Biocon --Upgrade to Hold; Raise TP to Rs480 :: Citi

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Biocon (BION.BO)
Upgrade to Hold; Raise TP to Rs480
 Upgrade to Hold (2M) — We upgrade Biocon to Hold (2M) from Sell (3H), with a
TP of Rs480. Biocon’s deals with Pfizer & Mylan establish it as a leading play on
biosimilars. Besides, the Pfizer deal assuages our primary concern on its ability to
aggressively pursue this opportunity without hurting profitability & B/S. Valuations
stop us from being more constructive – we would look to buy at cRs400 levels.
 A Leading Biosimilars Play — Biocon’s partnerships with Pfizer (insulins) & Mylan
(mainly MABs) validate its capabilities & establish it as a leading play on
biosimilars in developed markets. While many are targeting this space, Biocon has
tied up funding & front-end support for a large part of its pipeline – allowing it to
be more aggressive. We expect these factors to reflect favorably on valuations.
 Pfizer Deal is Material — The global licensing deal with Pfizer for biosimilar
insulins is a material one from Biocon’s perspective. Besides enabling it to
capture significant value from its pipeline upfront (US$350m in upfront &
milestone payments), Pfizer’s involvement is also likely to ensure a relatively
better ability to navigate through regulatory requirements / hurdles & capture
share on launch – especially in the regulated markets of EU & North America.
 Strong 2Q — Higher sales in Axicorp (+27% YoY) & lower R&D spend led to good
2Q nos (sales +17%; PAT +20%). Biopharma (+9% YoY) & research services
(+7%) remained relatively subdued; however, higher licensing income led to
higher EBIDTA margins (+164bps). We raise our FY11/12 estimates by 2%/11%,
primarily on higher sales in Axicorp & lower R&D spend.
 Raising TP to 480 — We value Biocon’s base biz at Rs360/sh (Rs290 earlier), as
we roll over to 18x FY12E EPS. We also value the insulins deal with Pfizer
separately, given the sizeable cash flows involved & the back ended sales – this
adds Rs120/sh. Cumulatively, we arrive at a TP of Rs480.