The generics business has seen some strong growth, as you've mentioned, with the liraglutide launch. But could you give us some colour on what the growth in the base business ex of liraglutide is? And within that, if one looks at the generics profitability ex of R&D, it is lower on a quarter-on-quarter basis. There is a 600 points lower R&D spend, but a 200-bps sort of improvement in profitability. So, is that some competitive intensity playing out in your base business? And on the biosimilars business, if you could share any updates on your formulary listings for the insulin in the US? And given that that wasn't the case, what are the products that are driving your North America growth? And if you could give us some colour on the market share across products and what's the change in the market share?
The generics business has been exceptionally important for us to get back to profitability. So, what's really underpinned that turn around right now is really a product mix that we've focused on. We focused on getting cost out of the system that's helped as well and operating leverage has started to play. We've talked about in previous earnings calls that you will see once we integrate the businesses that the operating synergies will start reflecting in the business and that's what you're starting to see. We had said we won't quantify it until we have better visibility to it. As we get to the second half, we'll start quantifying it and letting you know but you're starting to see that in the numbers already. The part related to R&D is also another significant piece, which has contributed to R&D to the EBITDA that you see. On the biosimilars side, there's been a couple of growth drivers that Kiran listed in her opening speech, which was about our denosumab biosimilars, which we talked about and most importantly, earlier this month, we announced that aflibercept is a product we are launching in the ophthalmology space. It's launched now and available to patients in the United States. That gives us a very unique play before a large part of the other competition comes in. It's a big asset and we're very bullish about how that is going to grow. Our insulin glargine market shares have been steadily growing over the last couple of quarters. Our market shares have grown for glargine over last quarter as well. And we've got active conversations going, which we will make public about our insulin aspart, which is branded Kirsty, as we move from the closed-door network that we currently supply to in the US to the more commercial players.
Maybe Kedar can help understand the growth in the base business on generics versus the growth that's coming from the new product launches that you've done, liraglutide and a couple of others. And just also to understand that R&D is obviously a need-based spends and that's clear. But just to get some colour, because if I look at quarter-on-quarter, the revenue is more or less similar, but you've seen a change in the margin, right? You've spent lesser on R&D by roughly about 6% in that business, but you've seen only a 2% improvement in EBITDA. And therefore, is that more due to competitive intensity or is the EBITDA margin lower due to any other factor?
Actually, there is nothing particularly different to call out from a competitive intensity standpoint in generics. As you know, the growth will always be dependent upon new launches. This quarter, actually, the contribution from liraglutide is in single digits, so it's picking up and not fully reflected in this quarter. And I think you should note the work that we have done on opex across all three companies from quarter four to quarter one and even year-on-year, you will see a significant drop in the operating expenses. So as part of integration, we have taken a hard look on all costs and there is an effort to be more productive, more efficient, which will allow us to retain the EBITDA. So, I think it's difficult to give you precise movement about new launches or existing business or R&D, because there will be quarter-to-quarter fluctuation. But if you take two messages, the new launches are expected to scale up even in generics in the subsequent quarters and the work on opex and the thinking on productivity remain very strong.
In your opening remarks you'd mentioned, and I think you've mentioned this last quarter as well, that with the improving momentum in the biosimilar business, our focus is on profitable growth. So, if I were to read that a little more specifically, should I assume margins for the biosimilar business to improve versus last year? Would that reflect with this focus on growth? And how should we think about exit revenue or when you say meaningful improvement in the second half, could you give us some color on what that meaningful improvement would be?
Yes. So, I'll start with my comments and then ask Shreehas to add to it. But basically, when we talk about focusing on profitable growth, I think we would like to basically veer away from just focusing on market share. Because I think a lot of the focus from the investor community is on market share, and if you're going to only double down on market share, there is a danger that it might lead to an erosion of margins and profitability. And we would therefore like to really, really calibrate our business in a way that we maximize the profitable growth and profitable businesses that we are seeing across our biosimilars. Shreehas added: the expectation as new products come in, there will be those products will obviously be at a higher profitability margin. So clearly, that expectation is accurate and we should expect. It'll also help us offset the market dynamics, because price erosion is also another thing which is real in a situation in the market which will also happen. Kedar added: I would urge you to normalize the 27% of last year. If you remember in quarter three, we had allocated more products for North American region, and for that quarter and for the full year, that pulled up the profitability. So, if you normalize last year's margins to maybe 24%, 25%. Yes, then we are all driving towards margin expansion. On meaningful second-half improvement: we have always directed this to say we will be in the mid-20s, and it will ramp up.
Given that the existing biosimilar has very high market share. What's the thought process there? Would that be a very slow ramp-up in market share? How do we think we can get a fair market share in Aflibercept?
The first thing is that there was a large concern in the past that in the ophthalmology space whether biosimilars would be an accepted space. I think that myth's been busted already and there is clarity that biosimilars are high-quality products and will be accepted and will thrive in the ophthalmology space. So, I think that path has been paved, which is a very good sign. Where it places us is in a very strong position as we come in this month with a with a clear path for the next few months. We've got some active contracts that Matt Erick, who's our Chief Commercial Officer, and his team in North America have been tying up. So, we believe, Neha, this would well, almost every ramp has a start and then it takes some time before it reaches peak. We should have a good straight-out-the-gates a good start to this, which will build up towards the second half of the year.
Is it possible to give some sense or colour about what is the kind of uptake that we are witnessing, either in terms of penetration or enrolment or the kind of marketing engagement that we would be having or even in terms of the kind of contracting cycle visibility that we would be having for products like Adali, Ustekinumab, Aspart as well as Deno along with Aflibercept?
We have guided for new launches, and you just heard that Aflibercept just entered the market this month. And I think that is going to be a big contributor to growth this fiscal. Apart from that, insulins are tracking very well and very robustly, and with the commissioning and approval of the second drug product line in Malaysia, that's of course now unlocking a lot of the capacity challenges that we used to face for in terms of addressing the demand. Shreehas added: the five products that we have always said we are going to be focusing growth on, two we just talked about Aflibercept, Denosumab. But there is beyond that Aspart, Ustekinumab, where you've seen a tremendous offtake in the past year. And then you've got bevacizumab, which is in some sense understated at this point in time. These five products will drive growth. We have been contracting for some of these products in recent days. You know that July to September is the window when most of these payor negotiations finalize for full year for the following calendar year, and I think what I can tell you at this point in time is we are in a good place to have those conversations. It would be premature to disclose exactly what those are, but we are now in that place where we would be looking to bring these products to market.
Going back to the biosimilar, both approved as well as the launches that have just recently happened, if you could just characterize how some of the franchises are working. Let say for example the oncology franchise Ogivri, how are they doing in terms of either market shares. How should we look at our core portfolio maybe U.S., Europe, if you could also comment, oncology as well as diabetes portfolio, the insulins, and Aspart, for example, and I know the launches have happened in immunology, so just want to understand how the base business even in biosimilars are tracking?
The biosimilars business is very enduring, both in terms of its margins and its revenues. The products continue to be strong. We launched Fulphila in 2018. It's now eight years that that the product is been in the market, continues to drive margins and continues to have market share, continues to be a fifth of the market, a fourth of the market, whichever way you look at it, continues to deliver strong performance and contributions to the bottom line. Same with Ogivri, which is in the HER2 breast cancer space. We are looking to add some more products in that. Bevacizumab I just talked about. Insulin continues to hold market, continues to deliver margins. We have been very cautious - this is a very sustainable business in that sense, and very responsibly we have taken market. In Europe, adalimumab has done extremely well for us for the last 7, 8 years. We have had a very strong position, despite the fact that there is competition which played around with concentration and strength, because of the kind of quality that we brought to the market and the reliability of supply that we've been able to provide. Matt Erick added: those established products remain very strong from a market access standpoint. And as Shreehas said, with that strong stability comes strong margins. Our focus is continued on select channels to drive the sustainability. Market access going through into the July calendar year remains very robust in our ability to add additional market access in contracts in the U.S.
On the generics part, do you foresee now, with the kind of growth that we have seen, that there's a path to higher profitability, and the split of API to formulations, how is that trending?
So, I think the split of API to formulations is about 60:40 this quarter. Historically it's been two thirds and one thirds. So maybe eventually it will go there. The profitability improvement is an agenda across all three businesses, Shyam. So, we are not guiding specifically, but as the new launches kick in, as our work on the cost continues, margin expansion will remain a priority. And that will also include a hard look on operating expenses, hard look on what is relevant for us to pursue in R&D, and we do have active cost improvement program in the materials and factory overheads as well. So, all of this is expected to improve, and not only the portfolio improvement because of launches. So, we'll continue to do work on all these levers, Shyam.
On your efforts for optimizing cost, you mentioned you have been working on a lot of initiative to really assess the cost and make improvement wherever it's feasible. So just want to understand on two things. First, if you can update on utilization of some of the new units, including unit in the US and what kind of cost drag you are incurring as these new plants are scaling up? Also, can should we look at the current quarter depreciation number as the numbers to sustain in coming quarters as well?
We will not call out any specific number at this stage in terms of the cost drag, but what has happened is the improvement that you're seeing in the Generics profitability is because of three things. One is some of the premium on API products, pricing premium; secondly, optimization of the R&D portfolio; and thirdly, opex. So, I think all these three levers are helping, and you know there'll be some time lag before the new units start contributing meaningfully in terms of utilization. But our numbers for the subsequent quarters do show that. So as the things improve, the numbers will reflect at higher utilization and the associated benefit on revenues and margins. On depreciation: that line includes as the new launches happen in the market, the corresponding amortization gets charged to P&L. So that's the reason the number will keep moving as the new launches do come in. Shreehas added: the focus there has clearly been on fiscal discipline. What Kedar just mentioned is whether it is in the R&D alignment to business in terms of whatever we've outlaid there, or the cost synergies that have come in because of the operating leverage because we were able to merge the two businesses that it has offered. That is the first level of benefit that you are seeing come through in the cost benefit, and we expect this to remain. So, it's not a one-off that happened. We expect this to carry through over the course of the coming quarters as well.
You have launched, I think, all the targeted products, five products, which we discussed. So, when I look between now and say FY28, FY29, what I understand, we don't have more, like much more products to be added to the portfolio, and focus will be on ramping up the recent launches, or is any other product apart from Etanercept which could come in '29, should we assume between now and next two years' time frame?
We would be happy to surprise you, Damayanti, in a nice way. We have been working on the pipeline. We've not necessarily talked about everything, but the focus has always been to see that we have a new product launch either in the US or in Europe every year from here on till the end of the decade. That's what we've shared visibility to, and we will continue to strive towards that. So, you should continue to expect us to or at least see that we try to work towards that.
Given that there have been a few new launches on the Generics side, is there any launch expenditure that could see some operating leverage later as those scale and therefore could we see profitability improvement? And in context of what you mentioned on looking at both operating costs and R&D projects, how should one think of the growth trajectory on the Generics business if R&D projects are going to be prioritized to really only the focused ones? And on the Biosimilars business similarly, in the current profitability, given the spate of new launches that has happened recently, are there meaningful launch expenditures that could see operating leverage going forward?
The operating expenses we're not cutting what is required to be spent. So, I want all of you to remember that, and keep in mind that we are not cutting the muscle, we are cutting the fat wherever required. And the integration offers us synergies in operations, commercials, enabling functions. So those are the areas which we are taking a very hard look at, and the numbers do reflect that. The relations between new launches and the support required in terms of marketing and commercial expenditure, that will get done, and that will get more than offset by revenue increase. So, we'll be very calibrated, and we'll be very mindful on what needs to be spent and what can be optimized. Kiran added: when we talk about R&D, we have a very strategic view of where we should be playing in and investing in R&D. And I think that's what you will see, delivering better robust growth. I don't think we want to become just opportunistic in R&D investment, but we would rather be strategic in the way we are investing in high-growth opportunities.
What is our current stake in Bicara, and any plan to monetize it?
Bicara is no longer a significant investment for Biocon, and we will look at monetizing it at the right time. Bicara is doing exceedingly well, and we are very pleased that we have been able to create this value for Bicara by establishing it in the first place, and we will decide when is the right time to monetize. The current stake is, we have a small holding in Bicara, and we are in at this moment not contemplating to monetize.
While we have been seeing a kind of steady and consistent improvement in the profitability of the biosimilar business, we are now facing challenges from other two businesses, Syngene as well as the Generics business. So, the way Syngene guided for this year, there is low growth and challenges visible. Given that, whether despite the ramp-up in the biosimilars, should we see a kind of a moderated kind of a profitable performance for Biocon as a whole for FY27 or how should one see the challenges of Syngene for the current year?
So, Surya, let me first direct you to a very important pie chart that we have shown in our press release. As, you know 83% of our business comes from Biopharmaceuticals. The Research Services business accounts for about 17%. So, I think you should understand that the main growth drivers of our business is coming from Biopharma, largely from the biosimilars business as we have shared in my opening comments. So, we do not believe that a temporary decline in profitable growth for Syngene is going to impact the performance of Biocon as a whole. I believe that Biocon is positioned very well for good profitable growth because the main growth engine for Biocon is biosimilars, and even the generics business is now beginning to deliver better performance and better profitable growth. I must also remind you that our performance in the past has been severely impacted by a lot of the structured debt that we had included in our financials because of the structured equity element, which is now retired and behind us. And I think that's why you're seeing now a return to good, strong, sustained profitable growth.
I noticed that net debt has increased sequentially by around INR1,100 crores, and also the working capital has risen because of higher inventory and receivables. So, can you please explain the reasons for this, and how do you expect it to trend for the rest of the year? And do you expect the net debt to reduce by the end of the year, or would it remain flattish? And also, the quarterly interest cost, I mean, we had talked about INR210 crores, INR220 crores range. Would that also stay, or that can increase in the coming quarters?
The increase in inventory, working capital is largely in inventory, and that's basically we are getting ready for the second-half scale-up in both biosimilars and generics. So that's a good increase in the working capital, and that shows our confidence in expected scale-up in the second half. Net debt increase is linked to the working capital. It's not any other term loans. So, we are in line with the plan that we have, and the idea is to look at productivity and efficiency even in working capital. So as things progress, you should expect us to maintain robust days of receivables, and DIO, days of inventory outstanding, which used to be more than 400 for biosimilars in the past, it's been normalized to about 280, 290. And there are opportunities to improve on that further. But the investment that we have made in this quarter in inventory and working capital is to funnel the growth of the expected scale-up in second half. Year-on-year now, there is a significant decrease. So, there is a 23% decline in finance cost from last year. Last year, we booked around INR280 crores, this quarter, we've booked around INR213 crores, and this is despite the rupee depreciation impact on the dollar interest that we pay. And we have said that we are working on this actively, every single dollar that we get from free cash, the first use of that is in reduction of the debt.
What would be the impact of tariffs announced by Trump, which would be applicable after two years? However, are we well-positioned about improving the manufacturing capacity in USA?
The recent announcement by the US President, Donald Trump, in regards to additional tariffs was just a tweet. Right now, the law states within the United States, generics and biosimilars are exempt. So, legislation would have to be passed and redone. And I can tell you from spending numerous days on the Hill in Washington that it is a bipartisan review that access and affordability of generics and biosimilars must continue to exist. And by putting tariffs on this and adding additional cost would absolutely conflict with this. The other interesting thing about this is that in the next two years, the current President, Donald Trump, will be very close to his last month in office. So, there's a lot that has to happen. What we're doing as we look at it today, because it is law in the United States, we're continuing to push with our congressmen and women as Biocon and with our associations and affiliations in policy, that biosimilars and generics are great. They bring cost savings to the United States, and it should continue to be bipartisan between the Democrats and the Republicans to save costs to the American citizen. Kiran added: the Biocon Group is certainly looking at having the required footprint in terms of local manufacturing wherever needed. We do have a number of partnerships in this respect. No, I don't believe that we will be increasing our capex in establishing new facilities or capacities in the US. We will look at it through partnerships, if required, and we already have some of our own manufacturing facilities, which we will obviously utilize.