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Biocon (BION.BO)
Alert: Takeaways from India Pharma Conf., Dec. 6-7
Takeaways from Mumbai — Biocon presented at our India Pharma MiniConference in Mumbai. Below are key takeaways.
Steady growth — Biocon expects to grow at c15-20% over the next 3-4 years,
driven by launch of biosimilars in the emerging markets, growth in the India
branded formulations business and the research services business. Post FY14,
growth is likely to accelerate due to insulin and insulin analogue launches in the
regulated markets, as part of the deal with Pfizer. Margins are likely to remain
healthy despite some increase in R&D spend and should support earnings growth.
Pfizer deal for Insulin & Analogues — Biocon will receive upfront fees of US$100m,
a further US$100m in an escrow account (toward construction of facilities) and
another US$150m based on achievement of regulatory milestones. Biocon will also
receive COGS + markup on supplies along with profit share/ royalties on sales of its
products. Launches will start in emerging markets from next year (starting with
India). In regulated markets, the first product (Human Insulin) would be launched
in EU by 2HFY13. Glargine, Lispro and Aspart are in nascent stages of
development for the regulated markets; launches are likely only in FY14 & beyond.
In the US, they are working toward similar timelines but visibility is lower.
Other growth drivers — Immunosuppresants (~ US$ 4bn market) and Statins
(>US$ 10bn market) offer a good opportunity. The company has tie-ups with
several partners for products in these areas and approvals would drive growth. On
the Immunosuppresants front, various partners have already launched tacrolimus
and mycophenolate while the sirolimus patent is expected to expire soon. On the
Statins front, atorvastatin and rosuvastatin could see generic launches soon.
Way forward on Oral Insulin, IN-105 — The product is undergoing Ph-III trials in
India for Type-II diabetes and Ph-I trials in the US for Type-I. The product is
currently positioned as an add-on therapy to metformin but will undergo trials over
the long term as a replacement to injectable insulin. Post the Ph-I trial completion
in the US (Dec 2012), the company will look for licensing partners for the product.
Other key takeaways — 1) Axicorp will continue as a trading business but real
benefits will begin once insulin is launched in Germany; 2) Research services
business has shown signs of improvement; company will look at building a larger
custom synthesis business rather than the current FTE dominated business; 3)
Biocon is developing a pen device (reusable and disposable) for insulin, which will
be launched in India next year; 4) Facility in Malaysia will be operational in 2014
with a capex of US$160m.
Biocon
Valuation
We have a target price of Rs480 for Biocon, based on an SOTP valuation. We
value Biocon’s base business at Rs360/share – based on 18x March ‘12E EPS (v/s
17x Sept ‘11E earlier), at a 10% discount to our target range for leading generic
pharma companies in our coverage universe, such as Dr.Reddy's & Lupin. We
believe the discount is warranted given Biocon's relatively narrow product basket
in APIs & lower growth. Since pharma is a growth sector, we prefer to use P/E v/s
EPS CAGR as our primary valuation methodology for the base business of pharma
companies. We also ascribe a value of Rs120/share to the insulins deal with Pfizer
– based on an NPV of expected cash flows (upfront & milestone payments, capex
& development cost as well as payments linked to Pfizer’s sales). We build in
explicit forecasts till FY20, following which we use a terminal growth rate of -2%.
We assume gradual increase in market share for Pfizer and that Biocon makes
c15% on Pfizer’s sales. Given the back-ended nature of cash inflows and
uncertainty over timelines & assumptions, we use a relatively higher discounting
rate (15%) in our analysis.
Risks
Our risk rating for Biocon is Medium Risk as against the Low Risk rating suggested
by our quant based rating system, given the risk from rupee appreciation and
scope for delays / execution issues. The main downside risks include: 1) slowerthan-expected ramp-up in the insulins deal with Pfizer; 2) Setback on the oral
insulin project could hurt sentiment; 3) Sustained appreciation in the rupee could
hurt revenues & profitability, especially in the research services biz. Key upside
risks include: 1) licensing deals for oral insulin or T1h molecules; 2) faste- thanxpected progress in biosimilars efforts in the US & / or EU; 3) Swift turnaround in
the research services biz.
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