Biocon Limited (BIOCON) Earnings Call Transcript & Summary

Good morning, everyone. I'm Saurabh Paliwal from Biocon's Investor Relations team, and I want to welcome everyone to Biocon's Q3 FY '23 Earnings Conference Call. [Operator Instructions] Today, to discuss the company's business performance and outlook, we have Dr. Kiran Mazumdar Shaw, our Executive Chairperson; Mr. Siddharth Mittal, CEO and MD of Biocon Limited, along with other senior management personnel from business segments, including generics, biosimilars and research services. As I move on, I want to highlight the safe harbor related to today's conference call. The comments made during the call may be forward-looking in nature based on management's current beliefs and expectations. It must be viewed in relation to the risks that our business faces, that could cause our future results, performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements. After the end of the call, if you need any further information or clarifications, please do reach out to me. Now I would like to turn the call over to our chairperson for her opening remarks.

Thank you, Saurabh. Good morning, everyone. I'd like to start with the national budget, which was presented by the Honorable Finance Minister on the 1st of February this year. The budget has a favorable impact on our business, especially with respect to research. While details are yet to be published, the increased focus for R&D in pharma and healthcare through centers of excellence is certainly a step in the right direction. Now coming to the Viatris' transaction, Biocon Biologics has successfully completed the acquisition of the Viatris' Global Biosimilars business on the 29 November, 2022. Consequently, incremental revenues and profits post-deal closure are reflected in its earnings this quarter. Viatris' continues to provide commercial and other transaction services to Biocon Biologics as a part of a pre-agreed transition services agreement. In parallel, Biocon Biologics is designing a bespoke country-specific strategy and business model that optimizes for revenues and profitability. This we believe will create value for all our stakeholders. We've also drawn up a comprehensive integration plan and intend to start migrating business operations in a phased manner. There are several upcoming launches including biosimilar adalimumab in the US, making business continuity one of the key embedded terms of our integration plan. Now coming to debt reduction, I would like to take you through our debt reduction efforts. To fund the acquisition of Viatris' Global Biosimilars business, Biocon Biologics has made an upfront payment of $2 billion and issued $1 billion of convertible securities to Viatris. The upfront payment was funded through $1.2 billion of debt raised by Biocon Biologics, $650 million of equity infusion by Biocon Limited and $150 million of equity infusion by Serum. Biocon Limited had raised $420 million of mezzanine financing to part fund the $650 million of equity infusion into Biocon Biologics. I am pleased to report that Biocon Limited has entered into definitive agreements with Kotak Strategic Situations Fund for a structured funding of up to INR 1,200 crores. This funding together with the recently concluded stake sale in Syngene will help to reduce our net debt. It is important to point out that Biocon continues to maintain majority control in Syngene at 54.9% post this divestment. Furthermore, we believe the divestment achieves key objectives, reduction of the Group debt and increased public float for Syngene. Biocon Biologics is also in discussion with private equity investors for additional fund raise to pare down its acquisition debt. I would also now like to touch upon recent concerns around regulatory inspections. The post-pandemic recommencement of facility inspections by the USFDA in India has reportedly seen a surge in the number of Form 483s issue to companies, which has caused delayed approvals across the industry. Biocon's new product approvals post pre-approval inspections have also been impacted with the issuance of complete response letters or CRLs by the agency. However, I would like to mention that Biocon received facility and product approvals from other regulatory agencies including EMA. With the USFDA said to resume face-to-face meetings from March, we hope that this would allow us for greater engagement to address these issues. In the meantime, we are of course looking at this event as an opportunity for us to up-skill and advance our quality management systems so that we future proof our quality systems. In terms of leadership update, I am pleased to share that Shreehas Tambe was appointed CEO and Managing Director of Biocon Biologics in December 2022 following the retirement of Dr. Arun Chandavarkar who will continue to serve as a non-executive non-independent director on the Board of Biocon Biologics. I would like to thank Arun for his longstanding contribution to the Biocon Group, and my best wishes for Shreehas for the transformation journey ahead. I will now present the key financial highlights of the quarter. At a consolidated Group level, revenues for Q3 FY '23 were up 36% on a year-on year basis at INR 3,020 crores. Revenues from our Biosimilars business and Research Services business delivered strong year-on year growth of 54% and 23% respectively, and our Generics business grew at a healthy 18%. Core EBITDA, which. I would like to explain as EBITDA excluding R&D, licensing income, forex movement, dilution gain in Bicara and mark-to-market movement on investments grew 49% to INR 1,069 crores, which indicates a very healthy core operating margin of 36% versus 33% in the same quarter last year. Growth in core EBITDA was offset by higher R&D investment at INR 337 crores, an increase of INR 199 crores compared to the same period last fiscal, representing 16% of revenues ex-Syngene. This is a clear reflection of our advancing pipeline that would drive our future growth. We also recorded a forex loss of INR 44 crores as compared to a gain of INR 19 crores during Q3 FY '22. Reported EBITDA for the quarter was up 35% at INR 723 crores versus INR 537 crores in the same period last year, with EBITDA margins sustained at 24%. Profit before tax and exceptional items stood at INR 246 crores compared to INR 269 crores during the same quarter last fiscal. The drop in PBT is attributable to certain amortization and interest costs related to the acquisition of the Viatris business. The net profit for the quarter excluding exceptional items stood at INR 140 crores versus INR 187 crores in Q3 FY '22. It must be mentioned that there is a part impact of state dilution on Biocon's shareholding in both Biocon biologics and Syngene in the consolidated results. I would like to also now turn to exceptional items during the quarter amounting to rupees INR 182 crores, net of tax and minority interest, which primarily pertain to deal-related expenses of the Viatris transaction. And this of course then leads to a net loss of INR 42 crores this quarter. This, I'd again emphasize, is a one-off event, and we expect it to return to normal from next quarter. Now coming to segmental comments, I would like to start with Generics, our Generics business for this quarter. The Generics business delivered revenues of INR 718 crores during the quarter, a year-on-year growth of 18%. Profit before tax for the quarter was at INR 72 crores versus INR 67 crores last year. And sequentially, revenues grew by 15%. The performance during the quarter was driven by an increase in demand for immunosuppressant APIs as well as generic formulations, especially statins as well as recent product launches. Margins compared to previous year were neutral on account of continued pricing pressure in the US market. During the quarter, we entered into agreements with Zentiva, a leading European pharmaceutical company, under which Biocon will manufacture and supply liraglutide to Zentiva for its commercialization in 30 countries across Europe. And as you know, in liraglutide we are a vertically -- we are vertically integrated. This is a complex formulation and it includes a drug device combination used in the treatment and management of Type 2 diabetes and obesity. Another agreement -- we have also secured approvals for some of our key formulation products in Europe and we have also entered into a long-term strategic partnership with Farmanguinhos in Brazil for the supply and transfer of immunosuppressants, finished dosage formulation. And collectively, these agreements and approvals that we have seen -- it's important for me to state will actually allow us to drive that mid-teens growth for over the next 5 years and beyond. On the quality compliance front, we've been issued a Good Manufacturing Practice certificate by EDQM, the European authority, for our active pharmaceutical ingredient manufacturing facility in Bengaluru following a GMP inspection of the site conducted in September. With respect to our Visakhapatnam project, we continued to make broad progress and -- in terms of our greenfield immunosuppressant API facility. And in terms of new peptide facility in Bengaluru, this also is on track. We expect to complete the validation batches in both sides by H1 of FY '24. Now coming to biosimilars, Biocon Biologics recorded revenues of INR 1,507 crores with a year-on year growth of 54%, pursuant to the closure of the Viatris acquisition and steady growth in Biocon -- in the Biocon Biologics led business. The revenue for Q3 FY '22 -- FY '23 includes contribution from the acquired Viatris biosimilars business effective from the date of closing of the deal on the November 29, 2022. Previously, Biocon Biologics recognized only transfer price and profit share of biosimilar marketed by Viatris. Post completion of the deal, it now recognize the full value of sales and associated expenses. The reported numbers therefore include one month profit from the acquired business and a provision for interest expense and non-cash amortization charges related to the acquisition. Core EBITDA for this business stood at INR 663 crores, which is up 83% year-on year. Core EBITDA margin jumped from 38% last year to 44% this fiscal. On -- this of course was then impacted by R&D investments for the quarter, which increased to INR 280 crores or 19% of Biocon Biologics' revenues. We will see R&D investments normalize to around 12% levels of sales, as we accrue full revenues from by Viatris' biosimilar businesses. We continue to make very good progress on our R&D pipeline. denosumab and Ustekinumab biosimilar programs have completed recruitment for the global phase work and Phase III clinical trials. And biosimilar pertuzumab has entered Phase I trials for global markets. Viatris has initiated an interchangeability study for our biosimilar adalimumab, allowing us to maximize the commercial value of Hulio in the US. We have filed our biosimilar Aflibercept in general global markets, including the US and Europe. EBITDA post the R&D and other expenses stood at INR 361 crores, which is up 53% year-on-year. And EBITDA margin was stable at 24%. Depreciation & amortization and interest expense for the quarter increased by INR 146 crores year-on-year, of which INR 95 crores is attributable to the Viatris acquisition. Profit before-tax and exceptional items for this business stood at INR 102 crores. Advanced Markets continue -- continues to see a strong penetration of our commercialized products, holding now double-digit shares in the US. glargine's total prescription market share is trending around 12%, while new prescriptions are at 14%. We continue to see strong momentum in our biosimilar Pegfilgrastim market share, which has crossed 11%. In Europe, our biosimilar adalimumab continues to see a strong uptake in key markets such as Germany and France where it has 18% and 10% market-share respectively. We also saw an uptick in trastuzumab market performance in Europe achieving 17% and 20% market shares in France and Italy respectively. We continued to launch our products in new markets with biosimilar bevacizumab in Australia and biosimilar glargine and aspart in Canada last quarter. The Emerging Markets business continues to deliver strong performance underpinned by the insulin portfolio and biosimilar trastuzumab. We have expanded our reach through new launches across Emerging Markets, and the franchise will be augmented by the integration of Viatris' emerging market territories. On the regulatory front, USFDA has accepted our CAPA plan pertaining to the pre-approval inspection of insulin aspart in Malaysia, which was cited in the CRL. The bevacizumab CRL requires us to address the observations made during the site inspection for which we have submitted a CAPA plan and are awaiting a response. We are confident of committing closure -- we are committed to -- for the closure of the actions within the stipulated timeline, and we are confident of being able to resolve the asks from USFDA. In summary, the business continues to see healthy and profitable performance with several catalysts for growth, such as the launch of biosimilar adalimumab in the U.S. And we believe that the acquisition of Viatris' biosimilar business is a very key inflection point for Biocon Biologics, as we transform into a unique, leading, global biosimilar enterprise, which we strongly believe will drive huge value for all our stakeholders. Comment on Novel molecules; as a part of the ongoing pivotal Phase III clinical study of itolizumab in patients with acute graft-versus-host disease, enrollment continues to ramp up. There are now 45 clinical studies that are up and running. Enrollment also continues in Phase Ib clinical study of itolizumab for lupus nephritis, and Equillium expects to announce topline data later this year. I think it will be prudent for me to mention that many acute GVHD studies that were being conducted in -- by various companies have actually not succeeded, and this particular molecule is the only one showing robust data. So we hope that this will actually be if a very, very -- it will hold its promise and really get approval in the foreseeable future. Patient dosing for the Phase II trial in India for the clinical study of itolizumab in patients with ulcerative colitis began in December 2022. And based on the very encouraging and promising data in acute GVHD, Equillium recently entered into an option and purchase agreement with Ono Pharmaceutical Company Limited Japan where Equillium was granted -- has granted Ono the exclusive right to acquire its rights to itolizumab. We believe that this is a very important event, as Ono is a very highly respected company that has brought several important molecules to the market through partners. Now coming to Research Services, revenue from operations grew 23% to INR 786 crores over the corresponding quarter last year. Reported EBITDA was up 15% to INR 248 crores. Profit before tax was at INR 140 crores, up 9% over the corresponding quarter last year. The third quarter results show positive performance across all divisions, with solid growth in Research division's Discovery Services and Dedicated Centers. Development Services benefited from repeat orders from existing clients as well as an increase in the number of collaborations with emerging biopharma companies. In Manufacturing Services, the highlight of the quarter was the successful inspections of its biologics facilities by the USFDA, EMA and MHRA. With Good Manufacturing Practice certification from the regulatory agencies in place, the Company is now well-positioned to fulfill its long-term contract with Zoetis and progress its biologics growth strategy. So I'd like to conclude by saying that we expect to end FY '23 on a strong note, with healthy growth across all our businesses. Biocon Biologics will be the key growth driver as it begins to reflect the full quarter's revenues on the newly-acquired Viatris business from Q4 FY '23. Directionally, Biocon Biologics will be exiting FY '23 at $1 billion trajectory, excluding vaccines. Growth in FY '24 will come from the launch of adalimumab in the US and continued growth in glargine, trastuzumab and Pegfilgrastim. Launches of aspart and bevacizumab in the US post approval will provide additional upside. Biocon also is confident of delivering mid-teens growth in the company fiscal. With this, I would like to open the floor to questions.

We will start with Tushar Manudhane from Motilal Oswal.

Just on adalimumab clarification, so we have like approval for all the strengths or a specific strength? And secondly, with respect to interchangeability, what is the kind of timeline can be expected to get the approval?

Shreehas, you might want to take this.

Yes, sure, thanks Kiran. Thanks for the question. We've seen that there are several players in the market. There are low-strength and high-strength formulation players. We have low-strength formulation that we've bought. We also have a product which really checks the key boxes of being citrate-free, latex-free and a device which would really be what the patient experience will be all about. So we believe that we've got what it takes to be competitive in this market, Tushar. Another important aspect which you talked about, interchangeability, that is something that remains to be seen We believe that, that may not necessarily be a criteria to win. We do not see other biosimilars which are currently taken up in the national formularies having interchangeability at this point. Nevertheless, it's something that we will pursue and we will have the right to win when we get to our product into the market.

Interesting. So for our strength, what would be the market size?

So at this stage, if you really look at it, the market from a innovator perspective has been moved to the highest concentration. But we do not see high concentration or a low concentration really being the differentiator. We've seen similar commentary from other incumbents who come there, other players who have also looked at bringing products. We've also seen payer acceptance from other biosimilars which had been launched. So that may not necessarily be a criteria for success, Tushar.

And maybe you should add that we have had a huge success in Europe where we are a very, very positive patient experience. And we believe that, that will translate to the US market.

Yes, that's so true, Kiran. I think to add to what Kiran just said, Tushar, we are one of the few players who have been very successful. We've got a product launched in Europe. We've got over 80% market-share in Germany alone. And we've crossed 10% in France, some of the big markets in Europe. So we've come on the back of previous success and we're quite confident in our product will be received when we launch it in the US.

Sure. And the second question…

Matt, if you want to make any further comments?

I would just add that we're in -- already prepping with the Viatris sales force. So we're getting ready and already getting out there and speaking to key physicians, so that process has starting. We're now waiting to be able to talk about the key elements that both Kiran and Shreehas spoke about.

Interesting. And secondly, also if you could share some like clarity -- or rather visibility on the business from the Vaccines segment.

Your voice is very weak, but I think your -- if I understood you correctly, you're talking about any visibility on the Vaccines business, was that…

Correct.

Okay. Well, we've -- we had said that we will move past the -- once we have got the definitive agreements done, we are in the regulatory phase right now. We've secured the approval from the Competition Commission of India. The next phase is to get the National Company Law Tribunal approvals. It requires us to get approval at Karnataka where we based and also for Serum to do it in Maharashtra where they're based. We've in the last -- we're in the last stages that are in Karnataka and Serum has to move their applications to the Maharashtra and as well. That's still pending.

So effectively, 2Q FY '24 could be the timeline to look for?

Yes. So we have not been able to reflect the vaccine numbers this quarter is what I can say.

And lastly, if I may, on this agreement with Zentiva, any commercial outlook or guidance on this business?

Maybe Sid, you might want to give it?

So there is no revenue outlook I can give. On that I can say is, liraglutide for us is a very important product. It is a differentiated product and we feel we're very well placed to launch this drug along with Zentiva. At the time of market formation, Zentiva has semi-exclusive rights, so we also will commercialize directly. And we feel that total value of this opportunity will lead aid to the growth in the coming years.

The next question is from Cyndrella Carvalho from JM Financials.

I just wanted to understand the $1 billion exiting guidance that you are sharing for the by Biocon Biologics. Can you please help us understand this in more detail?

Perhaps, Chinni, you want to explain it, but let me start by saying that you've already seen that we are at a INR 1,500 crores level this fiscal for Biocon Biologics and we expect this number when we capture the full financials of the Viatris business in Q4 to cross INR 2,000 crores.

Cyndrella, morning. Just to make in and put it, INR 2000 crores is our expected revenues for Q4, excluding Vaccines. That translates to a run rate of $1 billion per annum. And then as you look into FY '24, you need to add growth on the existing molecules, the big opportunity in adalimumab US and then you add the addition of the -- I mean once we get regulatory approval for both beva and aspart, we'll see incremental revenues coming.

And of course, growth from existing products.

But how should we understand the facility planning? I mean we're still receiving CRLs and what is our…

Yes, but Cyndrella, we are already selling products. Please understand that we are still marketing trastuzumab, we're marketing glargine and we're marketing Pegfilgrastim in the US. Europe has all products being marketed, so please understand that we are looking at 2 products that need approvals and these numbers exclude those products. We have actually factored the fact that there may be a delay in that approval. We are hoping that we will get approvals in this calendar year, which will then be incremental to that $1 billion is what we're saying. So this -- excluding all those products, we are still at $1 billion run rate, is what we want you to understand.

Yes, so that's helpful ma'am. Just wanted to understand in terms of where are we -- I mean what are the USFDA's requirement, which is taking or creating these delays, any color that you can help us understand.

I think we have -- I had mentioned that in my comments, saying that are CAPA plan has been accepted by the USFDA and in Malaysia. And we have also provided a CAPA plan for the Bangalore facility, which I'm sure will also be accepted by the USFDA. We are in the process of basically implementing that CAPA plan that USFDA has accepted in the -- in Malaysia. And maybe I will ask my colleague -- I don't know whether Michael is on this call, but I will ask Michael to also add to what I'm saying.

Shreehas, you can pitch in, Michael is not there.

Yes, so let me just add to what Kiran just said, Cyndrella. I think what is important to note is that all the facilities that we are talking about are supplying product to the United States already. So it's not something that is fundamentally wrong with it is -- that's the first thing that I want to state. These are also products that have been approved like EMA and continue to be commercial in several parts of the world. The way to look at it is that, certainly there is a greater expectation from the agency, which we're more than happy to upgrade our standards and meet, and that's the exchange Kiran referred to when she talked about the engagement. We have provided a comprehensive response to the agency to see how we can meet with their expectation. We've got a response back from them saying they accept our proposal. So that's why we are quite confident in Malaysia with the aspart submissions that we've made, to be able to resolve it to their dissatisfaction. We recently received the CRL for bevacizumab in Bangalore earlier this month. We are quite confident we will be able to get that also to the satisfaction of the agency. These are always standards that we have to work to improve upon. We look at this as an opportunity to improve and strengthen our systems. We do not see this as necessarily a lacuna overall, but an opportunity to strengthen it further.

That's very helpful, sir. Yes, Shreehas, that's very helpful. Just on the timeline for interchangeability and how do we expect the market formation for Adi, any comments on that?

Specific training product, Cyndrella, that you're talking about?

Adalimumab.

Yes, so again interchangeability is an important topic to understand how it really plays out commercially. Now we've seen already contracting happen in the US where the first biosimilar is not an interchangeable product. And then there will be -- and it's received formulary listing, so clearly, it's not a condition precedent to moving forward. We've seen similar things happen on the insulin end as well. So that's the first piece, that it's not mandatory to success on the commercial side. The second piece which is related to this, how interchangeability plays out in real life is you can have one player who can get interchangeability approval and get some exclusivity post-launch for a period of 12 months, which effectively means, even if you were to have interchangeability approved, you would probably have to wait until that exclusivity runs out. So again, from a commercial standpoint, it would really be another contracting cycle before you can get there. I would think that interchangeability is something which is nice to have. It is something that we are confident of anyway. But it's a very US-specific phenomenon. We do not see that in rest of the world. We, as I said before and Kiran rightly pointed out, we've seen great success with the product -- with Hulio adalimumab in Europe and we are quite confident that we'll be able to get that success. The real piece here is the patient experience and hub services, which Matt can talk to you about in more detail, but it's about our device and we very confident about the kind of device we're bringing to the market. It's a 2-click device and which should really be very, very helpful for the patients. So that really gives us the right to win, Cyndrella.

Just one last, if I may. And that is on -- when do we expect consolidation from the Serum side, timeline I'm asking? Would it be Q1 or as the earlier participant highlighted, it is first half of FY '24, what should we try and build in terms of our models?

Yes, I think right now we don't have clear visibility of the regulatory competition, but yes, maybe we can look at next fiscal for that -- for those numbers to be consolidated.

Next question is from Damayanti Kerai from HSBC.

My question is again on adalimumab. So you have mentioned, it's not mandatory for you to succeed in this market, but the interchangeability studies which you have initiated, what is the completion timeline which you are aiming for?

Damayanti, we can get you the exact dates on the interchangeability study. But as I've said, it is -- the BBL dates of this would matter only after the first commercial launch of the interchangeable product, which we believe will be in July of 2023. So until July of 2024, even if you had an interchangeable product, it's really not going to make a difference.

And by which time I think we will have the interchangeability label, if that's your question.

Okay, yes, sure. And this adalimumab launch which you are prepping for, so in the current contracting cycle, how do you see your positioning so far in view of your discussion with payors, etc.? So once you're ready to launch -- so far like how do you see your reach within these contracting cycles?

Maybe, Matt, do you think you want to comment on that? You're mute, you're on mute.

Yes, thank you. Sorry. Thank you for the question. Yes, we are in right where we need to be in our preparation. We are speaking to key payors as well as the -- key to these are really 4 channels, and the first channel is speaking to the payors. And we're having great discussions as we look for the paying cycle starting in July. The next piece of this is we're having additional discussions, as I mentioned, getting out with physicians and understanding our product and the 2-click, as well as being citrate-free, latex-free, all those key attributes so they understand our product, Hulio. The other facet here, and we're speaking to and we don't mention a lot but is key to this is the specialty pharmacies. So we're starting those discussions with specialty pharmacies. Those are the ones that send a product to patients and act -- it's not really retail component, they act as that pharmacy to be able to get their products to the patient that the doctor has prescribed. And then Shreehas had mentioned, the other key channel is really the patient services. So how do we help the patient help the physician through the process that they're used to from the innovator. All 4 of those will be standing up, and as I said, we're having detailed discussions with key payors right now in our anticipation of our launch that will occur in July.

My second question is on some of the launched biosimilars where you have gained notable market share as commented by Kiran ma'am in her opening remarks. So I just wanted to understand, how do you see pricing scenario for these products although like we have gained market share, but what's your view on the pricing situation right now?

Shreehas, would you like me to start and then jump in?

Yes, why don't you go ahead, Matt, please?

Okay, great. Again, thanks for the question. We do see some of that deflation. But as far as to our models in our plan, they are aligned. And as you look at the different channels, the medical side as well as the pharmacy benefit side, on the medical side in the trastuzumab and the Pegfilgrastim you're speaking about, we're seeing nice steady states in our average selling price. And this has allowed us to continue to grow share as well as to be able to maintain that deflation that is occurring that you've seen in the marketplace. Also we have an extensive sales force that -- where we're seeing great success in our commercial plans as well as our clinical side. And I think that's attributed definitely to our sales force and the relationships we have in the understanding of our product and the pull-through. So I feel we're in a very good spot based on our modeling and our plan. And also being vertically integrated we have the staying power as well as we have the broadness of the portfolio. When we think about oncology and the products we have there, we're in, well, a good position to be able to compete.

Okay, so you expect market share to go up further as you push more on the commercial efforts?

We are seeing a nice trend in that continued upside in the market share and it's showing in the NRx-es and the TRx-es that you can see in the IQVIA data, we're making good progress.

Sure. My last question is, what's your debt reduction goal? So obviously effort again ongoing there, but anything, say, in next 6 months to one year? How much did you want to reduce on your books?

So Damayanti, if you will give us a little bit of time, we are in the process of raising this debt and we would like to share it with you once the process is complete. But needless to say that we want debt at a very, very manageable and low level, as much as we can get it to. So let us share this data with you as soon as we complete the debt -- the equity raise.

The next question is from [ Dhaval Bhalodia ].

I have 2 questions. First question is for most of our current biosimilars, our markets are stuck around higher single digit to the lower double digit except for the LANTUS biosimilar. So it seems we have now full control of sales and contracting. Is there anything we were doing differently than Viatris used to do, so we can increase our market share and penetration?

Matt, you might want to answer this.

I had a little hard time understanding, but I believe it was around…

No, basically I think the question being asked is, are we going to do something different to what Viatris is doing to market and get better market penetration. And the answer is yes because -- let me start comments by saying that we are looking at dedicated sales efforts for biosimilars, but I'll leave it to Matt to add to this.

Yes Kiran, absolutely. We are doing more, and we're seeing the opportunities, particularly in additional customers in the conversation that we're having. As we mentioned in previous calls, a lot of this is -- we have 100% focus and we have some great opportunities as we look at not only the payor side, but the retail pull-through, our ability to talk to physicians. And the integration is going well and we're continuing to see that progressing as well as being able to talk to new customers, especially as we look at the vertical integration that we have at Biocon Biologics.

Second question is, majority -- yes, sorry. My second question is, since most of our new biosimilars like Avastin and Humira, we may be the fourth or fifth player in the market versus first or second in case of the Neulasta and Herceptin. So are -- we have any particular strategy since we are the fourth or fifth player to address -- to come with any particular strategy? And the second thing, Humira has a wide use, like it's a dermatological product, is a gastro product, it's an autoimmune disease product, and most of our biosimilar product is only oncology. So we have separate sales staff to -- for the Humira or any other thing we are doing for that?

Shreehas, would you like me to start and then chime in?

Yes.

Great. So let's start with our product, Hulio. We are going to be in that what I would call the first wave. Amgen did launch here over the last month or so but in that first wave, as you know, there is no one going to be exclusive. So we have a tremendous opportunity to be part of each one of those formularies. Each of the payors has said that they will have at least a biosimilar plus one or plus 2 and we'll be in that first wave and have our plans to be able to participate and win with those payors. So being exactly a little bit later than Amgen is not in my opinion a hurdle because it's the way the payors have opened this up and we're well positioned to win these formulary positions. And then we're also -- as I mentioned, we're in a good position after winning the formulary with this sales force that we have coming from Viatris and adding to it we have that ability to pull through. And then, we also have a great understanding of the specialty pharmacy and especially pharmacy, as I mentioned, is how the products are dispensed. And then, we're in the process of continue to stand up and add additional patient services to what we're developing with Viatris to be able to have the patients have those discount co-pays or the ability for them to get additional services. So we're in a good position with our Hulio product. As Shreehas and Kiran also mentioned, we have history. A lot of our competition doesn't have history. We have global history and market leadership in Germany, in France, to be able to talk about, as well as our product has that 2-click mechanism. And we mentioned that it's also a citrate-free, which won't cause any pain at injection site. As it relates to -- I believe you're asking about the oncology products, we are well established in our sales force as well as our relationships with key physicians. So as we launch products, even though we're not first, which ideally we love to be first, we have that mechanism and the understanding of how that medical benefit works and to be able to pull that through on the oncology side with our sales force as well as our payor as well as our ASP understanding of how the industry works.

And I might remind Mr. Bhalodia that Biocon was the Company that received the first USFDA approval for trastuzumab or biosimilar Herceptin.

We move on to Harith Ahamed from Spark Avendus.

So you'd previously guided for a $1.8 billion revenue for Biocon Biologics in FY '24 and a $500 million EBITDA. So are we maintaining that guidance given there is some delay in the closure of the transaction with Serum?

Yes, maybe Chinni, you would like to respond to this? But basically, I think we will be focused on these numbers that the market has -- I mean that we have shared with the market and we will basically look at -- as you know, there have been delayed approvals of aspart and bevacizumab. We are also trying to catch-up with that particular gap. But we are looking at how to basically stick to these numbers. Of course, this does include, as you know, $300 million of vaccine revenues. So I think we will be looking at all these numbers and making sure that we share with you any changes to these numbers. There's also been an impact of the currency parity between the dollar and euro and dollar and yen. So I think that also has impacted some of these numbers. But we are trying to see how close we can get to those numbers.

Got it. My second question is on the R&D spend at Biocon Biologics specifically. We see the almost INR 100 crores delta on a quarter-on-quarter basis and this with just a month of consolidation of the acquired business. So how should we think about the spend for next year? Do we still maintain that 12% to 15% of revenues guidance that we've given in the past on the much higher revenue base? Is that how we should think about it?

Yes, I think that's what I meant by saying that we will see normalization because this quarter you've only seen the impact of a month's contribution from the Viatris business. But going forward, we expect to basically normalized R&D spends to that sort of 12% to 15% levels.

And last one with your permission, Siddharth, there is an increase in the share of loss from JVs and associates. And we were under the impression that given that we've lowered the stake in Bicara this number would be trending down. We've seen an increase on a quarter-on-quarter basis. So how should we think about this number going forward? Is this a one-off quarter for that particular line item?

So I wouldn't call it as a one-off. Our shareholding is down to 55% and the expenses of Bicara has gone up as they are in middle of clinical trial and of course, the advancement of the lead program. And we do expect over the next few months for the fund raise by Bicara, which will further dilute our stake. But on an absolute number which we are treating as a loss from associate shouldn't materially change, because as they progress in clinic, the expenses would go up, they're also spending money on their pipeline, the follow-on pipeline. Of course, that's at very early stages. The expenses will not be significant. But just from a model perspective, we expect something in the similar range over the next few quarters.

Next question is from Surya Patra, PhillipCapital.

First question is -- or couple of questions are there about the -- to understand better the integration that -- also Viatris operation. So in fact when we -- what we believe that, okay, with this acquisition of Viatris' biosimilar operation we have seen vertical integration. And theoretically that should have supported gross margin sequentially. But we are not seeing any change this quarter although this is not a reflection of a full-quarter performance of the acquired operations, but is it fair to believe that the gross margin should see a kind of sequential up move post integration? That is one. Secondly, I wanted to understand a bit more on the distribution charges what we are paying to Mylan, in which line item that is getting captured, whether it is…

You're muted.

I'm audible?

Yes.

Okay, sorry for that. Then I'll repeat my question. So though about the integration, some clarity I wanted, so theoretically with the acquisition of the Viatris operation that provides more integrated activity now and hence the gross margins would have seen sequential improvement, but this quarter we are not seeing anything like that. It is a slightly lower on the -- sequentially. So can you give some clarity about should we see and expect a sequential improvement in the gross margins after the integration?

Kiran, can I take that?

Yes, please.

Surya, can you just clarify the gross margin, you mean net of material cost or the core EBITDA which is net of all operating costs?

No, net of material cost.

Yes, net of material costs at the BBA level, we've seen that improvement this quarter where it improved by 2 percentage points over the last quarter. [Technical Difficulty]

Okay, so then possibly at the Biocon consolidated level, it would be pricing challenges or whatever that we would be seeing, that could be one reason. Is that -- the understanding correct?

Siddharth, you want to take this?

Maybe Indranil, you can just…

It's also -- it's not so much on pricing, but it's also about product mix. So we will see a quarter-on-quarter flux because of product mix. This should normalize going forward.

Okay, and…

Yes, I may just comment. Really look at the core EBITDA performance, not so much our own gross margins and that for Biocon Biologics it's at 44% improvement over the last quarter.

Okay, so now that practically -- including the R&D spend, why, because that is an integral part of our business, and in the next couple of years' time, we are likely to see an upward move only -- [indiscernible] upward number in terms of R&D spend, so the overall margin profiles of Biocon Biologics, how should we see considering also the integration of the acquired operation?

The SG&A cost that will come through post-acquisition for the full effect of this SG&A cost is absorbed in our -- when we report our core EBITDA. And as I indicated, we are now trending above 40% this quarter and the previous quarter. So we see the overall SG&A cost being comfortably [Technical Difficulty]. Kiran did mention that we are looking at bringing R&D cost down to about 12%. So you would see EBITDA now then trending towards the high-20s nearing 30, from a margin profile, if that was your question.

Okay, yes, so…

And that's an improvement, as you can see.

Okay. Just last question, let's say for the biosimilar business. So obviously, the key product opportunities what we are having for -- let's say, for FY '24 is beva, aspart, adali as well as rh-Insulin I believe. So how should we think, given the kind of a timeline that is there and the regulatory clearance that we are waiting for, so and the contractual cycle also that is, considering all that, whether these are considered to be the real FY '25 triggers for us to grow?

So let me answer you, Surya, by saying that FY '24 certainly is going to focused on the successful adalimumab launch. And I think we are also looking to see how much we can grow our existing products like glargine, trastuzumab and Pegfilgrastim in the US, but also we are focused on making sure that we focus on Europe for all the products that are approved. As you know, in Europe we have all products approved, in fact we have 7 products approved in Europe, of which the real focus up until now has been just to -- not all 7. So we are looking at seeing how we can basically leverage and add to the business in terms of all products in the -- in Europe. So I think that's the way we look at the FY '24 and of course, we are hoping that aspart and bevacizumab will also be approved this calendar year, in which case, obviously there is some contribution to the FY '24 for growth. But for FY '25 growth will see all these products contributing to strong growth.