Will Invest Rs 2,000 Cr In Small Molecules Segment In 3-4 Years: Biocon MD

After a muted Q4 show, Biocon CEO and MD Siddharth Mittal in an interview with Samreen Ahmad says the Covid-19 impact may have pulled the biologics business down by Rs 100 crore in the quarter but the company is on track to achieve the $1 billion revenue target from the segment by 2022. He also reveals plans of investment of Rs 2,000 crore in the next three to four years in the small molecules segment. This quarter, the company also exited its JV with UAE's Neopharma, which was owned by Indian billionaire B R Shetty, who is now enveloped in allegations of financial irregularities. Edited excerpts:

How big has the Covid-19 impact been on Q4 numbers for Biocon and why has it mostly affected the Biologics business?

Being a services company, the research arm Syngene was able to move the staff to work-from-home when the lockdown was announced. In case of small molecules, even though we have a large part of sales in the third month of the quarter, over the last few years, we try to do a 30:30:40 ratio in sales for three months. We try not be entirely dependent on the sales booked in the last month of the quarter. In Biologics, a lot of shipments were planned in the natural course during the last week and once the lockdown was announced, outbound logistics were impacted as the number of flights got reduced significantly. Biologics products also need to be shipped out in 2-8 degree centigrade containers so even if a cargo slot was available with airlines, it wouldn’t suffice. On a YoY basis, it was a loss of Rs 100 crore for biologics business, mostly because of the Covid-19 situation.

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Is it a one-off impact and will the company stick to its revenue target of $1 billion by 2022 in biologics?

Yes, the biosimilars team is confident of delivering those numbers and we are already expecting recovery to happen from the next quarter. By the second quarter of FY21, we expect normalisation of growth as we have deployed our risk mitigation strategies.

The small molecules business is ahead of biologics in terms of revenue. By when is this segment likely to reach the $1 billion revenue milestone?

Biocon started its pharma business two decades ago with small molecules and for 10-odd years we earned the entire revenue from this segment. In the past 10 years, we have invested everything in biosimilars and there was hardly any investment done in small molecules. We are now starting to reinvest in a portfolio of APIs and generic formulations in both R&D and manufacturing capacity. Once we start seeing an impact of this, it will be at least 2-3 years before you see numbers going up. We aspire to be in line with the generics industry and for that we need to create additional capacities and develop more products. So for 2-3 years we will be in an investment mode.

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What are these investment plans? How many products are in the pipeline?

Our focus area continues to be fermentation, semi-synthetic products, and complex APIs. Overall in API, every year we are looking at 5-10 new product filings and commercialisation of up to 5-7 products. In generic formulations, we will look at 5-6 product filings annually. Over the next 3-4 years, we are looking at around Rs 2,000 crore of capex in the small molecules segment. The large part of that will go in Vishakhapatnam where we are constructing a greenfield fermentation plant for immunosuppressants in which we are investing around Rs 600 crore. The remaining capex will be utilised across our sites. We will also be adding to our R&D infrastructure in Hyderabad and Bengaluru.

Will the demand for generic formulation products go up because of Covid-19?

The areas we play in are chronic therapies where we do not see demand fluctuating on an overall basis. There could be a timing when customers are stocking up but eventually the overall end demand won’t go up.

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Why did the company call off its JV with Neopharma in UAE? Are you completely exiting the market?

UAE changed its pricing mechanism in the market last year where instead of linking pharma prices to the US and Europe, they linked it to the home country price. As a result we had to take a price reduction for a lot of drugs, which was 30-35 per cent on an average across our portfolio. As a result the JV generated a huge loss in FY20. In fact, for the full year, the JV lost almost Rs 60 crore on a sale of 80 crore. To break even, we needed a long-term plan, which is what we were working on but unfortunately the whole governance issue and alleged financial allegations against the BR Shetty group of companies had a big impact on us. We want to work with partners who have high governance standards. So we decided it was not appropriate for us to continue with this JV.

We are exiting the UAE market. We could have bought the 51 per cent JV stake from Neopharma but we were still dependent on NMC Health as a distributor who shut shop. And the base business was itself losing money so we thought it was time for us to cut the losses and focus on other markets.