues from operations were INR 1,058 crores, which grew 1% as compared to last fiscal. This includes licensing income of INR 12 crores this fiscal, but this compares to the INR 79 crores that -- of license income that we received in Q3 last year. From a segmented perspective, the Small Molecules segment revenue was INR 369 crores, down 9% from Q3 of last year. The Biologics segment revenue was INR 190 crores, down 15% over last year. However, when adjusted for licensing income, product sales grew 16% as compared to last year, with growth seen in both insulins as well as biosimilar antibody sales. Branded Formulations showed strong growth of 27% at INR 156 crores against INR 123 crores last year. The Research Services segment represented by Syngene was up 17% at INR 387 crores compared to Q3 last fiscal. We incurred gross spends of INR 94 crores on R&D this quarter. And of this amount, INR 53 crores is reported in the P&L, corresponding to 8% of revenues, excluding Syngene. We capitalized an amount of INR 41 crores related to our biosimilars and insulin analog development expenses. We booked a ForEx gain of INR 7 crores this quarter. Group EBITDA was at INR 256 crores at margins of -- with EBITDA margins of 23%. Core margins, that is EBITDA margins net of licensing impact of ForEx and R&D, stood at 27%. The reduction in margins percentage as compared to last year is on account of lowering licensing income, compounded by fixed and operating costs related to Malaysia. Our reported net profit for the quarter was INR 92 crores which represents a net profit margin of 8%.Now coming to individual business segments. Small Molecules continue to face headwinds as a result of continued pricing pressure and channel consolidation in the U.S. impacting the statins business. This is also further led by a decline in Rosuvastatin API pricing. Continued demand for immunosuppressants helped to offset some of this pressure. We anticipate this trend to continue in the near future.When it comes to Biologics, the financial performance of this segment was impacted on account of plant requalification activities undertaken at our fill-finish plant which led to production disruption. We also booked significantly lower licensing income resulting in lower revenues as compared to last year. Segment margins were impacted due to lower licensing income, coupled with fixed and operating expenses related to the Malaysia insulins facility like I had mentioned earlier. Given that the drug product plant is now back online and producing commercially, we expect biologics production to normalize in Q4, thereby furthering sales growth. The Biologics segment is expected to bounce back in a robust manner in FY '19 on the back of expected regulatory approvals and product sales in emerging markets.Branded Formulations, the growth of the segment was led by the U.A.E. business, driven by new and in-license products with momentum in branded generics. The Oncology and Comprehensive Care franchises in India also led growth in the domestic market. Syngene grew 17%, driven primarily by the Chemical Development vertical, reflecting good underlying performance. Biologics and biological discovery has also seen good traction. We expect Syngene to close FY '18 with strong momentum, this time primarily driven by Biologics.When it comes to product development and regulatory updates, Biocon and Mylan have submitted their response to the U.S. FDA on the complete response letter issued by the agency for biosimilar pegfilgrastim. The European Medicines Agency, or EMA, has accepted our resubmission of Marketing Authorization Applications for both trastuzumab and pegfilgrastim. As regards our Insulin Glargine, our market authorization applications are under advanced stages of review in the EU, Australia and Canada. The application for this drug is also under review with the U.S. FDA.I would also like to mention here that our Insulin Aspart, global Phase I clinical trial for this molecule has recently been initiated.Bevacizumab, the global Phase III trial for this molecule is progressing well in various sites in the EU and India as first-line treatment of patients with stage IV nonsquamous non-small cell lung cancer. In terms of the Novel Biologics pipeline, we received DCGI approval to conduct a Phase II, Phase III study in Type 2 diabetes patients for our oral insulin candidate, Insulin Tregopil, in India. Dosing has commenced, and we expect this trial to be completed in about 2 years.Before I conclude, I would like to summarize as follows. The financial performance this quarter was muted. Pricing pressure and channel consolidation in the U.S. have impacted our Small Molecules API business. Reduction of licensing income and supply constraints due to plant requalification activities have affected the performance of the Biologics segment. While challenges remain in Branded Formulations India business, the Branded Formulation segment as a whole has shown good growth this quarter, driven by the U.A.E. business. Syngene performance is beginning to not only normalize, but gain traction. The regulatory advancement in our Biologics business made during the period all bodes well for our future. We are hopeful of a recovery in our consolidated performance in the coming quarters, led by the Biologics business and our Research Services business. I would now like to open it up for question and answers. Thank you.
[Operator Instructions] The first question is from the line of Prakash from Axis Capital.
First question, trying to understand gross margin movement, especially Q-on-Q, Y-on-Y, I understand the Biologics sales have been lower. But Q-on-Q also it has marginally dipped. And if I see the segmental performance, I think the Small Molecules have done better Q-on-Q. So if you could highlight what has really led to the decline Q-on-Q on the gross margins, please.
So the quarter-on-quarter move is very nominal, 60 basis points, obviously, at a base of -- I mean, at a gross margin of 55%, 56%, we'll have those minor fluctuations. So I would not say that there has been anything one-off or anything not in the normal that has impacted the margins. Obviously, it turns also depending on the product mix within the various segments and also which segment gives how much growth.
Yes, so I mean, because -- the question I asked because the sales mix actually improved. If you see the sales, services Q on Q has improved. Your Branded Formulations marginally dipping, but Biologics have Q on Q improved. So is it largely due to the licensing income? Or that also has improved, so I'm just trying to figure out what has really happened.
So when you see the segment results, it is after R&D expenses. So while -- the gross margin would've remained same because at the consolidated level, as I mentioned, the gross margin has not significantly changed, but the segment result is after considering all the other expenses and R&D costs.
Perfect. And secondly, on the update on the peg, so since we have submitted our data, what would be the next steps going forward? And when are we expecting the approvals?
So in terms of the Pegfilgrastim, as Kiran mentioned in her opening remarks, we've submitted -- Mylan has submitted the response to the complete response letter that we had received. Obviously, now the FDA would review that response and give approval in due course. We can't, at this moment, give a definitive timeline. But just suffice to say that we expect a decision from the regulator hopefully in the first half of 2018.
Lovely. And lastly, I think we saw, Kiran, ma'am, on TV talking about the potential listing of the biosimilar assets. So if we could know which markets probably we're looking at? And what is the time frame here, that would be very helpful.
I think I made a comment very clearly, that we will obviously be looking at opportunities to unlock value from our Biologics assets in the foreseeable future. And I think it's too early for us to give you any timelines in terms of when this listing would happen, but suffice to say that at some stage in the near future, we will be looking at this kind of opportunities to unlock value.
I just want to, Prakash, just go back to the answer that I gave regarding the timing. I don't mean calendar '18, I mean, FY '19.
[Operator Instructions] The next question is from the line of Ritika Jalan from Narnolia Securities.
I just have some housekeeping question, like what is the CapEx guidance for the next year, like CapEx for FY '18 and FY '19?
Well, FY '18 is almost over, but what we have said directionally is that, on an annualized basis, we have roughly INR 100 crores of maintenance CapEx. And in addition to that, we already started construction of our antibody plant, where we're going to invest somewhere between $150 million to $175 million, including the qualification expenses. And this facility would be commissioned over a period of 2 years, so you can expect a large part of CapEx payout in the next 2 years towards this.
Okay. And do we expect the margin to grow further from this level? Or do we expect to maintain the margin?
We cannot give any guidance on margins. What we have said in the past is that when we have a biosimilar products in the developed markets, intuitively the margins should go up. But beyond that, we cannot give any specific guidance on the margins.
And what is the reason for decline in the like license income, [ can you please ]?
The licensing income is lumpy. It all depends on what deal is done during the quarter. Sometimes you also have milestone payouts depending on the approval of our products. There is no trend that can be really looked at here.
Do we have further scope of more licensing income or in other -- to other emerging countries or something like that?
The licensing income, generally, this year, has been low. So if you look at 9 months licensing income, we have us INR 21 crores compared to INR 129 crores for the 9 months of last fiscal. Now the licensing income is derived mostly when you out license these drugs in emerging markets. And since most of our existing biosimilar drugs, we've already struck partnership in large emerging markets. Now the licensing income would start going up only when we have new molecules that we start licensing.
A little bit outlook on when that will start, like when your deal will be finalized and all?
Well, it's in various stages, so it's not -- I mean, we cannot give an outlook exactly in terms of the timing and the amount that we are saying is, as you heard of, that we recently got approval for our biosimilar bevacizumab in India. So that's a good licensing asset for us. And we would start discussions with our existing and new partners in emerging markets, which should result in increase in licensing income over the next few fiscals.
Okay, okay. And on the Malaysian facility, like a couple of questions, are there like -- what are the expense related particularly to the Malaysian facility?
So we have said in the past that fixed expenses for this facility is going to be around 48 million or 20 million a quarter. And this quarter, we had $12 million of expenses, including interest and depreciation in the P&L.
Okay. And it will be continued going ahead or somewhat?
These are fixed expenses, so they will continue. The depreciation, the interest, the employee cost, the utility cost. By very nature, these are fixed, so they are not going to fluctuate or go down.
[Operator Instructions] The next question is from the line of Nitin Agarwal from IDFC Securities.
On the commercialization of biosimilars in regulated markets, I mean, what's your own take on the differences that you've seen, even though it's very early days, in the way pickup has been in the U.S. versus Europe? We've seen some challenges even Pfizer is facing with Inflectra. So I mean, how do you see this commercialization in the U.S. market really developing going forward?
As you know, this is -- Mylan is transcending the commercialization in both Europe and in the U.S. market. And I think this question is better addressed to them because it is not appropriate for us to comment. But having said that, I believe that, as you very rightly said, these are early days. And as you know, that the uptake of biosimilars in Europe has been very strong. And we expect that in many segments in the U.S. especially in the area of oncology drugs, I think there will be a positive response to biosimilars, is what our take is. But I think we will have to watch the market, and I think Mylan is in a better position to answer this question.
Sure. And secondly, the question is, I mean, in this business, while it’s very, very limited, competition opportunities would be there across products. I mean, how important is being first to market in these products in your assessment?
I think it's important to have an early mover advantage, and I think having a partner like Mylan who understands the market very well, I think it definitely is advantageous.
Okay. And secondly, in terms of the emerging market rollout for our pegfilgrastim and Glargine. I mean, how do you see FY '19 versus in terms of progression on that front?
Well, I think the real opportunity for pegfilgrastim is obviously the highly regulated markets of Europe and U.S. I think when it comes to Glargine, we are represented fairly well in many, many emerging markets. So really, the next big opportunity for Biocon is -- and Mylan, is the European and U.S. markets. And I think the European review is fairly advanced. So we hopefully will get into the market in this calendar year in Europe.
And so is trastuzumab also for the emerging markets?
Well, trastuzumab for the emerging markets, as you know, we've received the approval from ANVISA. And we are obviously positioning ourselves to look at many others such big emerging market opportunities. So I think we will look at emerging markets very seriously in terms of the near term.
But do you think the sole -- for us, the emerging markets across trastuzumab and Glargine, will it be FY '19 be a sort of an inflection year? Or it's more like a '20 [ bare ] probably view. We'll probably see critical contribution coming from…
No, I think obviously FY '19 is going to focus a lot on emerging market opportunities for these biosimilars, but I believe that obviously the big opportunity is once the U.S. and European markets open up will be the big opportunity. And that takes a bit of a ramp up. So FY '19 certainly is definitely an emerging markets play in the near term.
I'll add -- Nitin, I would just like to add one more thing which was there in our press release, but not in the highlights of this call, that we also received approval for our Insulin Glargine in Russia, which is for this -- for Glargine is amongst the top 3 emerging markets. So that again, in addition to Brazil and some of the other emerging markets, recently -- this quarter, we received approval in Russia. So that will also reflect in our growth in FY '19.
And how big would the Glargine market be for Russia?
Suresh, do you have the number readily available?
Yes, so Glargine is a sizable opportunity in Russia as well. And I think if you see the way it has been going at this point, I think those numbers are in the region of about, I would say -- although Glargine has been moving towards 20 from Lantus, but I think those numbers have been pretty strong to look at in FY '17.
Do you have any specific number just to help us model it a bit?
Yes, let me just come back to you on that number in a bit.
The next question is from the line of Charulata Gaidhani from Dalal & Broacha.
My question pertains to the profitability of Small Molecules. There is a lot of volatility in the numbers -- in the margins. Can you throw some light on that?
Well, as I've mentioned in one of my earlier comments that these expenses are net of R&D expenses and other expenses, so it's sales minus gross margin. I mean, sales minus cost of manufacturing and other expenses. Now some of these other expenses tend to be lumpy. Again, R&D expenses, we had high R&D expenses for our ANDAs in the quarter 2, which would've resulted in a reduction in the margin compared to what we have in this quarter. So you should really look at it on a 9-month basis to see what would be the normalized margins. If you look at 3 quarters total for Small Molecules, it's roughly INR 200 crores, which means the average margin or average profit per quarter is roughly INR 65 crores.
Okay. Okay. My second question pertains to growth in Branded Formulations. What has led to this growth? And how sustainable is it?
Kiran's -- it was there in Kiran's remarks that growth was driven largely in our U.A.E. business. And also in terms of the guidance that we said that there will be challenge which remains for our Branded Formulations India business. However, our U.A.E. business which has -- we have seen a good growth there, and we will continue to see good growth in the coming quarters.
Okay, okay. And have we commenced insulin supplies from Malaysia to EU?
Not yet, we have not yet got the EU approvals. So only after we receive the EU approval and once we are ready to launch in EU, the supplies would commence.
The next question is from the line of [ Vipul Shah ] from Sumangal Investments. We'll move to our next question, which is from the line of Cyndrella Carvalho from Dolat Capital.
Ma'am, congratulations on the first biosimilar approval of trastuzumab. So all's set in terms of going ahead with the biosimilars. So ma'am, just wanted to understand Insulin Glargine update for the EU region. Where are we right now? And what is our tentative expectation on that approval?
So as I mentioned in my opening remarks, we are in a very advanced stage of review with the EMA, and we expect to receive, well, positive news from them very soon. And once that happens, that is for marketing authorization, we then expect to receive marketing authorization shortly thereafter. So as I mentioned in my opening remarks, we hope that we will enter the European market with Insulin Glargine in this calendar year.
Okay. So ma'am, just understanding, we have received the rh-Insulin. Human insulin approval also, we have received approval in Russia. So all these supplies would start from the Malaysian plant, is that correct?
Yes, between both the Malaysia and the Indian operations, we will basically balance the supplies across the markets.
So any color that you can provide in terms of utilization from the Malaysian site for the -- with -- if, like whenever we get Insulin Glargine, how should we look at it over 2 to 3 years from here onwards?
Well you -- we can't give you exact color on that kind of opportunity until we basically start seeing ramped up sales. But enough -- suffice to say that obviously, it is in our interest to see how we can quickly fill up capacity in Malaysia and that is what our objective is. But having said that, I think we are also very pleased that we got the offtake agreement signed with the Malaysian Ministry of Health, which obviously has also taken up a pretty important capacity of the Malaysian facility. So with added opportunities kicking in from EU and other emerging markets, we hope that the Malaysian operation will be optimally utilized.
And ma'am, on the trastuzumab, we expect the entire emerging markets and the other developed market approvals to come by. We already have ANVISA with us already and more approvals to come. So how do we see FY '19 from -- not from the developed market, but from the other markets' point of view?
We actually will map out all the opportunities and make sure that we actually address the really lucrative opportunities in the emerging markets because obviously we do need to make sure that we are prepared to cater to the developed markets opportunities as they emerge. So I think we will map that very, very carefully and make sure that we have a sizable presence in the emerging market opportunities. But equally, we think we will map it out to ensure that we are in readiness for the developed markets as well.
So just like earlier guidance of around 200 million from the biosimilar kind of, so we're closer to that, or it will be going a little next year? What is the sense?
Well, I think biologics certainly has had a setback because of some of these inspections. We could have been right on target if we hadn't had those setbacks by the EMA reinspection. But having said that, I think once we cross that hurdle, I think we are very confident that, although we might lose a few quarters, we will actually be able to hit that target definitely next fiscal.
Okay, that's good enough. Taking the discussion to the Small Molecules part, ma'am, any thoughts, any outlook over there? We have our first Rosuvastatin also in the U.S. market now and some other markets also, we are getting in. So like how should we look at these entire Small Molecule business because U.S. market still remains -- in terms of pricing scenarios, still remains not that so good. So what is the outlook? And if you can help us with a little more of color in terms of earnings in the Small Molecules segment?
So I think in the near term or in the next fiscal, I think the contributions from generic finish formulations will begin to appear, but the real opportunities will only kick in thereafter. I think from 2020, 2021, I think you can start seeing our specialty generics that we are developing to start contributing. But at this point in time, I don't want to be too hasty in saying that these are going to be big-ticket opportunities next fiscal. I think next fiscal, you will start seeing our generic molecules contributing to the Small Molecules segment. APIs will continue to be the sort of bread and butter of Small Molecules next fiscal, but thereafter, we hope that the vertically integrated approach and the forward integration approach that we have pursued through the ANDAs and generic formulations will obviously then help us to bolster both growth and volume in terms of revenues.
So if I may ask this last one, what is the update on the EMA reinspection initiative that we have in mind? Or we still await any update?
I think we do expect reinspection shortly.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Any thoughts on when should you expect U.S. FDA to inspect the Malaysian facility?
Arun. At this moment, we do not want to comment on timing of any inspections. Suffice to say, we've got our application for Glargine in the U.S. and that would certainly trigger an inspection. But I don't want to give any -- make any comment on the specific timing of the inspection. But clearly, the inspection would happen in due course. And as you know, the timing for approval is still some time away because it goes through the sort of the patent 30-month issue. So I don't think the U.S. inspection is on a critical path.
Okay. That's very helpful. And any thoughts on the timing of commercialization of Neulasta in the U.S?
I think that is a decision that Mylan would take based on, one, is the approval timings; as well as other situations around IP. And previously, Mylan has guided that they don't expect a launch in -- until either late end of 2018 or early 2019.
Okay. Okay. And just a question on Copaxone. Your earlier line was that by the end of this fiscal, you'd be resubmitting, are you on track on that?
We are more or less on track on that. I think we are confident of submitting it definitely in Q1 next fiscal, but we are still targeting to see if we can do it end of this fiscal.
Okay. And does that then tie up with Kiran's earlier remark about ramp up in the U.S. specialty sales in fiscal '20? Is that...
Glargine is just one set of opportunity]. As you know, we are working on a pipeline of ANDAs where we are trying to create a portfolio, and this portfolio is being done in a measured way. So every year, we're just filing a few ANDAs. So as they cumulatively add up to a sizable portfolio in the next few years and as the patent expiries happen, because many of the ANDAs we're filing now, the patent expiries happen only sometimes 2 years later or 3 years later. So that is why from a commercial standpoint, it may start moving a needle only at that point in time.
Okay. And any update on adalimumab BLA filings?
No, we don't have any comment on that at this point.
But it's in late Phase III if I'm not wrong?
That's right.
Okay. Just one last one for my side. This is for the emerging markets. What's the competitive landscape over this? I mean, general question, but if you'd care to be a little specific for Glargine Russia, or trastu Brazil. Are there several local players who may not qualify for U.S. or Europe, and therefore, we don't see them, but they are there in these emerging markets? Or do you think it's a pretty low competition, 2- or 3-player market as is the DMs?
So I'll just give a brief comment and then maybe have Suresh pitch in. By and large, the competition that we've seen in the insulin space globally still emanates from the -- that is Eli Lilly, Sanofi and Novo. And as you know, when it comes to some of these molecules, some of these innovators are also developing biosimilars. So by and large, we've seen competition predominantly come from the innovators themselves. Some markets do have local players, but the dominant competition still happens to be the innovators.
So this is Suresh. Thanks, Arun. Just to add a little bit on that particular aspect, I think there was a previous question given on Glargine in Russia. I think Arun is absolutely right. The major competition does come from the innovator companies in these markets. Russia specifically, we've seen that we would -- we are the first in that sense the biosimilar to be approved. And the innovator has -- the strategies have been to move Lantus to Toujeo. So the real impact that we would be having to make with our partner in Russia would be to actually see how we can create the disruption by actually bringing in the first biosimilar Glargine in that space and to kind of bring the market back towards Glargine. I think these are the challenges we would see, although the market in itself has been pretty large, almost 80 million in the previous year.
And Brazil trastu, is this -- is yours the first approval there? Or are there any more players?
No, Brazil trastu, I think, ours is the first approval.
The next question is from the line of Harith Mohammed from Spark Capital.
On the R&D spending this year, it appears that we are more or less flat versus last year. So is there -- how should we look at this number in terms of -- in absolute numbers from the current INR 400-odd crores gross spending? How will this number move over the next 2 to 3 years?
The R&D spend should go up -- even for this, year we had guided that it should be around INR 450 crores to INR 500 crores, and some of us, novel molecules progress in clinic, we would see an increase in the R&D. We also announced the collaboration with Sandoz, and I think the broad contours of the dealers discussed in the investor call, wherein we had said that the expenses would be shared 50-50. And even though these are in very early stages of development, but since you've asked about next 2 to 3 years, as these molecules progress and with -- we obviously will have expenses increase, R&D expenses increase, reflecting our share of Sandoz collaboration assets.
Okay. And given our potential to be the first biosimilar launched in the U.S. for both trastuzumab and pegfilgrastim, how do you look at our capacity situation given the exclusivity that we may enjoy for both these products? Will capacities be a constrain for us to capture share, a significant share in these markets for these 2 products? And in the context of some of the competitors having disclosed the kind of investments that they've made in capacities which are significantly at a higher scale so -- and our own capacity in your facility in Bangalore will take at least 2 to 3 years, based on the capacities that are available now, how much share can we capture? Or will capacities be a constrain when it comes to capturing market share during the -- especially during the exclusivity phase?
So this is Arun here. I'll just add color to it. Number one, of course, my standard disclaimer would be that we would not be able to share competitive information linking capacity to market share and grabbing the opportunity. Having said that, clearly, our assumption is that we would plan our capacities in such a way that we would cater to the market as the market share ramps up. And I think we mentioned earlier that we've already triggered other, say, capacity expansions in our antibodies facilities and all of them would come into play as we launch and ramp up market shares in the [indiscernible].
The next question is from the line of Shradha Patil from Wealth Managers.
Now just a question on the time lines, would it be a fair assumptions to make that we expect trastu and peg approval from the EU sometime around the late first half of the next fiscal or early H2 in the next fiscal?
If we look at European approval for trastuzumab and pegfilgrastim, I would say that my expectation would be that it would be sometime in the later part of this calendar year or towards the second half of -- or middle to second half of next fiscal.
Okay, okay. And how about the U.S. approval for Glargine and pegfilgrastim?
Similarly, I think in my comment to an earlier question, I mentioned that Mylan had previously talked about the potential to launch pegfilgrastim in the U.S, say, in early 2019. So clearly, the expectation is that the approval should be in place before that. Glargine is still some time away.
Okay. Okay. Okay. Secondly, based on the 9-month numbers that we had got, how confident are we of achieving the next year target, especially in the Branded Formulations and Biologics? Because if you see the numbers, then we will almost need to double the Branded Formulations sales and see a very high growth in Biologics. And with the background of Biologics sales more is coming from the emerging markets and also the segment that we had to see during the year due to the remediation process, how confident are we achieving the target for the FY '19? And what would be the drivers for achieving that?
Yes, so I'll just make a comment and then also have Kiran comment on that. So the quick comment I would have is that it's certainly our endeavor to meet the long-term guidance that we issued in 2013. Well, of course, some of the things you mentioned around Branded Formulations continue -- would be risks to this guidance. But clearly, if we look at our growth driver or the growth sector, which will be our Biologics segment and the Research Services segment represented by Syngene, we would definitely expect to either meet or even exceed the segmental guidance that we had provided for these 2 segments for next year. But as we do see...
That's the Branded -- that's the Biologics and the Research Services?
Yes, but we -- certainly there are headwinds in the Small Molecules and Branded Formulations businesses. Small Molecules, we alluded to the tough, the rapidly changing competitive landscape in the U.S., which impacts our API customers, resulting in sort of a cascading pricing pressure on us. And clearly, from API segment as well as the branded for Small Molecules segment and branded formulations India, when we provided the guidance, of course, that was in dollar terms, and the rupee is, of course, moved since then, and these 2 segments which have a significant rupee-denominated revenue component to it do not benefit from that rupee growth. So I do accept that in a growth segments like Biologics and Research Services, I'm very confident to either meet or even exceed the guidance. In Small Molecules and Branded Formulations, we will do our best.
We'll move to our next question, which is from the line [ Vipul Shah ] from Sumangal Investment
Can you give any color on the current capacity utilization of our Malaysia plant? And what should be our cash breakeven in terms of capacity utilization for Malaysia? Hello.
Yes, so -- hello. Can you hear me?
Yes.
Yes, so we cannot talk specifically in terms what would be the breakeven capacity utilization, but needless to say, at this stage, we have not achieved the optimal capacity utilization. And since this facility is part -- is used -- going to be used for our Glargine sales for U.S. and Europe, a large part of the capacity has been reserved for Mylan as and when they get the approvals in these markets. So right now what sales we are doing is from emerging markets, and it's not going to be a significant utilization of the total available capacity.
Until Mylan gets those approvals, right?
That's right. That's right.
And, sir, I missed your call on Sandoz deal. So can you give me a brief contours of that deal?
So it's a collaboration to develop the next generation for a biosimilar pipeline. It's for a number of molecules. The number has not been mentioned in our disclosure. And what we have said is that both the parties would be responsible for developing the molecules on an end-to-end basis, which would mean the entire development commercial -- the clinical, the regulatory would be managed for the specific molecules by the respective partner. However, the commercialization in Europe and U.S. would be front ended by Sandoz, while for all other developed markets as well as ROW would be front ended by Biocon. In terms of commercials, it's cost and profit share of in the ratio of 50-50.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
My couple of questions on Small Molecule segment. One, when we are seeing a revenue decline of almost about high single digit in this quarter year-on-year basis, how the volumes would have done in that revenue decline?
Yes, The volumes either would be at the same level of last year or would have gone up. The major reason for the drop is the pricing challenges. I think one of the specific examples I can take is Rosuvastatin. Rosuvastatin volumes are doing quite well, but the pricing has significantly gone down compared to last year. So generally, if we look at the -- I mean, this is a statins portfolio or the immunosuppressants portfolio, the volumes continue to do -- well, in our plants, continue to manufacture full steam, the pricing which is impacting the revenue growth or the growth is because of the pricing.
Just one clarity on this. How frequent is repricing of the contracts? Let's say, you are supplying API to a partner, and in the formation level, the pricing has gone down, so immediately, the same quarter, you'll have to reduce the pricing or there is a lag in which you get impacted?
Well, it's a combination of both. So at times, there is an impact immediately during the quarter, and in certain cases, the price negotiations happen on an annualized basis.
Okay. But would you say which is more predominant between the 2? Annual pricing...
Annual pricing, I would say would be the -- most of our contracts would be on annual pricing, but even in those circumstances that we have annual price agreement, if the market pricing changes drastically, then we have seen our customers come back even during the term of the price agreement to get a lower pricing or higher discounts.
That's helpful. Just one more clarity, based on the financial segment or financial that you gave on profitability and capital employed on Small Molecules, roughly we do make -- still make very, very healthy returns of 20% plus on the segment. And Kiran talked about pressure on outlook in terms outlook pressure continuing, is that very high return? Is that, you think, can come down at a certain point or time to high single digit or low double digit? Was it 20% plus we make right now? I think...
We do not expect that. I mean, as I've mentioned in response to one of the earlier questions, that segment results, when you look at, even on an average, let's say, INR 65 crores to INR 70 crores a quarter, that takes you to, let's say, an annualized profits of roughly INR 300 crores. And the total capital deployed for this business is roughly INR 1,300 crores. You're still looking at 20% plus, the ROCE. The only caveat I should add is, this is all the [indiscernible] pricing, I mean, this year, we do not expect any significant change, but if next year, again, if there is a big impact on the pricing, then it could come down a bit.
The next question is from the line of Nitin Agarwal from IDFC Securities.
I mean, initially, you mentioned about the value locking in the Biologics segment. Just if you can't really help us, given the fact that equity is pretty okay and we'll be running into serious cash flows from next year onwards once commercialization starts for our developed market by a single portfolio, what will the motivation for value locking in this business now?
As you know, we have basically also entered into a second partnership with Sandoz. And this partnership is also requires Biocon to develop certain assets from end to end. So we do expect a much larger spend on R&D as we progress and advance these assets. We will also be looking at various cash requirements for CapEx needs of our biosimilars in the future. All these, as you know, are gestational requirements because each of these require at least 2 to 4 years before you can actually commission such plants. So I think all in all, we are assessing our capital requirements. And based on that, we will basically raise capital in the capital markets.
And the only other thing I would also like to add is that one is the fund raise. I mean, the second is also just unlocking of the value. We go to capital markets for good reasons.
Yes. And secondly, in your experience, what's been our -- if you can fairly share, what's been the typical cost which is there for developing a biosimilar product?
I think we have basically indicated that depending on what the biosimilars is, it takes anywhere between upwards of $100 million and $150 million apiece.
And for us, that would be captured to that extent in the gross R&D spend that we indicate?
Yes, if we look at our gross R&D spend this quarter, I think I'd already explained to you that at the gross level, we incurred a gross R&D spend of INR 94 crores, of which INR 53 crores is reported in the P&L, so we actually capitalize an amount of INR 41 crores.
Sure. And lastly, on the trastuzumab in the emerging market where probably we have the marketing rights in a lot of these emerging markets, I mean, how do you see the subcutaneous version that Russia has impacting our positioning there?
When you look at biosimilars, I think it's about affordable access. It's about an emerging markets. I think the number of patients who can afford these very, very expensive treatments that really is about a different mode of delivery, I don't think these are what the Ministry of Health and other -- and the larger part of the population would be able to afford or access. So we believe that in the emerging markets, biosimilars certainly have a very, very major role to play. So we remain confident that biosimilars will be big opportunities in emerging markets.
The next question is from the line of [ Vikram Agarwal ], he's an individual investor.
Congratulations on your tie up with Sandoz. Just a quick question on, as you have a partnership with Mylan and also now a new partnership with Sandoz, so it is key that you take in both the partners and grow the business successfully. So how would you manage the relationship between the 2? Would there be any conflicts or something? And my second question is, I missed the Syngene call yesterday, is that they mentioned in the result that the state-of-the-art Biologics facility has been set up. So how large do you think that opportunity is? And how fast can you ramp that up?
So let me answer your question as follows. First and foremost, Mylan is a very valuable partner and so is Sandoz. As I explained in my con call regarding the Sandoz partnership, our partnership with Mylan is centered around first wave of biosimilars, and these are all near-term opportunities which we are confident will enable both partners to create a lot of value. Our partnership with Sandoz is for the next wave of biosimilars that come off patent post 2025. There is no conflict of interest. We believe that both these partners are extremely important and valuable to us for our future growth and for our biosimilars endeavors. So I believe that these are important partners, and we know how to manage both these partnerships in the way it should be done. In terms of the question that you -- I think what was your next question you asked? It was about Research Services and you asked about their Biologics facility. As you know, they are actually dealing with a large number of pharma companies, and as you know, many of these big pharma companies' pipelines are now moving towards Biologics. Amgen is one of their recent big customers and partners, and I think they have a very strong Biologics forecast. They also have certain Biologics R&D contracts with other companies like Zoetis and others. And I think there is a need for Biologics supply, right, from the clinical to the commercialization stage, and that is what, I think, Syngene is addressing in a big way.
Okay, so could you just share if how quickly could you ramp that facility up and some thoughts on that?
Well, I think Syngene is beginning to get very confident that it can have a very strong business based on Biologics manufacturing and development. And I think they have entered into various contracts, which basically -- which basically has given them a head start.
The next question is from the line of Prakash from Axis Capital.
I did hear Saurabh talking about the R&D being around INR 450 crores to INR 500 crores, current 9 months about INR 300 crores. So just a clarification here that, do we maintain that kind of run rate? And since you also mentioned Sandoz is coming, the collaboration will pick up. So what kind of R&D run rate we'll look forward for '19 and '20, please?
So let me start the comment and then Siddharth will add to it. As I've always maintained, I think R&D is a very integral part of our growth. And we need to invest in R&D, which unlike the generic pharma sector, requires huge investment dollars. Not only is it expensive to develop the kind of products we are developing, but it also is gestational in that it takes several years before you can actually complete the lab-to-market journey. And therefore, the R&D spend should be an indicator of pipeline expansion. And I think it -- actually, it should be viewed positively rather than one of concern.
And I think, Prakash, specifically answering your questions now for the 9-month, the gross R&D expense were INR 283 crores; and for the fourth quarter, let's say, give or take, will be at INR 400 crores. So that would be the guidance for this year. For next year, we do expect the numbers to go up to INR 450 crores to INR 500 crores range.
And secondly, a positive development on Aspart. So at what time frame, I mean, broad level requires for clearing the Phase I and Phase III? And what is the very broad level time frame that we can see for approvals and commercialization for Aspart?
So Prakash, I can't give you a specific frame, but you can see the time frame in terms of doing -- if we had to do like Phase I trials, Phase III trials, depends also on whether one needs to do type 1 and type 2 or just type 2 and things like that. So suffice to say, right now, we believe that this is an opportunity that will pan out in the next few years. And we are working closely with the regulators to see how we can accelerate the parts to approval. So it's too early days to comment on specific time lines at this stage.
Okay. Is my understanding correct that it typically takes 2 to 3 years for clearing Phase I, and then typically 2 to 3 years for Phase III? Is that correct?
Phase I should take lesser time, but Phase IIIs, if required, in the 2 indications, then it should take longer; if it's just 1 indication, it would take shorter.
Perfect. And lastly, on bevacizumab, so would be -- still be in the first wave, we've started seeing some approvals. So I just wanted to understand what could be the broad level time lines here?
We have progressed well on our Phase III trials. And whilst there are other companies also out there, we are certainly amongst the set of companies that are ahead in this.
We'll take the last question from the line of Shradha Patil from Wealth Managers.
Our Malaysia plant is currently approved by how many authorities?
So in terms of the emerging market approval for Malaysia, you know that we've already talked about approvals from the Malaysian authority itself and Brazil. And I don't want to give a color in terms of how many of the countries have approved it. But suffice to say -- suffice to say that Malaysia will be an important contributor to our emerging-market story for the insulin space in FY '19.
Okay. So...
Just to add to -- sorry, just to add to what Arun is saying, this is, of course, an addition to the European authorities approving the Malaysia plant.
Sure.
Correct, correct. So there are more emerging markets which have approved our Malaysia plant?
Yes.
Okay. And are we satisfied with the way that the approvals have been progressing for the Malaysia plant? I mean, from the time we have commercialized the plant?
We've always received approvals in the first cycle, so that does satisfy us. We've got our EU GMP in Malaysia for both drugs substance and drug product. We had the Malaysian authorities approve the product as well as the GMP. We had ANVISA out there and a few other regulators. So I think it's -- we've been going well.
Okay, okay. And could you provide an update on the accumulating ANDA filing?
I didn't get your -- cumulative?
ANDA filing?
No, it's been a small number right now because largely, as you know, that we've been operating through an outsourced model in terms of manufacturing until our own in-house capacity is -- get qualified. So our in-house facility has now been commissioned and used -- so for some of the early trials. And as that happens, we will ramp up our filings for our in-house capacity.
Okay. Now in the light of what Kiran said in one of the previous questions, that we see of a meaningful contribution from the [ complex business ] starting from maybe 2020 or 2021. So in between this period from now till then and in the light of the pricing pressure that we are seeing in the statins business and also the consolidation, what is our outlook on this business, keeping aside the ANDA on the Small Molecule?
Yes, so if we look at our long-term growth that we have given as guidance sometime back, the growth was in the -- either the high single digit or the low double digit kind of a range. That is what we expect to see until some of these new product approvals and ANDA launches happen.
Okay, okay. That would be helpful. My last question is what is the reason for the sequential drop in the Branded Formulations business this quarter?
I think we mentioned in the call last quarter that there was a one-time rebound because of the GST. Remember, the Q1 was very low. So this is now more normalized run rate.
This is a more sustainable run rate that we should see?
Yes.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Saurabh Paliwal for closing comments.
Thank you, Margaret. Thank you for joining us on this call, ladies and gentlemen. If you have any further questions or even any clarifications, please do reach out to me. Have a good day.
Thank you. On behalf of Biocon Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.