IIFL on Biocon Ltd - ADD; Insulin finds the right receptor

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Biocon Ltd - ADD Insulin finds the right receptor
Biocon has announced a major global partnership with the
established products division of Pfizer, for development and
marketing of biosimilar recombinant insulin and insulin analogues.
The deal highlights the large global opportunity in biosimilars, and
the early-mover advantage enjoyed by Indian firms such as Biocon.
While the development does not significantly alter our near-term
recurring-revenue projections for Biocon, the upfront payment of
US$200m is a major positive surprise, and emphasises the
importance of the programme to Pfizer’s global generics strategy. We
expect more upsides from Biocon’s biosimilars capabilities. ADD.
Global deal: The deal provides Pfizer a mix of exclusive and co-exclusive
rights to Biocon’s insulin and insulin analogue products (glargine, aspart
and lispro) globally. Biocon gets a US$200m upfront payment, up to
US$150m milestone payments over the next 4-5 years, and potential
revenues from product manufacture and supply.
Global insulin market: WHO estimates the 2010 market for diabetes
drugs and devices at US$40 billion, with insulin accounting for US$14
billion, or 35% of the diabetes segment.
Further ramp-up in emerging markets: Biocon already sells its
recombinant insulin product in 27 developing countries and glargine
insulin in India. In these markets, additional entry by Pfizer could provide
volume upsides for Biocon.
EU, US the big targets: Recombinant insulin is in clinical development
for EU and US. Phase III trials are already underway for EU, and the
product could be launched as early as in 2012. Timelines for US are a bit
longer, with a potential launch in 2014. Starting 2015, patents for insulin
analogues will start expiring in US and EU, opening up that market as
well.
Valuation: Biocon is trading at 20x FY12ii core earnings. While the
valuation is rich, we continue to believe in the potential of the biosimilars
pipeline to throw up further surprises. We retain ADD.