Biocon Ltd
NSE:BIOCON
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Biocon Ltd
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Ladies and gentlemen, good morning, and welcome to Biocon Limited's Q4 FY '18 Earnings Conference Call. I am Hunula George, moderator for today's conference. [Operator Instructions] Please note this conference is being recorded. I'd now like to hand over the conference to Mr. Saurabh Paliwal from Biocon Investor Relations. Thank you, and over to you, Mr. Paliwal.
Thank you, Hunula, and good morning, ladies and gentlemen. I'm Saurabh Paliwal from Biocon's Investor Relations team, and I welcome you to today's earnings call for the fourth quarter of fiscal '18. As Hunula already mentioned, the call is being recorded and a replay of today's discussion will be available for the next few days, 2 hours post the conclusion of this call. The call transcript will be made available on the website of the company in a few days. To discuss the company's business performance and outlook, we have today with us Dr. Kiran Mazumdar-Shaw, our Chairperson and Managing Director, and other colleagues from the senior management team. Before we get started, I would like to remind everybody on 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 clarifications, please get in touch with me. Now I would like to turn the call over to Dr. Kiran Mazumdar. Over to you, ma'am.
Thank you, Saurabh, and good morning, everyone. I welcome you to Biocon's earnings call for the fourth quarter and the full year of fiscal '18, which as you know, ended on 31st March 2018. It was certainly an exciting year for all of us at [Audio Gap]. We crossed many important milestones, and I would like to start by sharing with you the key highlights for the year. Our partner Mylan received approval for Ogivri, our partner biosimilar trastuzumab from the U.S. FDA in December 2017. We became the first company from India to get this biosimilar approved by the U.S. FDA, and our biosimilar trastuzumab also received approval in Brazil through our [Audio Gap]. And subsequently, an approval in Turkey was also received. It was the first biosimilar trastuzumab approval in all the mentioned countries. And certainly, from a Biocon and its partner point of view, it was certainly a great achievement.Mylan and Biocon also received approvals from the European Commission and Therapeutic Goods Administration, TGA Australia for Semglee, which is our biosimilar Insulin Glargine. Semglee is expected to be launched by our partner Mylan in Australia and Europe in the second half of this year. Biocon's partner in South Korea also received approval for the product and is expected to be commercialized later in the year. Biocon and Mylan agreed to accelerate the introduction of biosimilar adalimumab in Europe through Mylan's in-licensing arrangement with Fujifilm Kyowa Kirin Biologics, or FKB. FKB's product is at an advanced stage of review with EMA and could potentially obtain approval in Europe in the second half of 2018. We believe that through this arrangement, Mylan could commercialize FKB's adalimumab in EU around market formation date. Biocon retains its economic interest in this arrangement, vis-à-vis Mylan, in line with its existing global collaboration with Mylan for monoclonal antibodies.In January, we announced our global collaboration with Sandoz, a Novartis division and a global leader in biosimilars, for developing a set of next-generation biosimilar products. This, we believe, will bolster Biocon's existing global biosimilars portfolio, which comprise biosimilar antibodies as well as insulin analogs. The opportunities for this partnership are expected to open up in the next decade, or as we refer to, as the next wave of biosimilar biologics, thus equipping [Audio Gap] of the biosimilar opportunities beyond the near term, which are currently being addressed by our existing and very successful global partnership with Mylan.Biocon and Mylan have also agreed to expand their long-standing collaboration with the addition of 2 next-generation biosimilar programs with Insulin Glargine 300 units per ml and pertuzumab. Syngene, our Research Services subsidiary, extended its contract and increased the scope of its engagement with BMS, its largest customer. The next phase of the partnership will see the addition of a new facility to support future BMS research and development operations and expansion of the team and the extension of its existing agreement with BMS to 2026. Syngene also expanded its ongoing research collaboration with Amgen and signed a multiyear agreement with GSK, which will focus on accelerating the discovery of new drug candidates, using Syngene's discovery services platform. The collaboration also involves the setting up of a dedicated or customized research facility for GSK. I'm also delighted to say that Biocon was ranked among global top 10 biotech employers as for the 2017 [Audio Gap] released by Science Career magazine. We are the only Asian company to be feature in this list. This is a great testament to [Audio Gap] the opportunities our scientists get within the company, ultimately resulting in successful outcomes for the company.Now moving on, I will now present key financial highlights. I will start with the quarter and follow it with the full year. Financial highlights for the fourth quarter fiscal '18 indicate that we've delivered total consolidated revenues for the quarter of INR 1,237 crores, which is up 27% compared to last year. Revenues from operations were at INR 1,170 crores, which reflects a growth of 26% compared to last year. And this includes licensing income of INR 2 crores this quarter compared to INR 16 crores in Q4 last fiscal. From a segment perspective, our Small Molecules segment clocked revenues of INR 426 crores for Q4, which is up 8%. The Biologics segment revenue grew 47% to INR 241 crores, and Branded Formulations grew 14% to INR 149 crores in Q4. Syngene revenues were at INR 409 crores, up a solid 45% compared to Q4 last fiscal.We incurred gross spends of INR 98 crores on R&D this quarter. Of this, INR 51 crores is reported in the P&L corresponding to 7% of revenues excluding Syngene. We capitalized an amount of INR 47 crores related to our biosimilars and insulin analog development expenses. While the gross spends are similar to last year, the amount in the P&L has reduced on account of capitalization of bevacizumab-related expenses, which were reflected in the P&L last year. We booked a ForEx gain of INR 42 crores this quarter as compared to a loss of INR 17 crores in Q4 last fiscal. This gain is reflected in the other income line of the P&L statement. Of the total amount, INR 31 crores comes from gains in Syngene. Group EBITDA was at INR 300 crores for this quarter, with EBITDA margins at 24%. Core margins, that is EBITDA margins net of licensing impact of ForEx and R&D, stood at 26%. Reported net profit for the year -- for the quarter was INR 130 crores, which represents a net profit margin of 11%.The effective tax rate at 21% for the quarter appears higher than last year. In fact, 2% higher than last year, as we have utilized R&D incentives and deferred tax asset factors for the full year in Q4 of last year. Now coming to the full year's financial highlights. Total consolidated revenues for the year were at INR 4,336 crores, up 6% compared to the previous fiscal. Revenue from operations were INR 4,130 crores, which reflects a growth of 5% compared to the previous fiscal. This includes licensing income of INR 23 crores as compared to INR 145 crores the previous year. From a segment perspective, Small Molecules, the revenues were INR 1,508 crores, which is down 8% from the previous year. Biologics revenues grew 10% to INR 770 crores. Branded Formulations sales grew 11% to INR 612 crores, while Syngene registered revenues of INR 1,423 crores, reflecting a strong growth of 19% compared to the previous fiscal. We incurred a gross spend of INR 380 crores on R&D this year. Of this amount, INR 216 crores was reported in the P&L corresponding to 8% of revenues, of course excluding Syngene. We capitalized an amount of [Audio Gap] as compared to INR 135 crores in fiscal '17 pertaining to our biosimilars and insulin analog development expenses. While the gross spends are slightly down from the previous year on account of lower spends in our biosimilar development programs, the amount in the P&L has reduced on account of capitalization pertaining to bevacizumab-related expenses. We booked a ForEx gain of INR 83 crores this year compared to a loss of INR 3 crores the previous year. Major gains amounting to INR 74 crores were booked in Syngene. The group EBITDA is INR 1,035 crores for the year, slightly down 9%, with an EBITDA margin at 24%. 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 [Audio Gap] is on account of lower licensing income. We also faced pricing pressure in the Small Molecules generics segment globally, and the impact of a shutdown of the fill-and-finish plant for modifications and requalifications post regulatory audits; and fixed and operating costs related to the Malaysian facility also contributed to these lower margins. Reported net profit for the year was INR 372 crores, which represents a net profit margin of 9%. The effective tax rate for the full year at 26% again appears [Audio Gap] which was at 19%. This was largely on account of utilizing the incentives deferred tax asset, as previously mentioned.Now before I move on to discussing individual segment performance, I would like to share with you that the Board of Directors, in their meeting yesterday, have recommended for approval by the shareholders a final dividend of INR 1 per share. That is 20% of face value of each share for the financial year 2017/'18. Now coming to individual business segments. Let me start with Small Molecules. This segment faced headwinds as a result of pricing pressure and channel consolidation by our clients in the U.S., which impacted our statin sales. Continued demand for immunosuppressants helped offset some of the pressure in this segment. We launched our first finish dosage formulation in the U.S. market this year, which was Rosuvastatin Calcium in a highly crowded market. Despite the pressures, we were able to increase market share for some of our specialty APIs in key markets. [Customers] in developed markets received regulatory approvals, and we also made regulatory submissions for multiple APIs across developed and key emerging markets. This, we believe, will help this segment as we move into FY '19.Biologics. Biologics segment revenues grew 47% in Q4 and 10% for the full year fiscal '18. The full year growth was impacted by shutdown of our fill-finish plant for modifications and requalifications post certain regulatory audits last calendar year, leading to lowering of capacity. And also, we experienced lower licensing income pertaining to this segment. Adjusting for impact of decrease in licensing income, the product revenue growth was strong at 68% in Q4, and a decent 29% on a full year basis. So you can see that the major impact of growth is on account of a lower licensing income, and we could have had a much better performance if the fill-finish facility had not taken a shutdown. The growth was led by insulin sales in Malaysia, via the offtake agreement. Higher sales in Mexico, where we [Audio Gap] and traction in the AFMET region, contributed to the insulin's growth. Antibodies' product revenues increased as a result of the expansion of our geographical footprint in emerging markets, with increased uptake of products. [Audio Gap] bevacizumab by our partners for emerging markets in India. Increased product sales growth was partially offset by a decrease in licensing income. And a note on Malaysia operations. Last year, we had stated that starting Q1 FY '18, fixed expenses, including depreciation and finance costs related to the Malaysia plant, totaling to approximately USD 48 million annually, would be charged to the P&L account. We also said that while we expected to offset a portion of these costs by product sales in Malaysia and other emerging markets, we expect a loss at the Malaysia stand-alone level. In FY '18, Malaysia reported an operational loss of $5 million at a stand-alone level, when excluding the impact of R&D. In FY '19, the fixed expenses are projected to increase to $50 million on account of increase in operating expenses. Our Malaysia insulin facility is making good progress in receiving approvals for both the facility and the products from various regulatory agencies globally, including the European Medicines Agency and TGA Australia. And we believe this will help us aim for operational break-even in Malaysia after excluding R&D expenses next -- this coming fiscal or FY '19. In FY '18, the growth in Branded Formulations, which [Audio Gap] India and U.A.E., were led by strong growth in the U.A.E. business at 33%, while growth of the Indian business remained muted at 4% with performance impacted due to various challenges faced by the business.During FY '18, Biocon launched Biosimilar Insulin Glargine in U.A.E. under the brand name Glaricon. This was our first biosimilar launch in the U.A.E. market. We also in-licensed 2 more innovator brands from Novartis, which will fortify [Audio Gap] cardiovascular market, where we are currently rank among the top 10 companies.The U.A.E. business reported an overall strong revenue growth, driven by metabolic -- our metabolic portfolio, which comprises novel in-licensed products like Jalra and Imprida, and our own brand of biosimilar Insulin Glargine, Glaricon. Sales momentum of our other branded generic products also boosted revenues during this fiscal.In India, we launched, KRABEVA, a biosimilar bevacizumab, [indiscernible] oncology biosimilar launch in India. Developed for the treatment of metastatic colorectal cancer and other types of lung, kidney, cervical, ovarian and brain cancers, it is an important addition to our current oncology portfolio in India. While this was a key positive for the India business, we had to take price reductions in some of our products, both mandatory as well as market-based. And there was a temporary volume shortfall for certain biologic products due to the shutdown of our Biologics facility in Q2 and Q3 of FY '18. Lack of significant new launches and operational delivery has resulted in continued disappointment. We are closely monitoring our strategic initiatives undertaken to bring it back to normalized growth.Finally, Research Services. Syngene's revenues recorded a strong growth this year on the back of an overall strong performance across its businesses. While discovery services and development manufacturing services showed strong momentum, dedicated centers continue to be on a strong footing. Biologic services particularly showed a strong performance during the year. Revenue growth in Q4 was a robust 45% for Syngene, signaling a full recovery from the impact of the fire incident that happened in December 2016. The damaged facility is expected to be fully operational during the first quarter of FY '19.Product development updates. The review of our Biologics License Application or BLA for biosimilar pegfilgrastim by USFDA is progressing. We have responded to all information requests received to date and are awaiting their response. The target action date for a decision by USFDA is June 4, 2018. In Europe, the regulatory review of our Marketing Authorization Application or MAA for biosimilar trastuzumab and biosimilar pegfilgrastim are also progressing and we expect decisions by CHMP by the end of this [ calendar year. ]In the U.S., Mylan and Biocon's application for Insulin Glargine under the NDA pathway is under review by the FDA. The global Phase III trial of our biosimilar bevacizumab continues. Insulin Aspart has recently completed our global Phase I study, and we expect a PK/PD readout shortly.As part of our Novel Biologics, in Q3, we initiated a Phase II/III clinical study in India in Q3 for Insulin Tregopil in Type 2 diabetes patients. This, I might remind you, is our oral insulin program. The recruitment for this trial continues. Now before I conclude, I would like to summarize our performance in FY '18 and provide you with some outlook for FY '19. Fiscal years 2017/'18 witnessed significant progress in terms of our global biosimilar pipelines with first U.S. and EU biosimilar approvals coming through, along with the approvals in key emerging markets. We also expanded our biosimilar portfolio with a new collaboration with Sandoz and the addition of Insulin Glargine 300 units per ml and pertuzumab through our long-standing collaboration with Mylan. Syngene returned to growth, extended its BMS contract, added GSK to its list of marquee clients and continued to make investments to expand its capacities and service offerings. Prospects for fiscal '19 look exciting with growth in [Audio Gap] led by developed and emerging markets. And with Syngene continuing to deliver strong performance, in line with our previous guidance for these segments. We expect better performance from Small Molecules and our India Branded Formulations business in the coming year. With this [Audio Gap] the floor to question and answers. Thank you.
[Operator Instructions] The first question comes from Ronny Gal from Bernstein.
My question is on pegfilgrastim. First, on Europe. It sounded like the review that you were having with the MAA is essentially a review de novo, essentially going through the entire review. Is there any parts of the review already done in the first round counts towards this review, or essentially is it -- the MAA looking at everything from the beginning? And then switching over to the U.S. pegfilgrastim. Could you share with us whether you already shared with the FDA your final [ table ] for the biosimilar? And are you expecting another round of questions and answers with them before June?
Sure. This is Paul Thomas. I think your questions were, number one, about the status of EU review and then the same about the FDA review. I think on the EU review, as you know, we had both resubmissions last year. And to the query of whether it's a fresh review or a repeat of the same review, there are typically changes in rapporteurs that are handling it, and so there is some level of fresh look at it. But clearly, we benefit from the review that's already completed. But EU [Audio Gap] that they go through the calendarized cycle. And so we're working our way through that process. On the FDA review I think...
De novo?
Essentially de novo, no.
No, I wouldn't say it's de novo. I think we definitely -- we definitely benefit -- have a lot less fresh items that would be raised up in a review like this. But there's not a, yes. So on the FDA side, I think there's nothing new to report there. We have our action date coming up in June, and we're comfortable with where we stand in the review process.
Do you expect an outcome?
No.
The next question comes from Mr. Prakash Agarwal from Axis Capital.
Just trying to understand the R&D ramp-up from here given the fact that you added a couple of molecules with Mylan as well as the Sandoz collaboration. And also, you have a [ host of ] pipeline in the novel biologic side. So if you could help us on how should we think about R&D spend over this year and next year, please?
Siddharth, will you take the question?
Sure. So the accounts in FY '18, total R&D expenses were approximately 15% at a gross level of our revenues ex-Syngene, and we do definitely expect the numbers to go up next year. Also, it will be in line as the revenue numbers go up, so percentage-wise would look around the same range of 15% to 16%. But on an absolute basis, we expect next year to be closer to 450 crores to 500 crores. The pipeline with Mylan, the 2 new drugs that we've added, and also with Sandoz, let me remind you these molecules are in the early stages of development and a lot of the spends come in advance in the clinics. So we expect the advancement of these new additions in the coming years. But the increase itself will be on account of our novel molecules and you said advancement of our pipeline. And also on account of our ANDAs that we had slowed down the development in the last 1 or 2 years, and we are going to resume again on a very selective basis next year, but we will increase the development activity for ANDAs in the coming year.
Perfect. Secondly, on the gross margin side. If you look at the quarter, there has been some pressure, despite the fact that the mix has actually moved in favor of Syngene Research Services as well as the higher-margin Biologics. So just trying to understand, for this particular quarter, what really happened given the fact that there is a [indiscernible] in both the higher-margin businesses?
Well, actually, if you're comparing with last year, there is a reduction of 3%, and that's mainly on account of Small Molecules pricing pressure. But if you compare it with the previous quarter, the quarter third, and both the quarters, we had 55%, so -- which is quarter 3 and quarter 4. So it's in line with the trends we have seen this year. And if you compare with last year it's, as I mentioned, is mainly on account of reduction of margins on the Small Molecules business.
The next question comes from Mr. Surya from PhillipCapital.
On the Biologics revenue front, there is a positive [indiscernible] of costs and that was also anticipated that okay, the money market should recover [ after that ]. But [indiscernible] coming in the [indiscernible] at market rate. Just wanted to know, I mean, what of our products that we have launched in with which is [indiscernible] market share that so far that we have achieved in any specific market?
So in terms of the launches, as you know, we haven't launched a biosimilar product in the U.S. as yet. So the -- in that -- from a U.S. perspective, it's still the Small Molecules business. Whereas API sales to our customers who are servicing these markets and are only [indiscernible]
Okay. So I just wanted to know that you have achieved have for biosimilar division launch in the emerging markets?
Yes, I don't know which market share is larger in emerging markets, and as we have highlighted in the past, I think a couple of examples were illustrated by Kiran as well, that in some emerging markets, we have a significant market share having won, for example, tenders. I think Kiran alluded to the tender in Mexico for insulin, so that gives us a very dominant market share because that's a tender-driven business. So we have -- so our growth has come from such opportunities in emerging markets. On top of that, of course, we have the OTA business which is an ongoing business in Malaysia.
Okay. And [indiscernible] what could we [indiscernible]
Your voice is crackly. We are unable to hear you.
Any of the [indiscernible] which is [indiscernible] not very [indiscernible]
We can't hear you because your voice is breaking. Can you please get into a proper zone because your signal seems to be weak?
So [indiscernible] retail market [indiscernible]
We can't hear you.
I'm so sorry to interrupt, Mr. Surya. The voice is breaking, sir. The next question comes from Mr. Dheeresh Pathak from Goldman Sachs.
I just want to clear [Audio Gap] post approval of any IP issues [Audio Gap] well in [Audio Gap].
Can we just repeat that question because I think there seems to be a problem. We're unable to hear -- the sentences are breaking up in the middle.
So my question was -- I hope I'm audible now.
Yes, now is fine.
Yes, my question. I just want to clear my understanding that is there any IP issues that will launching [indiscernible] are you just waiting for over [indiscernible] both in U.S.?
See, I do know from a trastuzumab perspective, Mylan and Roche are reaching to a global settlement. And as far as pegfilgrastim in the U.S. is concerned, there is an ongoing IP where -- as part of the BPCI act. That IP process is underway.
And in the EU for pegfil?
In the EU, we don't have any specific comment to offer on EU.
And [indiscernible] question, sir. The adalimumab JV partnership. [indiscernible] if not [indiscernible] to understand that [indiscernible] earlier, Biocon [indiscernible] its profit share. Now how do you [indiscernible] have another [indiscernible] take a share [indiscernible] even when you put?
We can't answer that because we couldn't hear the question properly.
[indiscernible].
Can you answer that?
Am I audible?
If I understood the question correctly, you're asking us about the economic participation of Biocon in the deal that Mylan has signed with FKB for the European rights to adalimumab. If that's the question, then the response is that Biocon's, in relation to Mylan, our current cost share and profit share arrangement with Mylan, vis-à-vis the profits that -- and costs that Mylan incurs, continues as per our current global arrangement for MAbs.
No. my question is that [indiscernible] the [indiscernible] the [indiscernible]
I think there is a problem with the sound. We are unable to hear the question at all. It may be a problem in the connection, so we'll just resolve it, just pause for a moment. We'll try if we can fix this problem.[Technical Difficulty]
The next question comes from [ Cymlan Agarwal ] from Dolat Capital.
Cyndrella Carvalho from Dolat Capital. Ma'am, I just wanted to understand, before the pegfilgrastim approval, would we be able to see any inspection from U.S. FDA? Is it required? Because some kind of comment similar to this was made on Mylan's last call. So just wanted to -- some understanding on this.
Well, as and when an FDA inspection happens and is concluded, as for as our policy, we would, of course, make disclosure at the conclusion if there are any observations. So at this point in time, we do not have any comment on an FDA inspection.
Okay. And sir, in terms of our EU inspection, which we have been awaiting for the Bangalore plant, any update on that?
Yes. So again, over there, we've been inspected by the EMA, but we're now waiting for the EMA to give us the report. EMA, unlike the FDA, does not issue a report on the conclusion -- immediately on conclusion. So we would be able to make an appropriate comment once we actually receive a report from the EMA.
When was this inspection done, sir? Last month or a month before that?
Yes, I think the last month.
And sir, just some understanding on the branded India business. If you could help us understand, the growth rate has come fairly low. What is the -- what are the current challenges? And what is the way -- or how are we tackling them? And what is the way ahead for this business, typically for the India market?
Thank you for the question. This is Suresh Subramanian, Head of Branded Formulations, India. This -- last year's performance was impacted by, as Kiran was saying, shortfall of Biologics because of the upgradation and requalification of the plant. We also had the impact of GST, and we had some unfavorable pricing which we had to take to face competition. So these are some of the main reasons. And we also had some operational issues leading from attrition, which impacted execution. So the next year is -- hope -- we will not have these [ shorted ] issues and the impact of GST is behind us. In order to tackle pricing issues, we have installed a key account team, which focuses on business and on key accounts and therefore to be able to guard the business more closely. And also, we have installed some performance management measures and close review and coaching methodologies, which will enable prevention of attrition and improve execution. Added to that, we will also have new markets contributing, which have been delayed -- the approvals and listing have been delayed in markets like Sri Lanka, which -- it's a timing issue. So that will start coming in. And our in-licensing efforts will also help shore up business for the coming year -- for this year. So that, in short, was what was wrong and what efforts are we putting into kind of build business this year. I hope it answered your question.
Your next question comes from [ Hame Agarwal ], individual investor.
I have a couple of questions. I wish to understand, are biosimilars and Biologics subject to the same pricing pressure as conventional pharma as the buyers and the [ in-licensers ] the same?
Yes, this is Paul Thomas. Thank you for your question. I think it's a good question and I think a valid observation about buyers in many cases being the same. I think the difference that we have here is the -- on the competition side, the number of players involved in the market is quite different. The -- due to the -- as you've recognized, the long journey and investments required in order to develop one of these products, the number of competitors tends to be much lower than in those markets. And so we see a different dynamic and a much more gradual competitive price dynamic.
I see. But the [ analysts ] continues to be the same and buyers are still the same people, so when [indiscernible] said, "diabetes, why will somebody pay more for a biosimilar, biologic compared to a convention?" That is my confusion.
I think we need to explain to you that even in the general market, the -- what you refer to as generics of small molecules are a very different drug class compared to biologics or what we call as protein therapeutics. These are very different category of drugs, very different class of drugs. And the price points of both these products, whether it's a generic or a biologic, are very, very different. So what we are trying to explain to you is that the generics are a crowded market with a number of competitors, and therefore the pricing pressure is very intense. And you see a very low price when it comes to the [ buyer ] being able to negotiate a very, very competitive low price kind of bargain. But when it comes to biologics, either -- to start with these products are very expensive and the bargaining power that the buyer has, compared to a generic where the competition and the number of people offering the products are very, very few, the kind of discounts that [indiscernible] negotiate is much, much lower than for a common generic. I hope you understand that.
Yes, yes. Okay, so my follow-up question, Madam, would be, are biosimilars and biologics being subject to a more rigorous U.S. FDA, more stringent than conventional pharma?
Well, the whole regulatory part of bringing a generic to the market and bringing a biosimilar to the market is very, very different. The costs involved in bringing a generic molecule to the market is significantly lower. Generally, it's about between $5 million to $10 million maximum, to bring a generic molecule to the market. Whereas when you talk about a biosimilar product, it takes upwards of $100 million to bring a biosimilar to the market. So it's many orders of magnitude higher than a generic molecule, and that is why you don't see so much competition. And obviously, the time-to-market journey is also much, much longer. So it takes us almost 5 -- 3 to 5 years to bring a biosimilar drug to the market, minimum, compared to a generic. So if you think about all these dynamics, obviously it is very expensive and very long drawn-out in terms of the regulatory time line to bring a product to the market. And that is just the regulatory approval. And then, [Audio Gap] you have to wait for the patent expiry date.
And this is [indiscernible] R&D, Head of R&D. I can also contribute. Even the FDA and the EMEA organizations are learning along with the industry on how to approve these biosimilars. We in the industry have collaborated with the FDA in developing these guidelines. So all of this is a learning process on the biologics, so it's a growth area.
So we are amongst the frontrunners. So we are basically setting the path, so to speak.
Yes, yes, yes. Now it's just fantastic [indiscernible] journey [indiscernible].
Yes, okay. I can't hear the last bit, but I appreciate your comments about this being a very big effort.
We have a follow-up question from Dheeresh Pathak from Goldman Sachs.
I hope I'm audible now. So my second question in my first attempt, what I wanted to clarify was that, in the adalimumab, when FUJIFILM's product is being sold by Mylan in the developed market, would Biocon get any share from those profit streams or Mylan would just reimburse you for your molecule clinical program?
No, no. We are talking about Mylan reimbursing us participating in the profit share arrangement in the European market, where Mylan would market the FKB product.
So how do you retain your economic interest? Because, earlier, there were 2 people to share the profit pool, now there are 3 people. So what do you mean when you say you keep your economic interest?
Whatever economics Mylan has, we participate in Mylan's share of that economics.
Okay. So from the earlier part, it will be lower. But as a percentage of the profit share, it will be similar. Percentage sharing would be similar, but absolute profits would be lower?
[Technical Difficulty] Anyway, we get your message. We've got your question. I think it's been answered, right?
So we participate in, as I said, whatever costs and profits that Mylan has as part of this deal. We get our share of -- we participate in our share of that as per our global arrangement. Yes, Mylan would have an economic -- I mean, FKB, also will be getting its share. So to that extent, it would be a 3-way.
The next question comes from Sameer Baisiwala from Morgan Stanley.
I could [ refer ] times where you may have discussed this, but asking nonetheless. So on your comment on Malaysian facility, you mentioned that you made a $5 million operational loss in fiscal '18. In fiscal '19, your expenses go from $48 million to, I think, $50 million, and this year you expect to breakeven. So does that mean that it's just going to a delta of $7 million?
Siddharth?
That's right for me. So at the operational level, the P&L would have a delta of $7 million. And let me also remind you that there are various moving parts, so you cannot necessarily correlate the delta with the top line goal that we have because it's, as I mentioned in the previous call, that we also have cost sharing with our partners on the retail and the facility costs. And we also use the facility for development activities and [indiscernible] at molecules. So you will not able to exactly correlate what that means in terms of the revenue growth.
[ On that side, ] I'm not trying to counter revenue growth number to that. And the point here is that considering that you are going to launch in Europe and you work a few of these key emerging market approvals, this delta seems to be way too low. I mean, that was the whole point. I mean, I understand...
So that's precisely the point I was trying to make that. See, what Kiran had mentioned in our opening comment is that we're around close to meeting our guidance for biosimilars, which is at [ $200 million ] for next year. That growth will come from a combination of antibodies and insulin and Glargine growth. And as far as Europe, specifically, is concerned, what Mylan has also commented, we think, in their call is that they expect to launch the product in the latter half of this year, while the product registrations are received from all the European countries. And so what that would mean is the actual revenue which we'll capture for us in the fiscal '19 would be only for a few months, and that would be [ again to ] large quantities [ since ] typically expect penetration time to be 1 to 2 years in these markets.
Okay, got it. The second question is for adalimumab. Now what would you do with your own product? I think it has completed Phase III clinicals, first half 2017, if I'm not wrong. So what do you plan to do with that in the U.S., Europe and emerging markets?
So as I think Mylan has also mentioned in their investor call a few weeks ago, the arrangement with FKB is currently for Europe. However, there are options to extend that to the U.S. or other jurisdiction. At this stage, based on what we have seen and you're aware of, the potential launch time lines or market formation time lines in the U.S. that we still -- we feel there is a time to take a decision on which option to pursue in the U.S. and in other markets. So we will not rule in or rule out any option outside of Europe at this stage.
Okay. And just a quick one on your fiscal '19. I think, a few years back, you'd given aspirational target of $1 billion in top line. So do you want to update us on that or do you want to revise it?
So I think if you look at the -- I'd mentioned this in, I think, in the previous investor call also that when you look at the aspirational target, clearly from a -- if you look at what our growth drivers have been and what we anticipate them to be, which is our Biologics segment and the Research Services segment, I mentioned that we certainly expect those segments to be in line with our aspirational targets. We've seen that due to the global dynamics, which is not just Biocon-specific, but has impacted the entire sector in terms of the U.S. landscape for small molecule generics, we do see, let's say, similar challenges that all other pharma companies in that sector are facing. And at this point in time, we can continue to expect the -- in the near term, the sort of single-digit revenue growth on the Small Molecules business that we've seen in the recent past. Until we are able to fully sort of capitalize our current investments in small molecules, which is basically about growing our ANDA footprint and moving away from purely our dependence on third-party API sales to being vertically integrated. So that is a work in progress, and we are, as we mentioned, we continue to file sort of low single-digit number ANDAs very selectively. And in line with what, I guess, the generic pharma sector has been articulating, we, too, of course, with our differentiated product portfolio, which will pan out as many of these ANDA opportunities become commercial, try and play that game of differentiated generics, complex generics, fermentation-based generics, and things like that, which sort of are in line with our capabilities. So that's one trend. In Branded Formulations, clearly, there are 2 pieces to the Branded Formulations. One is the ex India piece, which is growing at a very healthy clip and benefits from the currency movements. In India of course, when we gave our original guidance way back in early 2013, the rupee was at INR 50. And the India business, unfortunately, has not benefited from that. On top of that, we've had some challenges. So at this point in time, we continue to see the Branded Formulations piece growing more in the mid-teens.
Okay. Any update on your Copaxone file?
Well, I think we had guided that -- we originally stated that we should be in the position to submit our responses this quarter. My sense -- I don't want to give a fresh guidance, but there might be some delay in our resubmission.
The next question comes from Ritika Jalan from Narnolia Securities.
Just [indiscernible] that on the FY '19 guidance that you have given the dollar [ $1 million ] revenue. And I know you are on track to achieve it, but the $200 million will come from biosimilar and $200 million from Branded Formulation. How the things going on? Or you want to delay the guidance for 1 or 2 years?
So, no, I want to -- I think you did not hear the comments being made by our CEO. But suffice to say that we continue to track well on Biologics and Research Services. I think what we said is we are likely to face some challenges and headwinds in our Branded Formulations numbers. And also, in terms of our Small Molecules numbers, because of the kind of market dynamics that are prevailing in the world, okay, there have been tremendous pricing pressures, price enforcement by NPPA and things like that. So we will directionally be in that sort of target to address the $1 billion target. But I think there are a lot of challenges that we have not anticipated maybe 5 years ago, which we are seeing how we can bridge that gap as much as we can. So I think we're already confident that on the Biologics and on the branded -- on the Research Services, we are pretty confident that we will be sort of aiming for those [Audio Gap], seeing how we can bridge the gap in terms of the other segments.
I want to understand that [ there are pricing ] challenges in the generics business. So can you explain to me that it will prevail going forward because of that gross margins were also affected? Pricing challenges in the [ generics ] business like Small Molecule business?
Yes, so I think we have already made a comment that -- I think Siddharth made a comment earlier that the impact on gross margins has been -- in the Small Molecules segment had been on account of pricing pressure.
Yes, but it will prevail going forward or like just [indiscernible] other pharma companies?
Yes. I mean, the pricing pressure on the older molecules, like statins, would continue. It would be less on the newer molecules like the immunosuppressants.
We have a follow-up question from Prakash Agarwal from Axis Capital.
Just trying to understand the CapEx. Given Syngene has also raised CapEx guidance. What would be our CapEx for '19 and '20?
Siddharth?
So in terms of cash flow, Prakash, it should be anywhere around INR 500 crores to INR 600 crores per year. Majority of this is coming from our new antibodies facility where -- which had started last year. But last year, the cash outflow was, at a Biocon level, excluding Syngene, was around INR 400 crores. A small component of that new facility was in last year but we've seen majority of that in the coming 2 years. Now the numbers I'm giving is at gross level, as we have previously indicated that, apart from Mylan, we'll also be contributing on that facility. So the numbers would get reduced. But again, if you look at the combined CapEx for the next 2 years, I think Biocon level, excluding Syngene, you should expect around INR 1,000 crores.
I'm sorry, can you repeat the last line? Biocon excluding?
Excluding Syngene, should be INR 1,000 crores for -- over a period of 2 years.
Okay, understood. Fair enough. And on Biocon Malaysia plant Phase II, that is not built in here, right, next 2 years?
No, that's not [indiscernible] in these numbers.
Okay, okay, understood. And secondly, there's a comment on increasing ANDA submissions. So what are our total ANDA submission pending approval? And do we expect approval starting fiscal '19?
So we have filed 2 ANDAs in FY '18, and our plan is to file more in FY '19. And this is, I think, in line with our guidance on also R&D, where the R&D ramp-up on small molecules is also likely to be seen going forward. Largely because of our focus on submitting some of these ANDA, some of which would be, as I said, not just regular -- some of them would be difficult-to-make products.
Okay, fair enough. And any color on the tax rates? You earlier talked about around 25%?
And we would broadly be around those percentage, but the absolute number would go up slightly. So the reason is that, as you can imagine, that we have now multiple legal entities where we have different business units. And some of these units, like to give an example, Biocon Pharma Limited, is our entity where we have our entire ANDA business, and that business is still in early investment state, so whatever expenses are there are not tax deductible. So -- because of that, at a group level, you might see a little bit of increase in the effective tax rate, and the overall tax rate will -- the tax amount will go up slightly.
The next question comes from [indiscernible] Investments.
I have 2 questions. So my first question is on your licensing revenue. What kind of opportunity do you see next year, FY '19 and FY '20?
So in terms of -- historically, a lot of our licensing income has been related to local partnering of our biosimilar assets. And clearly, if you look at the biosimilar asset opportunities, our focus to date had been largely on the trastuzumab. We still have opportunities with the other biosimilar programs to do partnering. I'm not referring to the ones which are in early stage, but the ones which are in late-stage development. So those opportunities continue to exist.
Right. And my second question is on your overall margins. So this year, we saw a fall in your core margin, core EBITDA margin. So how should we look at them next year, FY '19?
Siddharth?
Yes, I think you should expect margins for next year to be at similar levels, the core margins.
So around 27%?
That's right. I mean, though it can't be exact 27%, but it would be around similar levels.
Yes, I know, similar levels.
Yes, similar levels.
Siddharth, my last question is on the interest cost and other expenses. So all the interest cost and everything else hit the P&L or is there something still being capitalized in the balance sheet?
A majority of the interest costs are back in Malaysia, where we have a debt of almost $180 million. And the interest costs on that, net of the subsidies, we will from the government of Malaysia is in the P&L now. Now apart from that, we have smaller debt facilities for our other plants. And again, the bulk of that is in the P&L. And a very, very small component is capitalized along with the plant cost.
Okay. And last question is on your CapEx. You mentioned that you have a CapEx of INR 1,000 crores lined up for next 2 years. So would that be financed largely from debt? And from an internal accrual, do you need to raise any additional money?
What we have said in the past that we [ still ] look at a group level our net cash, or the debt cash less the debt balance, as of March '18, is at roughly INR 350 crores. So we have a lot of borrowing power where we are going to take on more debt. We also would look at the internal accrual -- I mean, if you look at the EBITDA levels this year, EBITDA was around INR 1,000 crores at the group level. So internal accruals and debt, definitely would be there. And at some point in time, we have also mentioned that we are open to divesting a small stake in Syngene if we -- to raise additional funds, if we don't want to take on too much debt on our balance sheet.
We have a follow-up question from Sameer Baisiwala from Morgan Stanley.
A couple more. So, sir, just to confirm, did you say that your gross R&D spend for fiscal '19 would be INR 450 crores to INR 500 crores?
What I mentioned is it will be 15% to 16% of our top line. And this year, the gross spend was INR 400 crores, but definitely it will inch up, I would say, it'll be very difficult to give an absolute number, but INR 450 crores to INR 500 crores levels will definitely be -- we'll be able to reach those levels because in the last 2 years, we have guided that our gross spend would be INR 450 crores to INR 500 crores, but though it was lower because, as I mentioned earlier, that there was a reduction in our expense for our ANDA business. But in the coming year, we would expect to see an uptick.
Okay. And can you just -- your thoughts -- I think it was being said that you probably plan to spin off the biosimilar business, let's say, separately. So if you can just update us on that and what's the thinking behind it?
So I think this is sort of work in progress because we certainly believe that this is a very valuable part of our business, and you also know that this is a business that requires a huge amount of investment to basically grow the pipeline and develop the pipeline and take it to the market. And therefore, we believe that this is an important opportunity for us to look at this kind of a prospect for creating a separate entity for our biosimilars and bio -- this business. And we will basically keep you informed as and when we progress this particular model.
The next question comes from Harith Ahamed from Spark Capital.
On the capitalized part of R&D, which was close to INR 180 crores in FY '18 and INR 50 crores for the quarter. So is there -- are there any other assets apart from Glargine and Trastuzumab, the spending for which is getting capitalized? Because both Glargine and Trastuzumab have been filed and the R&D spending on those assets are likely to have come off, but the capitalized R&D remains INR 50 crores a quarter. So that's the reason for [indiscernible].
Okay, Harith, Kiran had mentioned in her opening comment that this year we capitalized expenses relating to bevacizumab. So that's why you're right that the filing for Trastuzumab and Glargine is over, but not necessarily the expenses are over. We still have some expenses coming for these 2 molecules. But bulk of the capitalization is now for Bevacizumab, it's where we are in the global Phase III for Bevacizumab.
Okay. And is there a decision yet on the R&D spending that you'll be having for Toujeo and [ Projeta ]? Will you be able to capitalize those during the Toujeo project?
No, no. You need to understand our capitalization policy. We only capitalize molecules. Wherein we have got the approval for that particular molecule in one of the markets there, but for establishing the scientific proof of concept and also the technical and the commercial feasibility. So we, obviously, at this stage, are developing many more molecules just apart from the 3 molecules that we are capitalizing. And all the expenses for these molecules are being expensed off in the P&L. So for Toujeo and [ Projeta ], all the initial expense have until the time we see our first approval, would be in the P&L. And only the subsequent development expenses I'm saying will be in the balance sheet.
Okay. And is there an update on the new Biologics facility that you're planning in Bangalore? The time lines and the -- have you started the work there?
Yes. I just mentioned some time back that the further construction started last year. And I think in one of our previous calls, we had said that it would take 2 years to commission the facility. And then typically, it takes 1 year after that to qualify and file for approvals, and then 1 year to get the approval. So by next year, the facility itself should be commissioned and then 2020, we will do all the development work to file in all the markets. And then by '20 -- early '21 is when we will expect commercialization.
The next question comes from Charulata Gaidhani from Dalal & Broacha.
Yes. My question pertains to the reversal. There is a reversal in the Small Molecules business. Do you expect it to be sustainable? And what kind of a growth do you expect in Small Molecules going forward?
Yes, we expect this to continue, but on an annualized basis, we expect to see lower single-digit growth.
Okay. So you expect some more pricing pressure?
I think we see the U.S. pricing pressure is expected to continue. But more and more, our API partners, they start getting approval. We expect the growth to happen through that.
Okay, okay. My second question pertains to IN-105. The -- there is -- I mean, it is in Phase III, right?
I'm sorry to interrupt. Could you please be a little louder?
Yes, my question pertains to IN-105. The trial is being conducted in India. It is in Phase III. And there was positive data that was there that was the -- when it was last with BMS.
Yes. So, yes, the program right now is in Phase III. We've initiated the studies, a few patients have been dosed. The dosing will continue for the next couple of years. And we will look at the data in an interim basis sometime next year. So it's all in discussion with the DCGI office. And as and when we get new data, we will report that. We are very enthusiastic about this program. And just like any other development program, this is a blinded study, so we won't know what the results are until the study reaches its endpoints.
Okay, okay. And my last question pertains to what was the timing of the Glargine launch in UAE?
I think, it was sometime last year. I think, it was in the middle of last year.
The next question comes from Mr. Sumit Modi from Arete Investments.
I actually wanted to understand what are the challenges or milestones on our way to launch trastu in U.S. market? Because where I'm coming from is trastu will go off-patent only in June '19, so -- in U.S. So how are we -- can you give a color on the time line for the launch in U.S.? And before June '19, can there be a launch in EU?
So from -- when you say, what are the challenges between now and then, as you know, that from an approvability standpoint, the product is approved in the U.S. We received our approval on the 1st of December.
Sir, more on the milestones.
Yes, no. So -- no, when you say milestone between now, it is -- the launches in Europe and, I think -- well, the launches in U.S. are linked clearly to the dates that Mylan has agreed with Roche in terms of their patent settlement. I cannot comment on that because that is a confidential document between Mylan and Roche. And we would not be able to make any comments on the exact launch timing. But suffice it to say that settlement will govern the launch timing in the U.S. That settlement also applies to Europe. So it's a global settlement. So even in Europe, the settlement will decide on the commercial launch timings. In addition, of course in Europe, we are awaiting approvals. As we mentioned, we resubmitted our file with EMA, and we hope that we receive approvals by the end of this year.
That said, can we fairly assume that the launch of trastu won't be before June 2019?
No, I cannot make any comment on that because, as I said, that launch dates are governed by the IP settlement and that is a -- it's confidential and we would not be able to comment on exact launch dates.
Okay. And also on pegfil, if at all we get an approval with respect to the target action date in June, how -- what is the time line do we expect for the launch in the developed markets? Just a color or [ lever ] on it?
Yes. I think Mylan has guided that if we get approval in June, then they would target to launch in the second half of this fiscal year.
Okay, so this would be faster than trastu?
Well, I won't compare the 2. I will just say that pegfil will be launched in the second half. I'm not making any comment on the trastu launch date because that, I said, is governed by the IP settlement.
The next question comes from [ Simran Agarwal ] from Dolat Capital.
It's Cyndre Carvalho, Dolat Capital. Just a follow-up, ma'am. This question is to you, asking in terms of, how will we look at our FY '20, considering a lot will be coming in the FY '20. And there will be at least -- almost the 3 biosimilars, which we would be seeing in EU as well as in U.S., hopefully. So how should we look at the FY '20 and the way ahead?
So if you can just sort of, for a moment, look at what you have just asked me to comment on. Obviously, with increasing performance of our biosimilars portfolio in the marketplace, obviously we expect a better contribution from Biologics. So the percentage contribution of Biologics in our overall business is definitely going to trend upwards. And therefore, the piece of the pie occupied by biosimilars will increase. And being a high-value business and a high-margin business, obviously, our margins also should improve significantly once it starts becoming a significant part of our business.
Any color that you can help us in terms of like the margin profile in terms of -- not only just the margin profile, but the entire business wherein the biosimilars will become a significant portion if everything falls in place as per the expectations? So how then we should be able to look at it?
I think, we have already sort of given you some indication that when we sort of assume -- when we reach sort of peak sales of these biosimilars in the sort of '20, this FY '21, '22 time line, we are expecting $1 billion of contribution from biosimilars in that kind of peak sale times to our business. And so right now, we can't really guide as such. I mean, '20 and '21 and all, we cannot guide, but we expect that if everything runs favorably to us and if all the ideal conditions in the market remain, then these are the kind of things that we are looking at. But we do not wish to peg anything to a number at this stage because it's very, very difficult for us to make any predictions, because there are so many unknowns in the marketplace. So suffice to say that you will see improving contribution of Biologics and improving margins to these kinds of -- to this business going forward is all I can say.
But just a request, maybe a year later or so, because we will be anyway meeting our Biologics and our results over with Syngene's guidance that we had already guided. So if you could at least, after a year, provide us with some kind of a milestone would be great to look at. And just wanted to pique your thought on the kind of capacity-ready -- you feel that we are capacity-ready in terms of all these growth engines because our MAbs facility will be coming in by -- most expected by '21, so should we be ready for all these levers to play out?
And like, I think, Siddharth commented, that by 2021, we should have a lot of the capacity requirements in place because we are sort of well -- progressing well on the Biologics -- the new biologics facility. And we have built scale in our insulin business in Malaysia. So looking at all these, I think we are -- we would be in a state of preparedness as we approach sort of peak market share or peak opportunities going forward. So at least by 2021, we should be able to address a large number of these opportunities. But like you said, I think we will be able to give you better color on these opportunities as we enter the market and as we see how the market dynamics play because it's not as simple as the generics business. So I think we need to really give you a much more accurate forecast of how we see the market, once we get into the market and see how the market is sort of appearing for us in terms of the opportunities ahead.
The next question comes from Mr. Dheeresh Pathak from Goldman Sachs.
Siddharth, the INR 1,000 crores CapEx for 2 years, does it include capitalized R&D or this is excluding that?
It's only tangible assets, so it does not include capitalized R&D.
Understood. And if you have it handy, can you give me Biocon ex Syngene gross debt and cash?
Biocon ex Syngene would be approximately INR 600 crores of gross debt -- net debt, sorry.
Gross debt? Okay. Net debt? What's the gross debt, if you have that handy?
See, the cash levels are roughly INR 1,000 crores and INR 1,600 crores would be [indiscernible].
Ladies and gentlemen, on behalf of Biocon Limited, this concludes this conference call for today. Thank you for joining us, and you may all disconnect your lines now. Thank you, and have a pleasant day ahead.