Biologics biz a large value unlocking opportunity; see revival from Q4: Biocon

A: I think we have had a fairly challenging quarter and I had already shared this with you the last quarter saying that really we expect to see a revival in Q4 onwards because we have been challenged with certain re-qualification activities that has seen a challenge for us to really boost our biologics business which we now expect to revive from Q4 onwards since we have addressed most of those re-qualification issues and we are back on in terms of full production. So, many of our emerging market opportunities have had to be denied for a few quarters or at least scale down for a few quarters so now in Q4 we will start seeing better performance.

In terms of our small molecules business certainly we have been impacted by the channel stuffing and also from a lot of the very highly competitive landscape that we are seeing in countries like US where there is fierce price competition which has certainly affected us an Active Pharmaceutical Ingredients (API) supplier. But having said that we have also seen some good performance of some of our segments.

Immunosuppressants have done extremely well, and we have also entered the US with our own finished formulations generics and that overtime is going to offset some of the challenges we are witnessing in the API segment. So, again whilst we have seen a decline in our API, small molecule business compared to last fiscal and even if you compare it on a nine monthly level there has been 11 percent decline in our small molecule business we do expect that some of our finished formulation generics will offset it starting Q4.

Biologics, we definitely are confident, we will see a recovery from Q4 onwards now that our facilities are back on track. We expect more regulatory approvals from US Food and Drug Administration (USFDA) and European Medicines Agency (EMA) over the next 12 months, which will also then allows us to basically be much more confident of our biosimilars market opportunity going forward.

When you look at research services they have had a very smart recovery, a 17 percent improvement in revenues and they expect to basically end the year on a strong double digit growth. So, this business we believe is now back on track, has a strong visibility in terms of what the future holds. It has just signed some long term contracts with its anchor clients like BMS. It has expanded its partnership which Amgen and it is looking to actually enrol more large customers.

So, all in all I think our research services business our biologics business is doing extremely well. Branded formulations led by UAE is beginning to do extremely well. So, overall I believe that from Q4 you will see a recovery mode and then going forward in to fiscal FY19 we expect to see a good performance.

Ekta: There is some concern which has come in on the margins this quarter. Everyone expected a higher interest as well as depreciation cost. But I think the concern is about what exactly the margins would like going forward. You would probably scale up your R&D expenditure because of your tie up with Sandoz and you have this fixed cost continuing for your Malaysian facility, can you give us a sense in terms of where exactly margins would stabilise, a ballpark figures?

A: If you look at the core margins, I think you will see that at a core margin level we are sustaining at the 27-28 percent levels both at a Q3 basis and at a 9 month basis. Now when we talk about core margins, we are really talking about margins net of licensing income, net of foreign exchange gains and of course net of R&D. so, if you look at those core margins they are fairly sustainable and they have been sustained. I think what you are really seeing as sort of a declines in margins this quarter to 21 percent is largely on account of this fluctuations. Some quarters you see a drop in licensing income as you know licensing is a very lumpy business. That basically then sort of impacts our margins.

Then of course you are also seeing, as you very rightly said the impact of Malaysia and the impact of Malaysia is only going to go away when we start addressing the bigger markets. I am pleased that we just received a regulatory approval for biosimilar Glargine in Russia which is a very large emerging market. We have also seen a good uptake of Glargine in the Mexican market. We are hoping to receive a positive favourable response from EMA for our insulin Glargine. So, once we start looking at those kind of opportunities I think the capacity utilisation in Malaysia will improve and the impact of depreciation that we are seeing and operating cost that we are seeing from Malaysia will then start reducing. So, I think next fiscal you will see a much better improvement in these kind of impacts.

Ekta: You have announced a business transfer agreement couple of days ago with regards to your biologics business and you have mentioned that there could be some amount of monetisation of the biosimilar business that you would consider which would include probably listing, can you give us a timeline in terms of when we could expect this and would it only be listing because you have a couple of interested parties the likes of Mylan and Sandoz would you be open to probably say sell some stake to them as well?

A: Well, I don't think I want to make those kinds of comments, but I would like to say that we believe that our biologics business is a large value unlocking opportunity for us and as you know we have actually entered into this partnership with Sandoz which actually requires Biocon to basically enter into an end to end development responsibility which will obviously mean a greater R&D investmen. Given that we are going to expand our biosimilars pipeline both with Mylan and Sandoz and beyond on our own as well and if you factor the novel biologics pipeline that we are also developing on our own I think you will see that there will be a need for capital injection.

So, it will be a dual sort of objective of listing Biocon Biologics in the foreseeable future to basically unlock value and to raise capital to address some of these capital needs that we have in R&D and capital investment in expanding some of our manufacturing facilities. So, I would say that we will be addressing this opportunity over the next few years. We don’t have any optics on exactly when that will be but certainly as I said in near term we will look at listing of Biocon Biologics.

Ekta: Just leaves us with some thoughts on the Biocon Biosimilar business; one - when can we expect the European regulators to probably re-inspect the Bangalore facility as well as what might the update with regards to Pegfilgrastim as well as insulin Glargine be in regulated as well as developing markets?

A: We have basically informed EMA that we have completed all the various re-qualification activities and we do expect to be re-inspected very shortly. In terms of Pegfilgrastim as you know we received a complete response letter we have actually responded to that and again I think we expect a response from USFDA in terms of what next.

In terms of the insulin Glargine as I mentioned earlier, we do expect a positive response from EMA in the near future and with that we will be able to basically then get ready to enter into European market with our insulin Glargine. We have also commenced a phase one study for insulin Aspart which we have also partnered as with Mylan as the next biosimilar insulin Analogue so there is a lot of activity taking place in all these areas.

We believe that we are well on track to get a lot of these approvals over the next 12 month because as you know even in the complete response letter in Pegfilgrastim there were no scientific issues. I think it was more to do with some of our manufacturing requirements which we have responded to.