Citi on Biocon: Leading Indian Play on Biosimilars

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Leading Indian Play on Biosimilars
 Business Snapshot– Biocon is an integrated biotechnology company in India
that encompasses all critical stages of drug development – drug discovery,
development, and manufacturing and commercialization of
biopharmaceuticals and enzymes. With more than 25 years of expertise in
fermentation technology, the company has built strong capabilities in highgrowth
segments like statins, immunosuppressants and anti-diabetes. While
statins form the major part of its current business, Biocon is aggressively
pursuing the biosimilars opportunity in regulated markets and is also
investing in drug discovery research to build a future pipeline.


 Latest Quarterly Performance – Good growth in Axicorp revenues (+27% YoY)
& lower R&D spend led to good 2Q numbers (sales +17%; PAT +20% YoY)
while Biopharma (+9% YoY) & research services (+7%) businesses
remained relatively subdued. EBIDTA margin improved (+164bps YoY)
despite higher share of Axicorp (lower margin distribution / tender biz),
mainly on higher licensing income & lower R&D spend. We do not expect
any major pick up in base biz growth rates in the near term although higher
licensing income could buoy earnings.

 Key Catalysts / Issues – a) Progress on biosimilars legislation in the
developed markets of Europe and North America; b) More clarity on terms of
the insulins licensing deal with Pfizer; c) New launches by its partners in
Europe & US, triggering off API supplies from Biocon; d) Outcome of next
round of AOK tenders in Germany – any further upside for Axicorp; e)
Potential licensing deals for other biosimilars (viz. EPO, GCSF etc), oral
insulin or any of its other novel R&D programs

 Pfizer deal for insulins is a game-changer – Biocon’s insulins licensing deal
with Pfizer is a game-changer for the company, in our view. Besides
enabling Biocon 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.

 Valuations – Biocon has generally traded at a premium to other mid cap
pharma stocks, primarily on account of its niche positioning in biosimilars.
We believe that the recent deals with Pfizer & Mylan not only establish it as a
leading play on this opportunity but also allow it to pursue the same without
hurting profitability & B/S. The stock trades at c19xFY12E EPS (w/o
incorporating the Pfizer deal cash flows). We believe it should be able to
maintain these levels; however, the competitive nature of its API biz & the
trading biz at Axicorp could cap further re-rating.