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Biocon Ltd
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Ladies and gentlemen, good day, and welcome to Biocon Limited Q3 FY '19 Earning Conference Call. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Saurabh Paliwal from Biocon Investor Relations. Thank you, and over to you, Mr. Paliwal.
Thank you, Janice, and good morning, ladies and gentlemen. I welcome you to Biocon's earnings call for the third quarter of fiscal '19.Before we proceed with this call, I would like to remind everyone that a replay of today's discussion will be available for the next few days, about an hour following the conclusion of this call. The call transcript shall be made available on our website in the coming days. To discuss the company's business performance and outlook for this quarter, we have today with us the leadership team at Biocon, comprising Ms. Kiran Mazumdar-Shaw, our Chairperson and Managing Director, other colleagues from the senior management team.I would like to take this opportunity to remind everyone about the safe harbor related to this call. Today's discussion may be forward-looking in nature based on management's current beliefs and expectations. It must be viewed in conjunction with the risks that our business faces that could cause our future results, performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements. After the end of this call, if you need any further information or you need any clarifications, do get in touch with me. With this, I would like to turn the call over to Ms. Mazumdar. Over to you, ma'am.
Thanks, Saurabh, and good morning, everyone. And considering that we are still in January, I'd like to start by wishing everyone a very, very happy and prosperous 2019. I would like to start with key highlights for the quarter. European Commission accorded approval to our biosimilar for pegfilgrastim, Fulphila and to our biosimilar trastuzumab, Ogivri, which is being jointly developed by Biocon and Mylan. Semglee, our biosimilar insulin glargine, also codeveloped with Mylan, was launched in the EU during the quarter. Mylan also commercialized biosimilar adalimumab in-licensed from Fujifilm Kyowa Kirin Biologics in the EU, in which Biocon received economic benefit. With this, we now have received 3 biosimilar approvals in the EU and have an indirect economic interest on a fourth molecule. Our biosimilar insulin glargine was also launched in South Korea through a local partner as Glarzia. As part of our generic formulations foray into the United States, Biocon launched Atorvastatin Calcium tablets in the U.S. market this quarter. I will now present key financial highlights for Q3 FY '19. Total consolidated revenue for the quarter was INR 1,566 crores, up 43% as compared to last year. The revenue from operations were INR 1,541 crores, which grew 46% as compared to last year. This includes licensing income of INR 7 crores this quarter as compared to INR 12 crores in Q3 of last fiscal. From a segment perspective, the small molecules segment revenue was INR 469 crores, up 27%. Biologics reported revenue growth of 136% to INR 449 crores. Branded Formulations sales were at INR 212 crores in Q3, up 36%, and result services revenues was at INR 467 crores, reflecting a growth of 20% compared to last fiscal. We incurred gross R&D spend of INR 106 crores during this quarter, corresponding to 10% of revenue, excluding Syngene. Of this amount, INR 77 crores is reported in the P&L. We capitalized an amount of INR 29 crores related to our biosimilars and insulin analog development expenses. The gross spends are higher than last year, primarily on account of increased spend in biosimilars and insulin analog development programs. We booked a ForEx loss of INR 28 crores this quarter as compared to a INR 7 crores gain last fiscal. This loss is reflected in other expenses of the profit and loss statement. Based on strong operational performance, EBITDA grew 59% to INR 406 crores. EBITDA margin for this quarter was 96 -- was 26% as compared to 23% in the corresponding quarter last year. The improved performance was driven by a higher contribution from the Biologics segment, driven by high margin biosimilar sales. The growth in margins is despite a ForEx loss, underlining strong operational delivery. Core margins, that is EBITDA margins net of licensing ForEx and R&D, improved from 27% in Q3 last year to 32% this quarter. Net profit for the quarter increased from INR 92 crores last fiscal to INR 217 crores this quarter. This includes an exceptional gain arising on account of changed fair value of antidilutive rights in our investment in U.S.-based Equillium. Adjusting for the exceptional gain and associated tax, net profit for this quarter was INR 211 crores, reflecting a gain of 130% with a net profit margin at 14%. Thus, as you can see, we have had a strong delivery, financial delivery this quarter, and I am pleased that we have delivered the highest ever revenue and profit growth in absolute terms.Now coming to analyzing our businesses on a segment basis. Small molecules grew 27% over last year, led by a strong sales of core APIs and continued growth in our Generic Formulations business. A better product and customer mix resulted in robust API sales in various global markets. We successfully launched Atorvastatin Calcium tablets in the U.S. market this quarter. And this launch, along with traction in previously launched Rosuvastatin and Simvastatin formulations have helped the generic business deliver strong growth, contributing to the overall growth of the Small Molecules business segment in Q3. Coming to Biologics. This segment was the strongest performer, with revenue more than doubling from last year, growing 136% year-over-year. Segment margins saw a huge improvement year-on-year. A negative single-digit percentage last year has now transformed to a solid 30% during the quarter, thereby contributing to the consolidated margin improvement.Our biosimilar pegfilgrastim, Fulphila, launched by our partner Mylan in the U.S., continue to gain traction. And along with continued performance of trastuzumab in key emerging markets led to a strong performance for this segment. The performance of insulin was led by sales in Malaysia and markets in Latin America. During the quarter, Fulphila, which is our biosimilar pegfilgrastim, received a Notice of Compliance from Health Canada's Biologics and Genetic Therapies Directorate. With this, Fulphila is now approved in the U.S., EU, Canada and Australia. Ogivri, our biosimilar trastuzumab, also received regulatory approval in Australia. Additionally, we received regulatory approvals for biosimilar trastuzumab in various other emerging markets. As you can see, our biosimilar strategy is beginning to pay off with the launch of our biosimilars in the U.S. and EU. And we are greatly encouraged by the recent regulatory approvals of other key biosimilars in global markets. We are committed to play a significant role in enhancing access to our high-quality affordable Biologics for patients across the world.Now coming to Branded Formulations. The revenues for the segment, which comprise sales, product sales both in India and UAE increased 36% as compared to last year. However, I must explain that this was largely on account of sales in the UAE due to channel stocking. And going forward, we expect growth in this segment to be in the mid-teens. Performance in India was led by the Metabolics, Nephrology Immunotherapy and Market Access divisions. During the quarter, we introduced our biosimilar trastuzumab under the brand name CANHERA in UAE, and this is also expected to contribute to growth in the further -- in the future. Research services had another strong quarter, reporting a growth of 20% over last year. The growth during the quarter, was driven by good growth in discovery services and increased traction in the Biologics business. During the quarter, Syngene commissioned a new dedicated facility for Baxter and extended its collaboration with Merck KGaA with a widened scope of engagement until 2022.Now let me give you some product development updates. An update on the novel portfolio. Our partner Equillium received U.S. FDA fast track record designation for EQ001 or Itolizumab, which is our out-licensed anti-CD6 molecule for the treatment of acute graft-versus-host disease. Equillium is planning to initiate a Phase Ib/2 clinical trial in early 2019 called the EQUATE trial, which will evaluate EQ001 for the treatment of patients presenting with acute GVHD.So in conclusion, I would like to say that we have delivered a robust financial performance to date. We have witnessed all-around growth across our business segments with Biologics doubling year-on-year, while the core segments of Small Molecules and Research Services also have registered robust growth. Year-to-date, earnings have more than doubled led by the Biologics segment, driving high-margin growth, demonstrating significant improvement of our quality of earnings. We expect to continue this momentum across all our business segments into Q4 and end FY '19 on a strong note.With this, I would like to open the floor for question and answers. Thank you.
[Operator Instructions] We take the first question from the line of Ronny Gal from Bernstein.
If you don't mind, I have 3 of them. The first one is under Herceptin biosimilars trastuzumab. Your U.S. label does not include all the indication of trastuzumab. I'm assuming this has to do a little bit with the IP issues. Would you be able to market the product for all indications per your settlement with Roche? Or is this something that we should expect to come to market more gradually, one indication at a time until their patent expires? Second, I was wondering if you can break for us the growth, the sequential growth you've had between the September quarter and the December quarter in your Biologics segment between Europe, United States and rest of world. It's kind of helps us think about where the growth might be. And second -- and third, Kiran, if you don't mind, a bit more of a strategic question, we've heard a few companies suggest the U.S. market for biosimilars is not worth developing drugs for. And indeed, we have seen a reduction in number of programs pending before the FDA. So with respect to Biocon, is the U.S. market still viable? Are we in a wait-and-see position how it will develop before committing to further clinical development? Where do you stand on this idea of developing more novel biosimilars to the U.S. market?
Ronny, let me start by answering your last question, and then I'll sort of ask Paul and others to pitch in on the other question. As you know, Biocon is very committed and encouraged by the kind of noises and voices we are hearing about the absolute need for developing biosimilars to basically help you -- help the U.S. with the balancing its own health care spend. And I think they do see biosimilars as a very integral part of health economics as it did with generics. So I don't see any headwinds for us in terms of developing biosimilars for the U.S. market, and we continue to remain very, very committed to increase and expand our pipeline of biosimilar products under development both with Mylan and with Sandoz. And of course, we will also have our own portfolio going forward. So I don't think we are seeing any kind of negative signals from the U.S. market. And as you know, Biocon is also focused on a few novel programs, and I think this is something that we've always adopted strategically to have different kinds of businesses. Novels is still a very nascent business for us, but I think -- as you can see, I think biosimilars is an extremely strategic market segment for us, and we will continue to invest in this. And we believe that we have some early-mover advantage. Now why are the people are opting out of this business is something I cannot comment on. But as far as we are concerned, we remain firmly committed. So I hope that sort of answers that part of your question. Now coming to your first question on indication, I think I should remind you that ODAC actually has approved the drug for all indications extrapolated from the clinical data that we have done, so I think we are -- as far as we are concerned, we are approved for all indications. And...
Q2 to Q3...
The Q2 to Q3 obviously is about some -- the sales that we have made not just in Europe, but also, I think, we've had some really good upsides from some of the emerging markets sales. And that's why I think you're seeing the big jump. Equally, I think, you're going to see moving forward, as you know, trastuzumab now is ready for launch in Europe. We, of course, launched our Semglee in Europe last -- this quarter. So these are some of the reasons why you're seeing that jump in performance between Q2 and Q3.
We take the next question from the line of Prakash Agarwal from Axis Capital.
Ma'am, first question on the biosimilar sales. You mentioned that across line items, we'll continue to see the growth momentum. So understanding this Biologics piece growth better, so during the quarter, would we have significant amount of trastuzumab -- sorry, the insulin, which we have launched, and also for the ongoing quarters, is coming from the insulin and the trastuzumab in Europe?
So let me answer your question by saying that we have a biosimilars portfolio, which, of course, trials insulin and mAbs and pegfilgrastim. And pegfilgrastim, as you know, has already been launched in the U.S., and it continues to sustain its momentum in the U.S. When it comes to trastuzumab, you will start seeing numbers being reflected in Q4 and onwards. And then you're going to see, of course, the Semglee sales also being reflected as a part of the Biologics business in -- it was only reflected last quarter, but it will also continue to get reflected as we go forward. In addition to that, as you know, we have a very large Insulins business in emerging markets and we have a growing presence in terms of our monoclonal antibodies biosimilars in emerging markets as well. So all these collectively is really boosting sales. And as you know, regulatory approvals keep coming in. So as new regulatory approvals come in, we are able to enter new markets. So overall, we are seeing very good traction in our Biologics biosimilars business.
I understand that. I was trying to understand on the gross margins side. Since Europe launches and emerging markets also picking up significantly, the last quarter Q2 that we saw 66%-plus gross margin due to pegfilgrastim in U.S. would be the function of profit shares which keeps coming on in, say, quarter or 2, and we see improving gross margins from here? Or this is the gross margin one should look going forward as well?
So Prakash, gross margins are quite stable compared -- in Q3 compared to Q2 both if you look at the fact sheet. It's roughly around 61.5%. So I don't see any change now. In terms of going -- on a go-forward basis, would the gross margin improve? Yes. As we move forward and have more launches in the developed markets, the gross margin would improve for the Biologics segment and which would have a positive impact on the consol gross margins.
From this base also we're expecting some improvement is what you are saying?
That's right.
Okay. And lastly on the R&D and tax rates. So R&D, we were expecting it to inch up but it's been flat. So is it a timing issue and we do expect any ballpark guidance on the R&D for the year and next year and for the tax rate also?
Yes. So the R&D expenses would definitely phase up. We have said that it tends to be lumpy dependent on how the programs are progressing and how many number of programs we process. So on an overall basis, the R&D expenses that we have had at a gross level for the 9-month period has been at INR 314 crores. I would expect the year to be around INR 450 crores. And for the next year, obviously, the expenses would go up as some of our SANDOZ pipeline molecule-related expenses start inching up, while we see benefit of some of the expenses on Mylan collaboration products going down. But we will also have expenses for our novel programs and our small molecule ANDA programs. So from an overall perspective, next year, we should be over INR 500 crores in R&D at the gross level.
In that case, sir, why particularly low and is this the new normal?
No, I would not say it's a new normal. On a cumulative basis, we had roughly 19% tax rate for the group against the guidance of 23%, 24% earlier. We do have some benefits that we have gotten, the CapEx that we have done for which we get 35 EAC benefit. We also got benefit on some of the carryforward losses we had in our U.K. entity, which is now returning profitable because of the profits that we are receiving from launches in the emerging and developed markets. And I would say that for the next year, you should factor in 22% to 24% of the tax rate at the group level.
Next question is from the line of Damayanti Kerai from HSBC.
My question is regarding Fulphila. So if you can indicate the progress in the U.S. market in terms of like how much market share we have gained so far, and how we are looking for strategies to grow further from here. So that's my first question.
So in terms of Fulphila market share, I can -- we can say that we are tracking to plan. There's been good growth month-on-month in terms of the market share gains. So I think it's going exactly as we had anticipated it to.
Sir, any number which you would like to share?
Obviously, the numbers are there in the public domain, from the data at IMS or Bloomberg. And I will direct you to use those publicly available numbers. I think we have indicated that as we cover market of syringes, we are seeing traction month-on-month. And I think from -- I think we're -- at this stage, we are somewhere in the mid-teen.
Okay. My second question is regarding our launch preparation for Ogivri. And has there been any change from our previous strategy given that now we have 3 approved biosimilar for Herceptin in the U.S.?
You're talking about launch in the U.S. or launch in E.U.?
In the U.S.
The launch in the U.S. will track as per plan, and the plan is determined by the settlement between Roche and Mylan. It will go as per that plan.
Okay. But now like, with 2 more additional approvals, we are not changing any strategy compared to what we have earlier indicated or we have taken on?
The competition in the biosimilar landscape has been known to everybody in -- for quite some time, so it's easy to track that based on the progress in terms of Phase III trials and FDA approvals. So the competitive landscape in terms of who the key players are in key geographies is known and baked into our strategy and plan.
Okay. And my last question will be on Small Molecule growth. So one of the reasons we mentioned in the press release is that it's due to increase in API sales to India-based customers, who are delivering to the U.S. market. So what kind of products are these which still increase in demand? It's like more commoditized or with a niched kind of product? And are these mostly short term content or we have something in sustainable way also?
I think the product -- if you look at Biocon's product portfolio, basically, it comprises of products where the competitive landscape from an API perspective is not because our focus is largely on fermentation-derived molecules like the immunosuppressants and a few of these statins and Orlistat and products like that. Of course, it also has a few key synthetic products and differentiated complex products. So clearly, the growth has come across both our portfolio of statins and immunosuppressants both to India-based clients, who then formulate and have their NDAs in the U.S. as well as to other customers. So our Small Molecule strategy is anchored very much to our product portfolio strategy of carving out the differentiated part of our portfolio based on immunosuppressant and fermentation-based APIs and the like. And clearly, we see this as continued business, and we continue to see strong traction, both in our older APIs as well as in our newer APIs.
Next question is from the line of Harith Ahamed from Spark Capital.
On the U.S. trastuzumab launch that you talked about, now that there are 2 other players with approval, did you expect competition at the time of your launch? Or does your settlement give you some kind of exclusivity for a certain period in the U.S. for trastuzumab?
As we are privy to the Mylan, Roche settlement in terms of the timing, we are not privy to the timing of a competition. So clearly, I cannot answer that question as to what -- but rather, in response to a previous question, I mentioned that our assumption is that we know who the competition is for quite some time. The exact timing of their approval and launch depends on their progress and development. But clearly, competition is baked into our strategies and plans.
All right. And the biosimilar insulin Glargine launch in Europe, can you talk a bit about the progress so far and the early response on the countries you've launched and what's the kind of market share that we are targeting?
No. At this stage, we cannot give you color in terms of the specifics, except that we had a recent launch of the Semglee in Europe. We can't be specific in terms of -- at this stage, in terms of specific countries and specific market shares in those countries.
All right. And last one from my side. Can you give me CapEx number year-to-date, excluding Semglee, and the guidance for full year FY '19?
I'll ask Siddharth to respond to that.
The year-to-date CapEx for Biocon has been roughly INR 400 crores. And we expect to end the year around a little over INR 500 crores for all the projects that we are currently working on. Obviously, the spends would continue in the coming fiscal year.
We take the next question from the line of Shyam Srinivasan from Goldman Sachs.
The first question is on the strategy. Like you said, mid-teens now market share on your last biosimilar. If I look at for the other biosimilars in the U.S. so far, they have been struggling at 7% or so, especially for the, say, the REMICADE biosimilar. So what explains our success of having getting much higher share in a shorter period of time? This biosimilar, REMICADE, have been there since 2016. So is there something different about the drug or the innovator response, which is helping us so much? That's the first question.
Number one, I think any such early gains and all are clearly due to Mylan's strong presence in the U.S. Mylan drives our commercial strategy, and I would say it's -- I would attribute it to Mylan. The second thing I would point out is that when you compare and contrast launches for different products, I would say you need to broadly factor in, I think, there are specifics around each product that innovator different strategies may be different. The therapy segment may be different, something may be diabetes, something may be immunology, something may be oncology. So all of these dynamics play in terms of the channels to which we market this product, the segment, which we're operating in and, of course, the innovator response.
I don't know, sir, would that be one or our thinking that it's running, say, in the case of Neulasta, it's more acute settings, was chronic settings in REMICADE, would -- is there something that explains this in one factor? Or you think it's like a combination of many things?
So certainly, the fact that acute settings do not depend on switching to gain mix rapid progress in terms of market share helps the segments, which are more in the acute therapy. That's certainly a factor in favor.
My second question, I don't know if I heard Kiran wrong, was it saying trastuzumab in developed markets we are preparing in 4Q '19? Or did I mishear that at all?
No, I think Kiran was referring to the Europe, EU.
Okay. So there's a potential EU launch soon?
Yes, yes.
And this could be ahead of the -- what are the global. I thought the global settlement part was all...
It's tracking to global settlement.
Got it. Okay. And last question is on the Lantus in the U.S. Some of the patents have now expired. Can you just refresh on what the time lines on Lantus would be? Would it still be post 2020? Can you just give us some color there?
Yes. We are on track. There's no change in the stated guidance in terms of the 30-month stay as well as in terms of our timing to respond to the FDA's queries on the bridging study. We are tracking to the time lines previously stated.
Got it. If I can squeeze last one. Other expenses, even if I strip out INR 28 crores of FX losses, had sequentially jumped significantly to about, say, INR 200 crores or so. What is -- I'm looking from the factsheet. What explains our non-FX jump in other expense?
Well, Siddharth can give you color on this. I think at a high level, as you know, other expenses would have the ForEx component in it, in expenses. And as well as there is a component of -- whenever we have cost and profit share relationships with the partners, there is the element where we remit the profit -- our share in the markets we market to the partners. So it's a combination of all 3.
Next question is from the line of Surya Patra from PhillipCapital.
Sir, just wanted to have a sense on the future pipeline, biosimilar pipeline. Sir, in that, one of the long-awaited product is the rh-Insulin. What is the progress there for the U.S. market? And what is the time line that you can indicate now?
So clearly, I think if you look at the comment in the insulin, especially in the U.S., it's all been extremely favorable and supportive for the need for affordable insulin in the U.S. And we are clearly very much an active participant in this whole discussion about how do we get our rh-Insulin fast tracked in terms of regulatory approvals and launches in the U.S. You know that we have previously announced that we are in partnership with the Mexican company, Lab PiSA, for the U.S. rh-Insulin. And clearly, our development is tracking to that. Whether this development can be accelerated in light of the favorable commentary from the U.S. government and regulator is something that we are closely watching and actively participating in.
But is there any time line in -- like 2020 opportunity or beyond that?
I would say it's probably about -- I mean, if things go, our baseline model might be about 2 to 3 years. But if anything gets fast tracked, we can see if that is possible. But right now, the baseline, I would say, is about 2 to 3 years.
And regards to the adalimumab, any -- so what want to clearly believe about the U.S. launch, possibly -- and -- so anything on that, it would be good -- great...
So Mylan has previously disclosed their settlement with AbbVie, where the U.S. launch of adalimumab will not happen before somewhere in the middle of 2020.
Sir, it's July 2023.
Yes. So nothing will happen prior to that.
Okay. Fine. And a couple for these bookkeeping items that I wanted to know. Sir, this Branded Formulations business, the way that we have witnessed a strong traction here. So here, I just wanted to understand how the revenue is booked since that is a JV. So the -- just the profit share would be coming in as one line item, that is one. And also, we are seeing a traction in the revenues. So how is that booked? That is one about the accounting fact. And secondly, the economic trend just from the adalimumab for European market, where is that factored -- getting factored in -- which line item that is getting factored?
So Surya, we've had a 9 months growth in Branded Formulations of 13%. And even though this quarter was up 37% growth compared to last year and 29% growth compared to previous quarter, I think we have alluded to that for the full year, we would still track to a mid-teen kind of growth. So this quarter, we had a channel -- higher sales to the channels in U.A.E., which was then, as you know, a onetime kind of increase. So we shouldn't really take that as a new normal and look at the overall growth levels. Now in terms of the revenue recognition, we -- when we sell to our partner -- from U.A.E. entity sales to our end customer, the top line is booked in our top line -- in our revenues for the segment.
Okay. It is a manufacture and supply revenues that we book here, and the profit sales that comes for the revenue were based in there?
Yes, that comes through the JV line.
Okay. And regards to that economic interest over adalimumab, sir.
Yes, it's in the Biologics revenue line.
Okay. And sir, can you give some sense about the Malaysia plant. Now how is that, whether it has achieved a breakeven. And so considering that, what is the -- are we aware of the other expenses that is going to be in the subsequent period, let's say, next year?
So the facility, what we had said at the beginning of the year, while we had a small loss last year, we still expect to be breakeven. I think we will not break up the entity level P&L on a quarterly basis. Once the full year numbers are published, the numbers will be on our website where you can see the numbers. But we are on track to be around that breakeven number. So given that we have one more quarter to go, Mylan has recently launched [ NV ] in the Europe and the fourth quarter numbers are still to come in. So I would say that, yes, we are on track. In terms of the expenses, I think again, we had mentioned that the fixed expenses, including depreciation and interest for that facility is to the tune of $50 million. Next year, obviously, these fixed expenses would go up in line with the cost increases that would happen for all the operating expenses there.
But that would be much lesser than the revenue growth that we can see from that base?
Absolutely. Absolutely.
Yes. And just last one question. So on the CapEx, given the 200 -- about $200 million kind of CapEx of Syngene and our own growth CapEx that we are planning. So next year, what is the CapEx -- the consol CapEx that it could be?
Well, I would not comment on Syngene and you should direct Syngene CapEx guidance questions to the Syngene management.
Yes, yes. So that is my answer. So about Biocon put together on consolidated basis.
Yes. So I would say that last 2 fiscal years, Biocon's CapEx has been approximately INR 600 crores. This excludes the intangibles that we capitalize for the R&D expenses. And on a go-forward basis, I would expect, let's say, for the next fiscal, the same level of expense will be there.
We take the next question from the line of Nitin Agarwal from IDFC Securities.
Sir, 2 things. One is on the biosimilar sales in emerging markets. Like they're -- typically, they're in the developed markets. Would they be linear? Should we assume like a linear progression in this business? Or there is going to be a large-ish component of tender sales, where there could be lumpiness from a quarter-to-quarter basis on an overall basis?
Yes, there are some businesses where you can expect a fairly linear sale. For example, we have the offtake agreement in Malaysia, which has a far greater degree of predictability. So wherever the markets have a component of a strong proportion of retail business, it tends to be far more predictable, where it is tender because there -- and our current revenue mix is a mix of both tender and retail in emerging markets. So there is that element of unpredictability in tenders. But there's unpredictability in tenders, for a specific tender. The tenders are not like for a short duration like 3 months or 6 months. If you get a tender or you don't get a tender, it usually translates to a full year or a 2-year period.
And then what will be typically qualitatively a split? It's more skewed towards emerging markets, towards tender in general? Or it's more towards regular linear sales?
The emerging markets are a little bit -- but what happens is that since we have diversified the risk by being present in multiple countries, the granular level of lumpiness doesn't reflect in the emerging market sort of consolidated number. So because we have multiple products and across multiple countries and some countries have more than one tender.
Okay. And sir, on the point -- the scale-up that we've seen in the Basalog business, obviously, peg in U.S. would have contributed and there's obviously been a [ pre-saw ] in -- a pickup in momentum even in the emerging markets over the last couple of quarters. But it's largely -- from a product perspective, it's largely trastuzumab in emerging markets which has driven up the numbers, contribution of emerging markets. Or there are more other biosimilar [ like trastuzumab ] which have contributed meaningfully over the last 2 quarters.
I think Insulin Glargine and trastuzumab is where are the biosimilars sort of portfolio in the emerging markets is currently focused on. And so clearly, all of these are tracking -- doing well across all the 3 molecules. So I would say there's a contribution from all molecules. A specific molecule may contribute differently in a specific country. But at an aggregate emerging market level, all 3 have contributed significantly.
So that on these other expenses issue that we have talked about earlier, I mean, is it fair to assume that as the Biologics sales increased, I mean -- so is it fair to say that increase in other expenses is kind of linked to the increase in Biologics sales and as these sales sort of keep picking through, we'll keep having a proportionate or kind of some sort of increase -- linked increase to our other expenses also?
That's correct. So other than the ForEx, the other selling expenses and profit share will be directly linked to the sales increase and did not necessarily linearly link, but yes, there -- as the sales go up in the coming years and coming quarters, we would see an increase in the other expense line.
Next question is from the line of Dheeresh Pathak from Goldman Sachs.
Just understanding the other expense again. So the ForEx element is how much? And this is in Biocon books, right, not Syngene?
So the consol ForEx last -- during the quarter was INR 28 crores. And all of that actually did come from Biocon.
Okay. And the nature of this is ForEx debt? Or it is current liabilities? Or what is it?
Current assets and liabilities we stated at the December exchange rate. As you know, that in September end, the dollar was tracking around INR 74 compared to almost INR 70 in December, so that INR 4 movement led to a loss. Now on a cumulative basis, you should see that while we had also gain in the first 2 quarters, as the rupee had strengthened, then on a cumulative basis, we have on a INR 35 crores positive ForEx gain.
Okay, understood. And sir, you also said that profit share you are showing in other expense. Can you just expand on that? Like which markets are these? And can you just expand on that a little more?
We cannot break up by markets. But as Arun said that these are -- wherever we have multiple partners, including Mylan wherein we lead the sales and then we share the partner share of profit and which is booked in the other expense line.
Sir, my understanding was whenever we have entered into a partnership, it is mainly for marketing expertise of the partner. But you're saying you are marketing -- so you are sharing with the partner forward because manufacturing is done by Biocon, as I understand. So partner is getting -- and typically, partners are front-end partners, if my understanding was correct. So...
So it is Mylan [indiscernible]. So Mylan is a major component of this. In certain territories, we -- in certain emerging markets where we sell and when we share profits with Mylan.
Oh, you sell, you share profits with Mylan. Understood, understood. And sir, one other thing, last question. The intangible under development, if my understanding was correct, they were mainly linked to Herceptin and Glargine. Now you've commercialized both in certain markets, not obviously the largest market, which is U.S. So have you allocated certain cost and you are depreciating them? Or the full cost is linked to U.S. and you will amortize when you get the U.S. approved?
So just to correct, it's Glargine, trastuzumab and bevacizumab, cost to capitalize for these 3 molecules. We have started amortizing cost for Glargine in Europe since Mylan has launched. It also includes, by the way, the amount that -- our share of amount paid out to Fuji in Japan for in-licensing adalimumab for which again, the amortization has started. For trastuzumab in Europe, since the launch is planned in this quarter, quarter 4, the amortization will begin in quarter 4. And for U.S., the launch is the next fiscal year. So once the launch happens, the amortization would begin. But I should also say that while the depreciation or amortization is one aspect, you should understand that we continue to incur cost on the program even after they are approved in the U.S. and Europe because of the commitments given to the regulators and certain additional trials we need to do post-approval to generate data. Now those costs also get capitalized.
Okay. But bulk of the cost and in your allocation, if you allocate region-wise, let's say, on a molecule basis, region-wise, they would have been to the U.S. market, right? Is that fair enough?
Absolutely. I mean you would -- the way we break -- split it up between U.S. and Europe is based on the market size of the drug. So typically, you'll see a 2:1 or a 3:1 allocation between U.S. and Europe for most of our biologic drugs.
We take the next question from the line of Charulata Gaidhani from the Dalal & Broacha.
My question pertains to the outlook for price erosion as more and more players enter the biosimilars market with trastuzumab already having 3 approvals.
So what I would say is that clearly, all our strategy in terms of pricing, in terms of strategy to gain market share are factored in this. Now I cannot give you an outlook other than saying that yes, in the biosimilar or generics space, prices don't tend to go up. But in terms of -- it's a fact that over time prices would come down. Now if your question is, how rapidly will they come down? I think it really depends on markets tenders or retail and number of competitors out there and the psychology of the competitors, whether people are keen to gain volume at the cost of eroding value or where people want to sustain market share. So it's a very dynamic play. It's too early to have it, I guess, in terms of specific guidance. I don't think there's enough experience out there unlike the ANDA business because it's exactly what the trend would be.
Just one thing that I would like to add specifically for pegfilgrastim in the U.S. as you -- Novel and Mylan launched the product date, announced the discount to the innovator and CANHERA which recently got the product and approved and launched the drug in the U.S., also publicly announced that they will be -- their WAC will be at the same level as Mylan. So you can see that in the initial year, that no 2 molecules would have a similar level of pricing as well as the competitive dynamics are concerned. So each molecule with different number of players might be very differently.
Yes. And my second question. Can I have the sales and PBT from Malaysia?
I have mentioned earlier that we do not break up at an entity level on a quarterly basis. Once our annual accounts are audited, the annual accounts are published for stand-alone subsidiaries on our websites. So by May of 2019, you'll get the detailed financials for Malaysia on our website.
And just like you mentioned for BFI, mid-teen growth on an annual basis. What would be a sustainable growth for small molecules?
So the small molecules, 9-month growth has been at 20%. I think in Kiran's closing remarks, he had alluded the performance that we have witnessed year-to-date is something that we can expect going into quarter 4. And beyond quarter 4, for giving a guidance for next year would not be possible at this time.
Next question is from the line of Ranjit Kapadia from Centrum Broking.
My question relates to pegfilgrastim. What is the market share in the U.S.? And how many players are there? And the second question relates to in licensing of products in the U.A.E.? And how is the scenario for Januvia and Janumet.
Sure. On pegfilgrastim, we know this is a $4 billion to $5 billion market overall with most of it in the U.S. Currently, there are -- in addition to the originator product, there's ourselves and one more biosimilar in the market.
And in terms of in-licensing products from Novartis, you mentioned Januvia and Janumet. They are doing quite well. Our brand is Jalra.
No, we don't have -- I just want to clarify that our products that we are marketing in U.A.E. is not Januvia. We have bought Vildagliptin under the brand name Jalra, and that's doing fairly well. And we will continue to look at in-licensing products for the U.A.E. market.
And any possibility of increasing this business in the U.A.E.?
I just mentioned that our trastuzumab got approved, and we will be launching that trastuzumab under CANHERA brand name. And we expect that also to have a good contribution to our U.A.E. business.
Next question is from the line of Sameer Baisiwala from Morgan Stanley.
Can you again refresh us on the Glargine for the U.S. market? You mentioned about addressing the CRM as well as completion of bridging studies for the site switch.
Yes. So Sameer, I think what I mentioned is that whatever we had stated in our previous quarter continues to remain true. We are on track in terms of the bridging the manufacturing site from Bangalore to Malaysia. The information requested by the FDA, we are on track in terms of developing and timing or submitting that data. And of course, as you know, finally, the 30-month stay, that's also continues to track as per previously stated time lines.
What I'm asking, I guess, is when you say it's on track, what is the time -- I mean, are you looking at 1 quarter later or 2 quarter later to submit the data for both CRL and bridging studies?
So Sameer, the 30-month stay extended into to March 2020. So we are tracking to that. And we have been working with the FDA under the agreed guidance. And we are bridging studies, are tracking to finish in time, so that we can be in time as soon as the 30-month stay is over.
And then you say that, you mean to say you'll get the approval at the end of 30 months?
Yes.
Yes, that's what we are tracking for.
Okay, super. And second question is on bevacizumab. When you expect this market to open up in the U.S.? And second, do you think you could be in time for the first wave of launches?
So I think I -- this is Paul. I wouldn't want to comment very specifically on that since, I think, Roche has talked about settlement discussions being in various stages and not being able to comment specifically there. I think there are many moving parts there. I do know that they have mentioned various things in 2019, but that there are settlement discussions in progress. So I think we'll leave it at that.
And when you say the settlement discretion, you were referring to others or yourselves?
I'm just referring to Roche's general comments. Nothing -- I'm not saying anything specific -- I won't make any specific comments about us. I'm just referring to -- just repeating Roche's comments.
Okay. And the third question is on Humira. For your own product, have you developed both the low concentration and the high-concentration product? That's not [ in mg but by 0.4 ml ] is the one I specifically am asking for.
Right. So right now, the launch is with the lower concentration product.
Yes. But do you intend to earn -- develop the higher one as well or...
Yes.
Yes. I think that would be in development, but we won't give specifics about timing about that now.
Okay, great. And just one final on the capacity side. I think in general, the company has mentioned that you aim for 25% market share, and that's what you are geared for, your capacity are geared for. Now then for Fulphila, you are hitting mid-teens or maybe high-teen market share, do you think you can take it above 25% or your capacity could be a constraint there?
So I think what we have said is that we always have to align capacities to our market plans, and we don't build on our capacities upfront across our portfolio. We build them in a modular way, and that applies to all our programs. And we continue to track to ensure that our capacities come online as we gain market share or as we get approvals in other countries. So I really can't be more specific than that due to competitive reasons.
Okay, which means you will not get capped at 25% market share for Fulphila if there's a market opportunity.
Yes. So as I said, I don't want to give a specific answer. All I am saying is that capacity plans dovetail to our anticipated market plans.
Okay. And just final, Sid, on the new mAb facility, when do you think -- when do you expect that to get commissioned?
So I think we would be looking at commissioning the facility in '21, in the year 2021.
We take the next question from the line of [ Ravi Shan ], individual investor.
Just one quick question. So I think in 2014, you guys have put up a 5-year plan with targets for FY '19. I was just wondering, are you guys going to do the same thing again in terms of stating your vision for the 5 years coming up?
We have not yet made a decision. We will let you know by -- once we closed this fiscal year if we're going to give guidance, so expect a number guidance for the next 5-year period.
Next question is from the line of Nitin Agarwal from IDFC Securities.
So in the past, we talked about value locking the biosimilars business. There are 2 things. One is, a, with the biosimilars revenues and profitabilities sort of contribution [ fee ] picking up and, at the same time, our R&D expenses are likely to go up, I mean do we still see a need for value locking in this business as a means to fund for our future growth in biosimilars?
Yes. We are in investment mode. We have been investing heavily, as you know, in the CapEx and R&D. And as our collaboration with Sandoz, and as we develop also our own pipeline, definitely, the investments on a go-forward basis would go up. Though we have a debt on our balance sheet, we would look at equity also for our Biologics business either in a form of a private equity or in a form of an IPO at a future point in time.
And Siddharth, just probably on housekeeping. In these segments, you know, you carve out your business into segments and give us some sense on the EBIT number which is pretty helpful. Just one thing, in the current quarter, there's a pretty large amount sitting in other unallocable expenses.
Yes.
What would that be?
Those are INR 28 crores of ForEx expense. If you take that out, it is the -- the expenses on a quarterly basis is somewhere between INR 45 crores to INR 50 crores at a consol level. Last quarter, if you actually look at quarter 2, it was INR 13 crores because we had a ForEx gain of [ INR 29 crores ]. So when you add back that, you'll have the same number of INR 45 crores of unallocable expenses, which primarily has expenses like depreciation, corporate cost, other unallocable cost, specific to any of the verticals.
And your next question is from the line of Surya Patra from PhillipCapital.
Sir, just wanted to have some sense on the API or just one molecule API opportunity. So given the kind of development that we are witnessing from the China side, and on the wake of that, what opportunity that is feasible for -- [ forward ] in there in that small molecule APIs, that seems quite strong and seems sustaining also. So can you just -- you have also seen that progress in terms of inspection and all that for your plan. So now considering the pipeline or activities that you are doing there and the growth potential of what you are anticipating there, can you please say anything on that front?
Yes, [ Nihil ] here. So we certainly see this region but it's too early for us to comment. I think if we want to get into this region, it's going to be a long-term process for us. So we will comment at an appropriate time.
Okay. So as of now, how big is that opportunity in the overall Small Molecules business for us currently?
Are you talking about an opportunity in China?
No. Sir, that is -- anyway, is there a driving force that I see. But currently, the revenue Small Molecules revenue, this API piece, what we -- in the plan, what we acquired some time back and what is the kind of percentage that...
No, let me step back. If your question is about outlook generally for APIs and not specifically about China, I think we already -- our focus in the API business is clearly around technological differentiated products, whether it is fermentation, whether it is complex, whether it is potent, as you know, we had previously announced commissioning of our potent oral solids formulation facility. Clearly, that will be serviced by in-house APIs. So this differentiated portfolio of APIs is something that we will continue to invest in and grow our pipeline. And I think there is quite a bit of headroom for growth based on that selected portfolio. Second comment I would like to make is that I also said that from an API perspective, there is a certain part of the business opportunity. But increasingly going forward, the Small Molecules division would also focus on growing the generic formulations opportunity. And so rather than leaving a large chunk of the value on the table, if Biocon can capture a big chunk of that for specific APIs, that will be another significant opportunity for growth for Biocon.
Sir, please correct me, my understanding was that the plant, what you have acquired, it was not about fermentation API capacity. It was...
Correct. So those are the potent APIs, Surya.
Next question is from the line of Prakash Agarwal from Axis Capital.
Just one clarification on the profit share that we get from other partners, especially for peg. So since we launched and got some share in Q2 and Q3 now, so are these with a lag? And do we expect higher numbers going forward as the market share is increasing in Q4 and onwards?
So the -- when we supply the material, obviously, we get the profit share at a lag because we book profit share once Mylan sends to its customer. Would it go up or down? That is dependent on the number of launches. As we have mentioned that there have been some recent launches in quarter 3, there will be additional launches in quarter 4. So the profit share would go up.
And it will be a function of getting market share and obviously the pricing?
Absolutely.
Okay, okay. And this is applicable for the partner of Humira launch also in Europe. So that is not onetime, it will continue in that bucket.
Absolutely.
Okay, okay. And that's -- and with more launches, which you have mentioned trastu in Europe and maybe peg, so this momentum, what you mentioned or Kiran mentioned in the opening remarks, that is leading to a higher growth even Q-on-Q.
In addition to increased sales in emerging markets.
Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Saurabh Paliwal for his closing comments.
Thank you, Janice. Thank you all, thank you for joining us today. If you have any other follow-ups, please do get in touch with me. Until then, the next quarter, have a wonderful day.
Thank you very much. Ladies and gentlemen, on behalf of Biocon Limited, we conclude today's conference. Thank you all for joining us. You may disconnect your lines now.