Biocon Ltd (OTC:BCNQY) Q1 2021 Earnings Conference Call July 23, 2020 11:30 AM ET

Company Participants

Saurabh Paliwal – Head, IR

Kiran Mazumdar-Shaw – Founder & Executive Chairperson

Christiane Hamacher – CEO & MD, Biocon Biologics India Ltd.

Sundar Ramanan – Regulatory Affairs

Gaurav Laroia – Chief Strategy Officer

M. B. Chinappa – CFO, Biocon Biologics India Ltd.

Paul Thomas – Chief Commercial Officer, Biocon Biologics

Siddharth Mittal – MD, CEO & Director

Peter Bains – Director, Syngene International Limited

Conference Call Participants

Prakash Agarwal – Axis Capital Limited

Shyam Srinivasan – Goldman Sachs Group

Neha Manpuria – JPMorgan Chase & Co.

Nithya Balasubramanian – Sanford C. Bernstein & Co.

Surya Patra – PhillipCapital

Sameer Baisiwala – Morgan Stanley

Nitin Agarwal – IDFC Securities Limited

Charulata Gaidhani – Dalal & Broacha

Tushar Manudhane – Motilal Oswal

Yatin Mohane – Iroha Investment Management

Vishal Manchanda – Nirmal Bang

Operator

Ladies and gentlemen, good day, and welcome to Biocon Limited’s Q1 FY ’21 Earnings Conference Call. [Operator Instructions].

Now I’d like to hand the conference over to Mr. Saurabh Paliwal from Biocon Investor Relations. Thank you, and over to you, sir.

Saurabh Paliwal

Thank you, Vikram, and good morning, ladies and gentlemen. I welcome you to Biocon Limited’s Q1 FY ’21 Earnings Conference Call.

Before we proceed with this call, I would like to take this opportunity to remind everyone that a replay of today’s discussion will be available for the next few days about an hour following the conclusion of this call. The call transcript shall be made available on our website in the coming days.

To discuss this quarter’s business performance and future outlook for our company, we have today the senior leadership team at Biocon comprising Dr. Kiran Mazumdar-Shaw, our Chairperson; as well as other colleagues from the senior management team.

I would like to take this opportunity to remind everyone about the safe harbor related to this conference 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.

With this, I’d like to hand over the call to Dr. Kiran Mazumdar. Over to you, ma’am.

Kiran Mazumdar-Shaw

Thank you, Saurabh. Good morning, everyone. I welcome you to Biocon’s earnings call for the first quarter of FY ’21. I hope all of you and your families are keeping safe in these very challenging times.

Let me start with a quick update on the COVID situation. Starting with operations, we started this fiscal with a skeletal staff through April and started gradually ramping up from May, ensuring strict workplace protocols to maintain a safe and infection-free working environment. I’m happy to share that as of June, we have ramped up our manufacturing operations to pre-COVID levels. Supply chain and logistics situation has now fully normalized, and we continue to maintain good safety stocks for key raw materials and finished drug products from a business process continuity perspective. The vertical integration further helps us to have a better control on our inventory management.

In recent weeks, we have seen a huge increase in the number of COVID infections in Bangalore, resulting in the state government putting the city under lockdown once again. While the lockdown remains in place, several industries, including pharmaceutical, manufacturing are allowed to work unhindered and employees are allowed to go to work. This is clearly good news for us, our customers and all the patients across the world who rely on the medicines produced in our various facilities. However, as a precautionary measure, we have asked a substantial number of employees, especially those under support functions, such as finance, marketing, HR, IT and administration, to work remotely from home.

Employees in manufacturing, quality and R&D continue to report at the required strength to our various sites. We are monitoring the situation on a daily basis to ensure that both safety of our employees as well as the continued normal functioning of our operations routine.

On the research front, Biocon and Syngene have been actively addressing the COVID-19 challenge. While Syngene has established an accredited virus testing laboratory and has developed an ELISA antibody test kit, Biocon, as many of you would have heard, has repurposed its psoriasis drug, ALZUMAb, for the treatment of moderate-to-severe COVID-19 patients who develop what is referred to as the cytokine storm.

ALZUMAb, or itolizumab, received an emergency use — restricted emergency use authorization from CDSCO on July 12, and since then, the drug has been extensively used across the country with very promising outcomes. In fact, it must be noted that ALZUMAb is the only biologic with a restricted emergency use approval for CRS in COVID-19 patients. Our U.S. partner, Equillium, is also very encouraged by these results and is planning to initiate clinical trials in the U.S. at the earliest.

Moving on, I will now present the key financial highlights for this quarter. Post completion of our group restructuring in fiscal year FY ’20, the operating segments have been realigned effective April 1, 2020. Branded Formulations business has been merged with Biocon Biologics and Novel Biologics has been carved out as a separate business segment. As a result, the 4 new operating segments are Generics, Biosimilars, Novel Biologics and Research Services, that is Syngene. You will find us reporting in a very granular way in these 4 verticals.

Generics is the new name for our Small Molecules segment. It will continue to reflect numbers that pertain to our APIs and generic formulations businesses, including our ANDA business. Biosimilars will include performance numbers for Biocon Biologics as well as Biocon FZ, which is Biocon’s subsidiary in the UAE. Biocon Biologics business comprises development and commercialization of insulins and insulin analogs, antibodies and recombinant proteins as well as the India-branded formulations business.

Novel Biologics will be a distinct segment from now on. Novel Biologics segment will house the P&L for the Novel Biologic assets. Assets in this segment will be those housed under Biocon Limited, which are namely insulin tregopil, which is our oral insulin program, itolizumab and BVX-20. In addition, our U.S.-based subsidiary, Bicara Therapeutics will also be included. Bicara is developing a pipeline of bispecific antibodies, and I’m pleased to inform you that its lead asset, BCA101 has entered the clinic in the U.S.

The Research Services segment represents the financials of Syngene, and there is no change here. Now moving to numbers. In the first quarter of FY ’21, we delivered a year-on-year revenue growth of 14%, wherein total income increased from INR1,483 crores last year to INR1,690 crores in Q1 FY ’21. If you recall, we had assured you that after the drop in earnings seen in Q4 of FY ’20, we had said that Q1 of FY ’21 would be a recovery phase. And this is what it is.

We recorded gross R&D spend of INR142 crores for this quarter, which corresponds to 11% of revenue ex Syngene. Of this, INR107 crores is expensed in the P&L, while the balance amount has been capitalized. The increase in R&D spends reported in the P&L statement is on account of higher spends in our biosimilars pipeline.

During the quarter, we booked a ForEx loss of INR4 crores this quarter as compared to a loss of INR1 crore last year. This amount is reflected in the other expenses line of the P&L statement. EBITDA for the quarter was down 6% to INR432 crores. EBITDA margins for the quarter stood at 26%, down from 31% reported in the same period last year. The reduction in EBITDA margin during the quarter can be attributed to our biosimilars business that saw greater R&D spend and lower profit share contribution from our partners. Core margins, that is EBITDA margin net of licensing impact of ForEx and R&D stood at a healthy 32%.

Net profit for the quarter was INR149 crores. Adjusting the exceptional item and impact of discontinuing operation, net stood at INR153 crores.

Coming to reviewing business segments performance for this quarter. In terms of our Generics business, this reported a very strong revenue growth of 16%, up — which is at INR599 crores. The segment’s PBT margin for the quarter stood at 17%, up 2% over last year, driven by higher revenues.

The API business witnessed a higher demand of certain key APIs across global markets as customers picked up stocks to ensure continued availability of drugs for patient serviceability.

Generic Formulations business also reported strong growth over last year. We had no impact of COVID on supply or demand of our products as they are needed for chronic therapy. As a strategy for expansion of our Generic Formulations business, we entered into an agreement with DKSH, a leading market expansion service provider with a focus on Asia, to sell and distribute 7 of Biocon’s generic formulations in Singapore and Thailand under Biocon’s brand name.

I would now like to give you an update on NeoBiocon, our JV in UAE with Neopharma. Given the decision to wind up a large portion of UAE Branded Formulations business, results of UAE operations have been classified as discontinuing operations. Revenues amounting to INR22 crores for Q1 FY ’21 and INR7 crores for FY ’20 have been excluded from segment reporting. As part of the winding-up process, we are in discussion with few interested buyers to acquire the business, which will include both the brand as well as employees. Biocon Biologics, however, will continue marketing its biosimilars portfolio in the UAE.

Now coming to Syngene. Syngene reported a flat performance as compared to last year with revenues of INR422 crores, having been impacted due to the temporary suspension of operations during the nationwide lockdown. During the quarter, there was strong performance in discovery services and dedicated centers. We expect Syngene to return to growth from Q2 onwards. During the quarter, apart from COVID-related initiatives, as mentioned earlier in my remarks, Syngene has signed a voluntary licensing agreement with Gilead for manufacturing and supply of remdesivir in India and other — and 127 other countries.

I will now hand over the section on Biocon Biologics to the CEO of Biocon Biologics, Dr. Christiane Hamacher.

Christiane Hamacher

Thank you, Kiran, and good morning, everyone. We are pleased to report that our Biologics business recovered in Q1, in line with what we indicated in the previous investor call. I’d like to point out that our total quarterly revenues are at an all-time high at INR689 crore. This marks a sharp recovery from Q4 fiscal year ’20 revenues of INR453 crore. EBITDA for Biocon Biologics is also up at INR196 crores from INR92 crore reported in Q4 last year.

When we compare performance versus previous quarter, I’d like to note that Biocon Biologics’ profits were particularly high in Q1 last year due to higher profit share from pegfilgrastim because of increased supply to the U.S. market. Q1 performance of this year is more in line with the average performance of full year fiscal year ’20. We expect this to increase in the coming quarters on the back of higher revenues. While we did capture in Q1 the revenues lost due to logistic challenges in Q4 fiscal year ’20, we have also seen a strong demand coming from most of the world markets, in particular, Latin America and the Africa/Middle East region. Growth was driven by trastuzumab and our insulin portfolio.

Regarding the U.S., we have seen a steady but gradually improving demand. Trastuzumab has seen a positive trend in market share, increasing to mid-single digits. The market share of pegfilgrastim has been maintained at 6%, indicating a solid underlying demand despite increasingly competitive dynamics. For both of these products, we expect that new contracting will further enhance the demand as our partner, Mylan, continues to establish itself in the biosimilar markets.

Furthermore, we are very pleased to have received the U.S. FDA approval of Semglee, our biosimilar Glargine in June. Semglee is our third product under the Biocon-Mylan collaboration that has received approval for the U.S. We are convinced that the imminent launch of Semglee in the U.S. will drive increased revenues as we tap into the $2.2 billion Glargine market opportunity.

In addition, new launches in EU will contribute to revenue growth in the coming quarters as we expand our presence in the EU, including major markets. In our ambition to constantly innovate, we are also pleased to announce the global collaboration with Voluntis, a leading player in digital therapeutics. Through this partnership, we will develop and distribute a unique digital therapeutic to support people on our insulin in managing their diabetic conditions towards better outcomes, quality of life and thereby a reduction in overall health care costs. The exclusive licensing agreement will make Biocon Biologics one of the first insulin companies to offer a U.S. FDA-cleared and CE-certified digital therapeutic to patients across the world.

We continue to set ourselves up in our ambition to strive towards global leadership in biosimilars with the following progress. The review of our BLA for biosimilar bevacizumab both by U.S. FDA and EMA is progressing as per plan. We are on track with the development of Insulin Aspart with our partner Mylan. And at Biocon Biologics, our recombinant human insulin program is also progressing well under the 351(NYSE:K) pathway.

Furthermore, our biosimilar pegfilgrastim in Europe is in early stage of launch by our partner, Mylan. Also Mylan expects to launch biosimilar etanercept in Europe in the second half of this calendar year. So biosimilar etanercept, Biocon Biologics has shared economics.

Our partner, Mylan, received U.S. FDA approval for Hulio, a biosimilar to the world’s top-selling drug Humira. In accordance with its patent license agreement, Mylan will be able to launch in U.S. in July 2023. Biocon has shared economics in Hulio. Overall, we are on track to have at least 8 biosimilars being sold in developed markets by end of fiscal year 2022, addressing a market opportunity of approximately up to $33 billion. We anticipate that our pipeline will deliver at least three additional molecules between fiscal year ’23 and fiscal year ’25, after which we expect to launch an average of 2 molecules per year.

COVID has imposed a lot of pressure on health care systems across the world. Therefore, we are convinced that access to affordable biosimilars will play a bigger role than ever before. We are working together with governments, health care authorities and international organizations to make our inclusive health care solutions available to patients across the world. I would like to reiterate our guidance of meeting the $1 billion revenue target in fiscal year 2022.

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I now hand it back to Kiran for her closing remarks.

Kiran Mazumdar-Shaw

Thank you, Christiane. I would like to conclude by saying that we have begun FY ’21 on a confident note with both Generics as well as Biosimilar segment reporting strong growth numbers. The performance in Q1 should act as a good setup for the coming quarters where we expect continued and improved traction across our business segments, especially in biosimilars with the launch of Insulin Glargine, expected shortly in the U.S. We do look forward to a strong year ahead provided that there are no more unforeseen surprises from the pandemic. Thank you.

Operator

Thank you. Ma’am, should we open the floor for questions?

Saurabh Paliwal

Yes, please.

Question-and-Answer Session

Operator

[Operator Instructions]. We have a first question from the line of Prakash Agarwal from Axis Capital.

Prakash Agarwal

Congratulations on the recovery. My first question is on biosimilar offtake. So the commentary in U.S., the margin recovery is largely due to recovery in pegfilgrastim? And the second part to that is, how is the biosimilar offtake now given the hospital setup is still working on skeleton staff and people still don’t want to go to hospitals. So how are you seeing the June, July? How it has been in terms of biosimilar offtake, especially in your large products, peg and trastuzumab?

Christiane Hamacher

Thank you for your question. So first, I want to reiterate that also trastuzumab sees a very positive trend in the market and that we are seeing market shares in the mid-single digits. And what we are seeing, trastuzumab, pegfilgrastim are treatments for life — are life-saving treatment for life-threatening indications. So we are seeing that patients are coming back to the hospital, and we are seeing that clearly, these medications need to be given. But what I want to point out here is that for oral medications, we are seeing a higher need for telemedicine and home care across the world. And therefore, we also are very proud that we have the partnership with Voluntis because it will be important in the future that medications — that there are solutions, so that medications can be given at home instead of being in the hospital and what also means higher cost. Paul, please add to the U.S. market and the specifics. Paul?

Paul Thomas

Sure. I think you’ve covered it very well, Christiane. I think the COVID impact, I think, it’s definitely — we’ve seen a normalization overall. I think for specific case-to-case things, I think Mylan would have to comment in any further detail. But we see this normalization overall in the market because of the severity of it and the importance for these patients to continue to get treatment. And yes, I think the profit impact is broad-based, I think it’s across products and regions also.

Christiane Hamacher

And in this context, we also expect that contracting will be back to normal, which will also further enhance the demand.

Prakash Agarwal

Perfect. That helps. And my second question is on trying to understand the trastuzumab scale-up better. I mean when I see it versus Amgen expenses who launched later, got market share. Could it be due to bundling? And with our launch of Insulin Glargine coming would we be also in a position to start bundling given that we are one of the 3 players in Insulin Glargine? So would we be able to bundle other products in the biosimilar space as well? Or it doesn’t work that way?

Christiane Hamacher

And so while we are not commenting on specific marketing strategies, it is very clear that a portfolio of biosimilars plays a major role. When it comes to trastuzumab and biosimilars and the other molecules in the U.S. market, Mylan has clearly indicated that they are focusing on commercial execution. The biosimilar market is new. All companies are certainly observing the market and are having learnings. We’re absolutely confident that we see continuous increased performance.

So the point on bundling, we don’t call that bundling is valid when it comes to portfolio. And yes, we are in a very strong position because with trastuzumab, with pegfilgrastim and the biosimilar for Glargine, we are having 3 molecules now in the U.S. market. While a portfolio is important, it is important that for each and every customer in the U.S., there are tailor-made strategies when it comes to contracting. Paul, please add some specifics, if you like.

Paul Thomas

Yes. I think [indiscernible] portfolio is, we have our portfolio of biosimilars now in cross-segments also now. And there are — Mylan brings a broader portfolio and existing relationships to build on as well. So I think we’re looking forward to that being leveraged with the Semglee we launched. It’s competitive, as we already mentioned, but there is a presence there and it’s a payer-driven segment that can be centrally driven. And there’s an unmet need, as we talked about, right? Affordability is still a space where there’s improvement that’s needed in the U.S. market, and I think we look forward to be part of that solution.

Operator

Next question from the line of Shyam Srinivasan from Goldman Sachs.

Shyam Srinivasan

My first one is on the biosimilar, the revenue. I recollect, historically, it used to be EM loaded, in the sense, higher. If you can share us a split of biosimilar revenue now in terms of geographical split? Some kind of EM versus non-EM kind of a split, please?

M. B. Chinappa

Shyam, Chinni here. Last year, we ended with developed markets closer to 60%. This year Q1, we started with very strong growth in the MoW market and/or the rest of the world markets. And for Q1, it’s actually — MoW markets is just above 50% of our total revenue.

Shyam Srinivasan

Yes. Chinni, if you can help understand because the segmentation changed, right? And now we have Branded Formulations in there. So like-for-like, your — what you’re saying is 50% is MoW today is — am I understanding it right?

M. B. Chinappa

Just above 50% and it’s like-for-like when I mentioned.

Shyam Srinivasan

And if you can help us understand — yes, like-for-like versus Q1 in the new segmentation. So what could be the kind of growth across these 2 segments? Maybe that’s the underlying question, actually.

M. B. Chinappa

In Q1 or is…

Shyam Srinivasan

This year Q1 MoW growth versus last year Q1 MoW growth?

M. B. Chinappa

So Q1 MoW growth has been much stronger, and that’s why the mix has tilted in favor of the MoW market. As we see the full year play out, we see strong growth coming from both MoW and developed markets.

Christiane Hamacher

And we expect that the shift will move to developed markets.

Shyam Srinivasan

Got it. Got it. That’s very helpful. And in terms of the margin profile between these two, do you think it’s blended together very similar? Or do you think these are widely different in terms of the margin profile?

M. B. Chinappa

We don’t give margins by market. I would just say that US is the highest price market in the world.

Shyam Srinivasan

Okay. Got it. Second question is on the launch of Semglee and just the dynamics — around in the U.S. and the dynamics around substitution versus interchangeability. Is there any updated thoughts you could share?

Sundar Ramanan

As you know, the agency issued — this is Sundar Raman of Regulatory Affairs. As you know, the agency has issued guidance for insulins that specifically talked about the pathway that will lead to a faster interchangeability of insulins. For now, we are actively working with the agency. Once we get to know the path, we’ll be happy to share the details with you. I would like to add interchangeability will certainly help adoption, but — and ramp-up of market share, but not a showstopper for us.

Shyam Srinivasan

Yes. Mr. Sundar Raman, is it imminent? Or do you think this is work in progress, 6, 12 months for this to come through? And the launch will be irrespective of this, like you were saying. So we should assume it is a more traditional like how we did Neulasta — sorry, pegfilgrastim and trastuzumab assuming that we are having interchangeability on day 1?

Sundar Ramanan

So once we get clarity on interchangeability, we will be happy to share them with you. As of right now, we are working with the FDA on the fastest way to get to the market to get interchangeability.

Christiane Hamacher

The insulin market segment is of high interest for us, number one. There is so far only one other biosimilar in the market in the United States. It is a market segment of $2.2 billion that we are actually tapping into. Mylan also in the portfolio has other treatments for diabetes. Mylan is very well placed based on the experience in contracting to make Semglee a real success in the United States with a focus now on commercial execution.

Shyam Srinivasan

Got it. And if I can squeeze in last question on the generics side. If you can understand how formulation versus API has worked, and there are some qualitative comments on the demand being even better. So if you can share the qualitative color, please?

Siddharth Mittal

The split between API and generic formulation is 80%, 20%, 80% being API. And demand for formulations has been strong, so has been the demand for APIs because, obviously, the customers to whom we are supplying the APIs have seen a good demand for the formulations that they are selling in these markets. We expect to continue to see a good demand. The pricing environment is stable. So we continue to see a good traction in this business.

Operator

We have next question from the line of Neha Manpuria from JPMorgan.

Neha Manpuria

My first question is on the Biologics revenue. I just wanted to understand your commentary that market share for Ogivri and pegfilgrastim is improving versus, let’s say, earlier this year. However, you also mentioned that the profit share is lower this quarter. Could you give us some color as to why the profit share, even if I look at performance and the lag is not reflecting the underlying Biologics momentum, let’s say, in developed markets or in MoW?

M. B. Chinappa

Neha, it’s Chinni again. When we mentioned that there is a different profit share, we were actually referring to a comparison to Q1 of last year, where we had very high profit share consequent to some increased supplies that we were able to supply to the US markets. When you look at the profit share for this quarter, it’s more in line with the average of last year. And as we indicated with higher market share, then the launch of Glargine, we expect this to improve going forward.

Neha Manpuria

Chinni, if that is the case, then if I look at — if I were to look at your EBIT margin at 15% versus, let’s say, even if I were to ignore the first quarter, my margins for the second and third quarter last year was about 25%. I understand that the cost for biologics has increased. But has the cost increased to that extent despite the higher share from Ogivri in U.S. and higher share in peg, our EBIT margins are not reflecting it?

M. B. Chinappa

So again, I’ll just point you to the EBITDA margins. So last year, we have reached 33%, full year EBITDA average was 33% where the Q1 was much higher on account of this higher profit share. So I don’t want to compare against Q1, I’m more pointing to comparing with the average of last year. This year, the Q1 numbers are — on the margins front, it’s slightly soft. It’s at 28% versus the average of 33%, but we see that climbing back to 33% in line with the guidance for the year that we said that we expect to maintain EBITDA margins at the same level as last year. So what you’re seeing in Q1 is just an effect of multiple things. It will — when you average it over the year, it should play out at 33%.

Neha Manpuria

Okay. So as our revenue momentum improves, the profit share, therefore, should improve, right? Whatever happened in this quarter or the last few quarters in terms of profit share is not reflective of our underlying Biologics performance?

Kiran Mazumdar-Shaw

So if I may just jump in. If you remember, we told you that this quarter would be a recovery quarter. And I think the growth will only start from Q2 onwards. So I think we are very confident that starting Q2, I think you will start seeing better contribution in terms of our margins and our profit growth.

Neha Manpuria

Understood. My second question is on peg and to some extent, on Ogivri. First on Fulphila. We have seen at least the secondary data that we are seeing — have seen that market share is up at about 6% for peg for the last few months. As — and even the volumes have recovered in the month of June, I know it’s just 1 month of data, our market share has been flat. So how confident are we of improving market share, given, one, we’ve seen new players come in; and second, we have seen the largest player in the market, biosimilar player in the market seeing a recovery in market share? Second, also, if you can comment on your views on pricing given higher competition in both trastu and peg?

Christiane Hamacher

Okay. I will start, and then I will hand over to Paul. So what we have seen with pegfilgrastim is that 6% of market share was maintained despite the increasing competition. This is the dynamic there. As I’ve stated before, Mylan has clearly said that they have a focus on commercial execution. Therefore, we expect that, in particular, the contracting will further contribute to an increased demand and penetration for pegfilgrastim in the United States. And with trastuzumab, we have seen a positive trend, and it’s also important to manage. With trastuzumab and pegfilgrastim, we have two products in our oncology portfolio. What I expect because it’s a biosimilar market, a more disciplined behavior when it comes to price decreases compared to generics. Paul, please add.

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Paul Thomas

Yes. I think the Ogivri trend is really quite a nice trend over the past quarter. And so we look forward to that continuing. And pegfilgrastim, I think in the face of competition holding that level, I think, has been positive, and we look forward to it building from there. The extended capacities are in place at this point. Payer coverage for both products are — is strong, and there are new contracting starts. So we look forward to building on this space going forward. I think we still are looking for continued growth here.

Operator

We have a next question from the line of Nithya Balasubramanian from Bernstein.

Nithya Balasubramanian

So my question was actually on your Semglee approval and launch. You mentioned earlier that Mylan has existing commercial capabilities in diabetes. So if you can give us a bit of color on what capabilities and commercial infrastructure they already have? Because my understanding was that they do have a primary care sales force, but they will have to invest to start covering endocrinology. So help us understand what their current capabilities are.

Christiane Hamacher

So thank you for the question. We certainly cannot comment about details of strategic marketing plans or the operational details. But what we can say is that Mylan also in that area has a strong execution focus and is also very, very confident that they have necessary capabilities and reach to make an impact when it comes to interactions with health care professionals, professionals with payers and so on. I think Mylan is in a very good position to drive the uptake.

Nithya Balasubramanian

Okay. If I might ask you a follow-up question. I can understand you can’t reveal details. But I’ll tell you where the confusion stems from. Because right now, you are a total portfolio on biologics. But in the near future, you are expecting interchangeability. So while we do not have clarity on when that interchangeability is likely to come through, is Mylan likely to make additional investments which would be required to push through a branded product in the diabetology space?

Christiane Hamacher

Okay. A couple of questions. One is — a couple of comments. One is on interchangeability. What we have seen in the U.S. is also that PBMs are willing to switch products without interchangeability. So this is very, very important for the market uptake to understand this context. And interchangeability for insulins, from our perspective, and as explained before, is not a must-have because switches to other molecules are happening. And that is at a payer basis, that is at a PBM basis, and that links back to contracting where Mylan is strongly positioned with their resources and reserve capability.

Nithya Balasubramanian

If I might, again, ask a follow-up question. So my question is not whether payers will be able to switch because we’ve seen that happen in the case of BASAGLAR as well, right? So I do imagine payers to put Mylan Semglee on the formulary depending on how you’re contracting. My question was more towards if additional investment is required in the period between your launching now versus when you get interchangeability, is Mylan making additional investments now? Is that something you can comment on?

Christiane Hamacher

And this again has to do with the strategic marketing plan with the execution on the ground with the operations. And Mylan would be in the best position to answer that, but we are also not revealing these details, how we execute and what the strategy is behind, including investments.

Paul Thomas

I think I’d just reiterate that, I mean, it’s — there’s not — it’s not a black and white with interchangeability or the other extreme, right/we have seen — I mean yourself have said there’s plenty of payer-driven activity here without interchangeability. And so there’s many nuances to this.

Operator

We have next question from the line of Surya Patra from PhillipCapital.

Surya Patra

In fact, ma’am, you have indicated that the new contracting would be improving the biologic revenue going ahead. So I just wanted to have a sense that whether the new contracting for the pegfilgrastim for the 340B program has started, and that is now reflective in the numbers? And now having 3 products in the portfolio for the year, how is the contracting scenario that you are anticipating for the near future? If you can just give some color on that front.

Christiane Hamacher

So the U.S. market for each and every therapeutic area and products have specific segments for contracting. For example, there’s — for oncology, there’s huge institutions like Texas Oncology, Tennessee Oncology. There’s community oncology practices, and they have 340B. For all these segments, specific targeting, contracting approaches are required. And Mylan is very well-versed in coming up with specific approaches to segments. That’s true across our portfolio because every customer needs a targeted approach. And with a focus on execution, we are absolutely confident that we will see an increased market penetration.

Surya Patra

Okay. And on the 340B, whether we have already started any benefits seeing?

Christiane Hamacher

Yes. We are not giving any specific comments on any specific segment.

Surya Patra

Sure. And if you can just share your thought process and idea about the Insulia tie-up. So what — how is that fitting to our overall strategy for the insulin for the global market? And what really practically it can mean for Biocon Biologics?

Christiane Hamacher

Yes. I’ll just start with the comment, and I will then hand over to Gaurav Laroia, our Chief Strategy Officer. So we are absolutely proud that we have joined hands with Voluntis because it’s a leader in digital therapeutics. And what a digital therapeutic is, it’s a therapeutic intervention that we want to pair with our own insulins, with our insulin portfolio to have a better outcome for patients and also savings for the health care system. It’s not an app, it’s a therapeutic intervention. I hand over to Gaurav to guide you through how it works and how we see these strategies evolving.

Gaurav Laroia

Thank you, Christiane. This is Gaurav Laroia. So just to set the context of how it works. As Christiane mentioned, it’s an FDA-approved CE-marked app, which has clinical trial and the world evidence data to show that it can help bring in control the HbA1c levels at a personalized level of a patient. So it’s getting into personalized therapy at a patient level. So it’s a tool given to people on — people with diabetes who are getting on insulin or have uncontrolled insulin.

So how does it fit in? First, I’ll just say the size of the opportunity. Obviously, 0.5 billion people globally have diabetes, $725 billion spent on diabetes globally, $50 billion from 2015 to ’17. The increase in diabetes is projected from now to 2045, 48% globally. And clearly, 10 million adults added to diabetes from 2015 to 2017. So the number of people who need help in managing their condition is only growing, right?

The second point I would like to highlight is diabetes is often called a disease of halves, half the number of people who have diabetes are diagnosed, half the number of people who get diagnosed are treated and half the number of people who get treated reach control. In this situation, with Biocon Biologics having the largest portfolio of insulins in the basket and having a paired digital therapeutic that addresses the two parts of this problem of halves, right, is filled and how we plan to adopt it as part of our global strategy. So as I illustrated through the data, huge unmet need. And the — this tool, which is a FDA-approved therapeutic actually, addresses the problems of the halves and pairing this with insulins can really address the problem that is surmounting with the decision support that diabetics have.

Kiran Mazumdar-Shaw

And I might add to what Gaurav said and saying that when you have — when you reach control, it saves the health care system a lot of money. So that is why it becomes very important to use digital therapeutics as a way of basically adding value rather than just making it a cost proposal.

Christiane Hamacher

I’d like to reiterate 2 points. Biocon Biologics is extremely strongly positioned when it comes to biosimilars for the insulin portfolio. Recombinant insulin with Glargine and with a biosimilar Aspart under development. Second is we mentioned that COVID is changing the world how health care is being delivered. Personalized ways, so that telemedicine services can be delivered to patients is the need of the hour. And our partnership with Voluntis speaks to that as well.

Surya Patra

Whether it changes the business proposition, ma’am, in terms of realization or in terms of the pricing of the product, all that…

Kiran Mazumdar-Shaw

Yes, that’s exactly what I’m trying to tell you that when you normally go and start discussing contracts, normally, it all becomes a pricing discussion. But here, you can actually have a very different set of discussions and have a value-add, which then the contracting companies will actually look at it very differently, and you can actually get a premium for what you’re asking for.

Surya Patra

Okay. And just last one question from my side, Ma’am. The PLI scheme, the Production Linked Incentive program of Government of India, what now they have revealed. And for that, they are saying that they have identified around 41 whatever the product. So in that, we have a couple of key products in that. And so far as fermentation, which is the focus area of that scheme. So knowing the fact that Biocon is the leading company in terms of the fermentation capability, and we are in the mode of creating capacity on the — on those small molecules front as well as the fermentation capability what we are having. So on that front, are we participating in a big way or anything that we are trying to get benefit out of the scheme or what opportunities that it throws to Biocon? Anything on that, if you can add?

Siddharth Mittal

Surya, this is Siddharth. So most of these 41 or 52 molecules are legacy molecules. There were a lot of the — if you look at the PLI scheme details, it’s a new CapEx investment. So I mean the decision we’ll have to make is whether to invest that capital in new products, future products or to invest in the legacy products. Obviously, the return on investments will be lower if you invest on these molecules. The CapEx in spite of getting an incentive from the government, the return would be lower. And when you look at the list — the main product that we have in that list is atorvastatin, for which we already have adequate capacity.

Kiran Mazumdar-Shaw

So I would say, Surya, this is not for companies like Biocon. I would suggest that this is a — these are opportunities for smaller companies who are CapEx crunched. I think they are the ones who should be actually availing of these benefits. I don’t think Biocon is in that kind of category.

Operator

We have next question from the line of Sameer Baisiwala from Morgan Stanley.

Sameer Baisiwala

Just on the industry side question for both pegfil and trastu. I would imagine that the biosim adoption is now close to 35% or thereabouts. So is the low-hanging fruits taken in now from — for industry to go 35% to 50% to 60% going to be harder? And second is, for your own products, I know Mylan is your commercial partner, but when do you expect to hit mid-teens sort of market share? Is it realistic to expect sooner? Or is it going to be — going to take some time?

Christiane Hamacher

So a couple of comments. So we have seen with the market dynamics in the U.S. as well as in Europe that double-digit market shares in the mid-teens are possible, even higher in the 20% and 30%. We have seen that in the oncology arena with a couple of players as an example. We are not commenting specifically how we see our market share uptake and revenue uptake for the quarters to come.

And the biosimilar market segment is still a market that’s being shaped, in particular, in the U.S. but also in other parts of the world. So that it is harder now to reach higher market shares of 20% or 30%, depends on each and every market segment and the dynamics there, the number of competitors, the time between the entry of competitors, but it’s still a wide open playing field. So I don’t expect that it is harder to achieve this market share where we have an advantage with our products. We are in the first wave of biosimilars, if you look at our molecules for the segments.

Sameer Baisiwala

Okay. I’m not sure whether my question was answered about the industry adoption going to 50%, 60%, all players put together. Is it going to be harder here on or — and the lower-hanging fruits being taken?

Christiane Hamacher

No. It is not harder for the industry adoption. As I have said, it is a field where the biosimilar players are now starting to come in. So that biosimilar — and biosimilar companies overall can move to 30%, 50% market share or even higher, has been seen in several markets of the world. So the potential and the possibilities are there, and this will play out over time.

Sameer Baisiwala

Okay, great. And second question, are we on track for Aspart filing in this 2020?

Christiane Hamacher

As I’ve mentioned in my commentary, we are on track with the development for Aspart, together with our partner, Mylan.

Sameer Baisiwala

Okay. Great. Got it. And just final question. For the 3 products that you’re planning to launch fiscal ’23 to ’25, when do you expect them to enter Phase III clinicals, just working backwards?

Sundar Ramanan

We are working with the agency on the scientific and regulatory pathways for these molecules. As we get further clarity, we will share them with you.

Operator

We have next question from the line of Raj Mohan [ph], professional investor.

Unidentified Analyst

Congratulations on the recovery. In the biosimilar space, are the price corrections post increased competition still in the range you had anticipated? Or are we a little more aggressive?

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Christiane Hamacher

Peter and Paul, do you want to take this?

Peter Bains

Yes. This is Peter speaking. We see the price corrections or the discounts in line with our expectations. There’s maybe a slightly more aggressiveness and some discounting in some areas specifically for markets, but overall, we see it the same, as Christiane highlighted. We also see that this will be less aggressive than in generics. And third, with the interventions such as Insulia that we’re planning to do, we think even to stand out and get the price premium as possible when we negotiate contracts with the payers. Paul?

Paul Thomas

I’ve nothing to add.

Unidentified Analyst

Based on your current assessment of the evolution of the biosimilars market, through the competition entering the space, do you have a broad conservative estimate of the number of players one could witness in this $33 billion market opportunity that you forecast by FY ’22?

Christiane Hamacher

We do. Peter, do you want to take this?

Peter Bains

Yes, but I didn’t get the question totally because there was a bad line, I think. Can you just repeat the second half of the question, please?

Unidentified Analyst

Yes. Of this $33 billion market opportunity by FY ’22 that you envisage, how many players do you broadly expect to be operating in this market?

Peter Bains

We expect several players in this market. I will not go into the specifics because it’s still a dynamic market, but it’s fairly competitive, obviously, but we are in a good position to be amongst the first to launch the products.

Unidentified Analyst

Would it be like sort of per product you’d be having 4, 5 kind of players?

Christiane Hamacher

The number of players will be different in the market segment. The number of players is important. What is more important is that players have the right business model and have a specific targeted approaches to all the different customer segments. And that’s what we are looking for. What’s also important is where are companies in — when it comes to the different wave. It’s important to be in the first wave because we are seeing dynamics starting to play out in the biosimilar market. Companies that are in the first wave have an advantage to be a strong player. This is not about a fair — share across the biosimilar players, this is about the right business model, the focus on execution and being in the first wave.

Kiran Mazumdar-Shaw

And I think you will understand — I think you will also understand that given the investment required in developing biosimilars the matrix that you’re likely to see is going to be very, very different to what you see in generics. So I think what you will see that you have to look at it molecule by molecule and then pipeline by pipeline, and timing by timing. So there are 3 various things that we are tracking in terms of competition. So you might find different competitors and different molecules. And then if those competitors are one-off, then they don’t have the kind of advantage that we have.

Christiane Hamacher

And in addition to that, we actually pointed out that it’s important to have a portfolio. As we have stated before, we are very well positioned in the biosimilar space. We have a platform of 28 molecules with our partners that will allow us to capitalize on what we are currently developing and what’s currently in the market. Portfolio plays a major role because health care systems are looking for savings. And now it’s COVID, so the demand for biosimilars, I’m absolutely convinced as well as generics will be higher than ever.

Unidentified Analyst

It’s pretty helpful. The final question, though, you have clearly spelled out the market share in Fulphila and Ogivri and Mylan’s strategy to drive further commercialization. Post the creation of Viatris in this Mylan-Upjohn merger, is there a possibility of expansion in distribution capabilities and consequently driving market shares up more rapidly? If so, by when can we see material gains?

Christiane Hamacher

So Mylan is best positioned to make any comments on the Viatris merger. What is clear from the announcements made that they are combining their strengths across the world. Upjohn with its headquarter in China is very well placed in most of the world markets. So we are very excited about this merger because of the combined strength of both of the companies and the focus on commercial execution.

Operator

[Operator Instructions]. We have next question from the line of Nitin Agarwal from IDFC Securities.

Nitin Agarwal

Siddharth, this is for you. On the generic business, now on the formulation side, we are a relatively small business at this point of time. And with the market dynamics being what they are, I mean how are we looking at this business over the next 3 to 5 years? And what kind of investments are you looking to make in this business?

Siddharth Mittal

Nitin, we have started to build a portfolio of our generic formulation products. This journey started 4 to 5 years back, was a slow journey. We — when the entire generics industry went through headwinds in the U.S., we had slowed down, but we are picking up pace again. We are building capabilities in terms of adding R&D infrastructure, adding manufacturing infrastructure, adding right skill people to work on this pipeline. And we are going to start ramping up a pipeline which will be under development and the filings would happen over the next few years. So I definitely expect, when you look at 4 to 5 years from today, this business contributing a much larger number in terms of both the percentage of the segment revenues as well as the absolute revenue, but it would take some time because even though we have some approvals and tentative approvals, we cannot launch those molecules because of the settlements or because of ongoing litigation.

Operator

We have next question from the line of Charulata Gaidhani from Dalal & Broacha.

Charulata Gaidhani

I have two questions. One pertaining to the recent Voluntis agreement, do you have competition in the similar area?

Christiane Hamacher

Okay. Gaurav, will you take that question, if we have competition?

Gaurav Laroia

So I think, as I mentioned to you, it’s a unique proposition when we provide this because what we provide is a portfolio of biosimilar insulins along with a digital therapeutic, which addresses two halves of the problem. Therefore, we feel we are very uniquely positioned because we are, as Christiane mentioned earlier, only biosimilar company to be able to provide a value proposition which encompasses a portfolio of insulins with a digital decision support tool. It allows for health system cost savings and therefore, interesting contracting opportunities.

Charulata Gaidhani

Okay. And is there a limitation because the focus is on type 2 diabetes, so — which is more an oral service?

Gaurav Laroia

The numbers, as I mentioned, 500 million people, most are type 2 and even if you take a small percentage to be on insulin, the numbers are huge. And as we mentioned, the consequences of not achieving control in the insulin segment is deterioration to other comorbid situations, which affect the heart, the kidney, the amputation, et cetera, and the eye, right? So there is a clear pharmacoeconomic benefit of this intervention to a population segment. So huge attraction in terms of the unmet need for patients. And when paired with the biosimilar offers a very strong proposition and which is large enough given the volume of patients.

Kiran Mazumdar-Shaw

And Charulata, let me tell you that in this world now that is evolving, this kind of digital therapeutic is not a nice-to-have, it’s a must-have.

Charulata Gaidhani

Yes. Certainly very novel and all the best for that. My second question is on the R&D spend. How much would you — are you planning to spend on R&D over the next 2, 3 years?

Kiran Mazumdar-Shaw

So as you know, our entire growth depends on how much we invest in the R&D pipeline. And this is something, which will happen over the years, and it will continue to happen. We are a science-led, research-led business, and we have to continue to invest in research and innovation if we want to grow at an exponential pace. So I think that is what is very clear. You can see that the investments we’ve made in itolizumab over the years will now become a very large opportunity for us going forward. So that is what we are actually focusing on. I think people must understand that it is only research- and innovation-led companies that can actually start showing nonlinear growth.

Charulata Gaidhani

Yes. But how much will be the spend?

Kiran Mazumdar-Shaw

So we are roughly at 11% to 12% of our non-Syngene revenues. So it can go up to 14%, 15% as well, but it’s that kind of a range that we have been presently spending at.

Siddharth Mittal

Yes. So the two different ranges that Kiran mentioned, one is at the net level and the second is at the gross level. So at a gross level, roughly 14%, 15%; at a net level in the P&L around 11% to 12%, excluding the Research Services revenue.

Operator

[Operator Instructions]. We have next question from the line of Tushar Manudhane from Motilal Oswal.

Tushar Manudhane

Just would like to understand on the CapEx side. Given that we have spent considerable amount, particularly on the biologics side, so how do we see the capital investment over the next 3, 4 years now?

Siddharth Mittal

I think Tushar, we had mentioned in the last earnings call as well that we will be investing $200 million per year for the next 2 years for sure, we cannot guide anything beyond that. And that $200 million is for generics as well as biosimilars, split half-half, does not have numbers from Syngene. And if you would have heard Syngene’s earning call, they would have indicated the CapEx requirements there.

Tushar Manudhane

Sure. So when you have said the Syngene part and even the generic formulation, so $100 million-odd kind of annual run rate. Given that the products now are into the commercial phase, so — and for which the CapEx is already done. So just wanted to understand whether there will be some amount of pause for this capital investment or that would continue for the foreseeable future?

Siddharth Mittal

See that CapEx is created for our pipeline products. The currently commercialized products, CapEx was done in the past. So these are all the CapEx for the future products. And as I mentioned, right now, I can give you clarity for next 2 fiscal years, FY ’21 and ’22 of $100 million each year for generics formulation and biosimilars.

Tushar Manudhane

Okay. All right. And just secondly, on the effective tax rate for full year ’21?

Siddharth Mittal

So 25%, it can fluctuate by 100 to 200 basis points. But thumb rule, just take 25% at a group level.

Operator

We have next question from the line of Yatin Mohane from Iroha Investment Management.

Yatin Mohane

Just wanted to quickly check, what is our dependence on China for procurement of raw materials?

Siddharth Mittal

So for biosimilars, very little dependency on China, but we do have a large dependency in generics business. Roughly 60% of our procurement is dependent on China. Though we do have multiple sources within China where we source from, and we are also working on a very aggressive plan to qualify vendors outside of China.

Operator

We have next question from the line of Vishal Manchanda from Nirmal Bang.

Vishal Manchanda

I have a question on itolizumab approved for COVID condition. So I wanted to check what are the existing CapEx capacities in terms of patient population that you can cater to? And what are the expansion plans on this? And how long the expansion can take?

Kiran Mazumdar-Shaw

So that’s a good question. Actually, this is a very important opportunity that we are addressing. And as you can understand, it was an unexpected opportunity. And so therefore, we will take two months to ramp up. And we have internal capacity that is available to us for actually addressing a very large global demand that is beginning to rise. And therefore, we are focusing on this. So starting in 3 months’ time, we’ll be able to have a very large capacity that we can actually address in terms of catering to the rising demand.

Vishal Manchanda

And would you need to file for approval in the geographies? Or would this kind of can happen automatic through your clinical trials in India?

Kiran Mazumdar-Shaw

Look, these are very early and unexpected opportunities. So we are mapping out the whole situation. And I think over time — by the next quarter, we’ll be able to share what is happening in which territory.

Vishal Manchanda

Right. And would it be fair to kind of assume about 5% of the COVID diagnosed patients would kind of need a therapy of this kind, like immunomodulator type of therapy?

Kiran Mazumdar-Shaw

Yes. I mean, at the moment, I think it’s about 10% of the patients who can actually fall into this category that result in these, what they call cytokine storms. So we are actually addressing this particular section of the population, the COVID population.

Vishal Manchanda

Okay. And one more on Semglee. So I wanted to check if the promotion expenses that Mylan would incur would — so while — before you get your profit share, would those promotional expenses be deducted? Or it would be the profit share calculated at the gross level? So the realization minus the cost of supply?

M. B. Chinappa

Sorry, we can’t reveal those kind of details on the contracting with our partners.

Operator

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Saurabh Paliwal for closing comments. Over to you, sir.

Saurabh Paliwal

Thank you, Vikram. Ladies and gentlemen, this is the end of the call. Apologies, we can’t take any more questions, happy to take them off-line. We’ll see you next quarter. Have a good day.

Operator

Thank you very much, sir. Ladies and gentlemen, on behalf of Biocon Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.



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