Visit http://indiaer.blogspot.com/ for complete details BIOCON: Enters into global deal with Pfizer for insulin products; Set to receive upfront payment of US$200m & milestones of US$150m; Long term positive
Event
- Biocon (BIOS IN, Mkt Cap US$1.8b, CMP Rs402, Buy) has entered into strategic agreement with Pfizer for global commercialization of Biocon’s biosimilar versions of Insulin and Insulin analog products: Recombinant Human Insulin, Glargine, Aspart and Lispro.
- Pfizer will make an upfront payment of US$200m to Biocon with additional development and regulatory milestone payment of up to US$150m. Further, Biocon will receive royalty linked to Pfizer’s sales of these products across global markets.
- This is an exclusive partnership between the 2 companies for these 4 products. Under this agreement, Pfizer will have exclusive rights to commercialize these products globally, with certain exceptions which includes co-exclusive rights for all the products with Biocon in Germany, India and Malaysia. Further, Pfizer will have co-exclusive rights with existing Biocon partners for some of the products primarily in a number of developing markets.
- Biocon’s Recombinant Human Insulin formulations are approved in 27 countries in developing markets and commercialized in 23 while Glargine has been launched only in India so far.
- Biocon will remain responsible for the clinical development, manufacture and supply of these biosimilar Insulin products, as well as for regulatory activities to secure approval for these products in various geographies.
Large market opportunity pegged at US$14b
- The current market size for diabetes drugs and devices is estimated at US$40b with Insulin accounting for US$14b (~35% of overall market).
- By 2015, a number of insulin analogs are expected to lose patent thereby offering large opportunity for biosimilar product. Post patent expiry, the market size is likely to reduce due to entry of generics.
Emerging markets offer immediate upside; Upside from regulated markets will come in the long term
- Both the partners expect revenues from emerging markets under this agreement to start in near future with Biocon having approval for Recombinant Human Insulin in 27 countries.
- However, the entry in Europe and US market is a few years away as the products will be launched post patent expiry in these markets. The management mentioned that products from Biocon will be in market as soon as patents expire in the respective countries thereby giving it an early mover advantage.
- Both the companies expect an approval for Recombinant Human Insulin in Europe by 2012 followed by US approval in 2015-16. Approval for Recombinant Human Insulin will be followed by approval for Glargine, Lispro and Aspart.
- Currently, Biocon is conducting phase III studies for Recombinant Human Insulin in Europe and intends to begin registration process in US shortly.
- The existing manufacturing capacities of Biocon are enough to support Insulin supplies estimated by Pfizer over next 5 years.
- The US$200m to be received by Biocon will be utilized for development and registration of these products in various markets and expansion of existing manufacturing facilities.
Impact: Good deal but cash inflow to be utilized for capex & development expenses for insulin
- As of now, Biocon receives US$200m upfront and is eligible for milestones of US$150m in the FY11-13 period. Plus it will be eligible for royalty on Pfizer’s sales of insulin products in emerging markets which is unlikely to a big number. This is the immediate-to-medium term upside from the Pfizer arrangement.
- The upside from regulated markets of Europe and USA is still some years away. The earliest of these upsides can come through in FY13/14 when Biocon & Pfizer expect to commercialize recombinant insulin in Europe and later on followed by launch in Europe.
- Launch of insulin analogs – Glargine, Lispro & Aspart – in regulated markets will commence from FY15/16 onwards and hence is a long-time away.
- We note that a significant part of the upfront & milestone payments will be utilized by Biocon to expand its insulin capacities and for product development and clinical trial expenses (which are higher in case of biogenerics as compared to a normal product).
- Hence, as of now we value the upfront and milestone payment (worth US$350m) on a DCF basis after deduction for 10% of these payments.
- We estimate DCF value of Rs25/sh from this deal after adjusting for combined expenses of US$225m towards capex, development and clinical trials for this initiative.
Valuation and view
- Key growth drivers for FY11/12 will be: 1) Traction in the company's Insulin initiative with Pfizer, 2) Ramp-up in contract research business and 3) Incremental contribution from immuno-suppressants API supplies.
- However, higher R&D costs, increased depreciation and higher expenses linked to the scale-up of the domestic formulations business will continue to temper down earnings growth.
- Option values for future include separate listing of Syngene and a potential out-licensing of the oral insulin NCE.
- We estimate EPS of Rs17 for FY11E (up 15.7%) and Rs20.3 for FY12E (up 19.5%) leading to 17% earnings CAGR for FY10-12. Our estimates exclude the upsides from the upfront & milestone payment from Pfizer as these are valued separately on DCF basis.
- The stock is currently valued at 24.5x FY11E and 20.5x FY12E earnings adjusted for DCF value of Rs25 for the Pfizer deal.
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