Biocon F4Q14 – Oral insulin studies with BMS to report data by March 2015; human insulin approved in 55 countries – April 29, 2014

In a call led by Chairman and Managing Director Ms. Kiran Mazumdar-Shaw, Biocon reported F4Q14 results last week. Below, we have enclosed coverage of the call’s top five highlights, followed by Q&A.

1. Management noted that phase 2 US clinical studies of Biocon’s oral prandial insulin, IN 105, “continue to progress well,” and readouts are expected toward the end of FY 15 (calendar: April 2014-March 2015). Biocon apparently continues to collaborate with BMS, though no details on that collaboration were shared. There are no trials for IN 105 posted on ClinicalTrials.gov.

2. Biocon’s recombinant human insulin is approved in over 55 countries (up from 50 in F3Q14), and its generic insulin glargine is registered in over 10 countries. There was no update on the global phase 3 study of insulin glargine with Mylan.

3. Biocon’s constrained insulin manufacturing capacity was a focus of Q&A – it appears it will be more than a year before the situation is resolved (once the new Malaysia insulin manufacturing facility is commissioned and qualified by regulators).

4. In India, Biocon’s insulin portfolio grew 41%, compared to 19% for Sanofi, and 20% for Novo Nordisk (no base of sales provided). Biocon remains #4 in the overall insulin market in India, though its 11% market share in 100 IU insulin is down from 13% in F3Q14 and 15% in F2Q14.

5. Dr. Arun Chandavarkar was promoted to CEO and Joint Managing Director of Biocon. Dr. Chandavarkar has been the COO of Biocon since 2006 and has spent 24 years with the company.

Top Five Highlights

1. Management noted that US clinical studies of Biocon’s oral prandial insulin, IN 105, “continue to progress well”; readouts are expected toward the end of FY 15 (calendar: April 2014-March 2015). There are no trials for IN 105 posted on ClinicalTrials.gov, a highly unusual situation and we’re not quite sure how that’s possible. In line with what we heard in the F3Q14 call, Biocon continues to collaborate with Bristol-Myers Squibb on this program, apparently in line with the option agreement originally signed in November 2012 (see below). As we understand it, this has included BMS involvement in the phase 2 trial redesign. The news continues to surprise us, given AZ’s acquisition of BMS’ diabetes business and assets in December (both commercial and pipeline products). The BMS collaboration for IN 105 is an option agreement for a Biocon compound, which might exclude it transferring over to AZ. Still, during January’s call, BMS management painted a rather gloomy picture of the diabetes market. With that alone in mind, we were surprised to hear of BMS’ continued collaboration with Biocon. In speaking with Biocon management, the company is not aware of any change in stance from BMS.  

• Per the original option agreement, Biocon would continue global development of IN 105 through phase 2 via redesigned trials, and BMS would aid Biocon in the trial redesign process. The partnership encompasses financial, strategic, and clinical support throughout the development phase. BMS has an exclusive option post-phase 2 to further develop and commercialize IN 105 worldwide (excluding India). If BMS exercises its option, which we would assume it would not, Biocon will receive a licensing fee in addition to potential regulatory and commercialization milestones. Biocon management has not discussed BMS’ specific involvement with the program to date, which makes it hard to know how much BMS has stuck to the terms above.

2. Biocon’s recombinant human insulin is approved in over 55 countries (up from 50 in F3Q14). In Q&A, management commented that it is commercialized in “about 10 countries,” though a follow-up conversation confirmed that this number is factually incorrect. It is not clear how many countries Biocon’s insulins are commercialized in. The generic insulin business continues to see “very good demand” from emerging markets, identical to comments made in the last quarterly call. “Strong growth” came from expanding the geographical footprint and increasing market penetration (neither was quantified).

• Biocon’s generic insulin glargine is registered in over 10 countries (no change in three quarters). There was no update on the global phase 3 study in partnership with Mylan – as a reminder, this would support approval of Biocon’s glargine in developed markets like the EU and US. The F3Q14 call suggested this study would start in the first half of 2014, though we assume that is a long shot at this point. Management has not commented on an expected completion date, though we suspect this would take at least six months to a year to complete. We wonder if Biocon will elect to hold on glargine development efforts until its new Malaysia facility comes online in a year.  

3. Biocon’s constrained insulin manufacturing capacity was a focus of Q&A – it appears it will be more than a year before the situation is resolved. Management said Biocon is “maxed out” on insulin production capacity at the current facility in Bangalore, despite an FY14 expansion. Until the new $180 million Malaysia facility comes online and is qualified by regulators, “growth can only be incremental.” The Malaysia facility is still on track to be commissioned in FY15 (calendar: April 2014-March 2015), consistent with the update in the F3Q14 call – according to Biocon, this will be “Asia’s largest integrated insulins manufacturing facility.” However, once commissioned, Biocon will still not be able to commercially supply insulin until regulators qualify the plant (“a long regulatory process for each country”). In addition, bridging work will likely be needed between the Bangalore facility and the Malaysia facility – this could entail purely CMC work, or could also include limited PK/PD data. Management explained that “each jurisdiction probably may take a different view,” but Biocon is going on the assumption that “full blown clinical will not be required.” No timeframe was provided, but we imagine that a significant uptick in supply wouldn’t happen until at least one to two quarters following the plant’s commissioning.

4. In India, Biocon’s insulin portfolio grew 41%, compared to 19% for Sanofi, and 20% for Novo Nordisk (trailing twelve months basis, as of March 2014; no base of sales specified; Lilly was not listed on the slide; source: AIOCD; IPSOS). Growth has remained consistently high in the past year – the F4Q13 call one year ago cited growth of 30% in the Indian insulin portfolio, while the F3Q14 call three months ago cited 25% growth. We would emphasize that Biocon’s higher growth is from a lower base (~$20-25 million), so a direct comparison with the insulin companies is not really possible. Biocon remains #4 in the overall insulin market in India, though its 11% market share in 100 IU insulin is down from 13% in F3Q14 and 15% in F2Q14. The F1Q14 call in August stated that Insugen, Biocon’s rh-insulin in India and predominant brand, would reach INR 100 crores (~$16 million) in sales “very soon” in India (it was not specified, but we assume this referred to annual sales). We estimate that Basalog, Biocon’s glargine in India, has annual sales in India the $3-4 million range. Basalog is still ~40% cheaper than Sanofi’s Lantus in India, and Insugen is still ~13% cheaper than Novo Nordisk’s human insulin.

5. Dr. Arun Chandavarkar was promoted to CEO and Joint Managing Director of Biocon. Dr. Chandavarkar has been the COO of Biocon since 2006, and has spent 24 years with the company. Biocon founder CEO Kiran Mazumdar-Shaw will continue in her role as Chairman and Managing Director of Biocon. The appointment was not extensively discussed on the call or in the supporting materials, and there was no Q&A related to this news. 

Questions and Answers

Q: How has the export growth been specifically on the insulin export side?

A: While I won't give specific growth numbers, insulin has grown well. We have had some very good growth coming from insulin. It has been driving the growth. And also, some of the other specialty products within the small molecules area.

Q: Of the 55 markets, how many are we commercialized in?

A: We have an approval in over 55 markets. We are commercialized in eight to 10 - maybe about 10 markets. [Editor’s Note: In a follow-up conversation with Biocon management, the company confirmed that this number was accidentally shared and is factually incorrect.]

Q: With all the capacity expansion that has happened in the Bangalore facility, any color on how much would that address for, say, FY 2015 and 2016 till Malaysia comes on board? Would you expand two more markets pretty rapidly in next two years or should we still look at a very gradual ramp up?

A: So, that new capacity came on stream earlier this year. And we are looking forward to maybe a small bit of balancing capacity accretion in FY 2015 as well. Furthermore, of course, year-on-year, we already have targets in terms of productivity improvements, which also has always resulted as incremental capacities.

Now in the specific case of how much of the capacity in the insulin plant is available for commercial sales - besides depending on the productivity improvements and physical capacity, it also depends on how much of the capacity is occupied for the development of a lot of our products for the regulated markets, as well as development of the analogs, which also get developed in the same manufacturing plant. But suffice to say that we are expecting to see a robust growth in the insulin segment in FY 2015 as well.

Q: Can you share the existing capacity in Bangalore?

A: No, we can't give a number but we are pretty close to the peak. So I would say by end of FY 2015, which is also when we hope to commission, but not necessarily get approval for the Malaysia facility, that growth can only be incremental thereafter until Malaysia is qualified.

Q: On the Glargine, Merck is also saying that they're entering phase 3 with Samsung. How many players are really seriously eyeing this glargine product now?

A: I mean, as all of us know, glargine is a huge opportunity. And based on at least what we know and what is in public domain, it's Lilly and Merck has just announced. And then we are in the space. So, at least what we know about is three players.

Q: Related to the insulin and insulin analog pipeline. Most of the development work has been done from the current facility in Bangalore, but once Malaysian facility is ready, you'll be selling from that. Can you just help us understand what would be the regulatory requirements that you need to do for site switch or any such things to be able to commercialize from Malaysia, what you're actually developing from Bangalore?

A: Immediately, once the plants get commissioned, we will not be able to do commercial supplies. There will be a long regulatory process for each country. And we are maxed out here on capacity, especially in terms of Bangalore. So in the near-term, there's a bridging strategy that will apply. Each jurisdiction probably may take a different view, but we are going on the assumption that full blown clinical will not be required.

Q: What about just the US?

A: My comment applies to the US as well.

Q: So you think there will be some bridging clinical study?

A: No. I'm guessing that some bridging will be required. Whether the bridging is going to be purely a CMC bridging, or it includes CMC as well as a limited PK/PD, we will determine that as we go forward.

Q: But you're putting some serious capital at work in Malaysia. Should we not have enough clarity on this now? Because if you are required to do more extensive work, that not only pushes the timeline by few years, and also your cost goes up a fair bit.

A: This is a clear area of focus. We are reasonably clear in what is required, but for the regulatory authorities to be clear, they normally like to see data. Once we have data from the Malaysia facility post validation batches, the regulators would be able to give us specific guidance.

Q: On the debt front, out of the $160 million CapEx that we plan for Malaysia, we had guided for 50% of it to be raised through debt. Is that correct?

A: We had said that 70% of the total cost would be funded by debt. And the total project value is close to $180 million. We have mentioned that the whole facility would be commissioned in the next year, in FY15, so obviously all the payouts other than any retention amount would be drawn down in FY 2015. Right now, the debt that has been drawn is close to $100 million. And we are going to draw another $20 million to $30 million.

--by Adam Brown and Kelly Close