Goldman Sachs :: Biocon: Neutral as Axicorp set to be LT drag; reduce TP

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Biocon (BION.BO): Neutral as Axicorp set to be LT drag; reduce TP
What’s changed
We reduce our FY11E-FY13E earnings estimates for Biocon by 15%-41%
on the back of 3QFY11 results and greater clarity on revenue recognition
and R&D expenditure from the Pfizer deal. As a result, we reduce our 12-
month TP to Rs 318 (from Rs392), implying 2% potential downside. We
remain Neutral on Biocon despite the recent correction (down 26% in
CY2011) as we believe the stock is fairly valued at current levels.

Implications
 Core business to remain soft; Axicorp a drag over the near to
medium term: We expect the core business to grow at 14% CAGR
over FY11E-FY13E driven mainly by the base statin business and the
expanding domestic footprint. We believe that Axicorp will remain a
drag on Biocon over the next 1-2 years given the significant pricing
and margin pressures currently in the German market.
 Biosimilars in US still a long shot: The pathway for approval of
biosimilars in the US is still unclear. We believe that the lack of a
cost sharing agreement with Pfizer on their Biosimilars deal may
lead to downside for Biocon in case large-scale clinical trials (and
hence higher costs) are required for approval.
 Pfizer revenue to boost top-line: Biocon will recognize the revenue
from the Pfizer deal as licensing income, which will contribute
directly to the top-line. As per management, the US$100mn upfront
payment from Pfizer will get amortized as license income while
another US$100mn in the escrow account will be recognized based
on capacity expansion. We expect the revenue recognition to be
staggered over the next 4-5 years and closely related to the R&D
spend on the biosimilar insulin program.
 Milestones and sales payments unlikely in near term: We believe
that milestone and sales related payments from Pfizer would attain
meaningful proportion only after approval and launch of biosimilars
for the key markets of US (post 2015) and EU (post 2012).
 Cut earnings estimates on Pfizer deal: We revise our FY11E-FY13E
revenue estimates to incorporate the license income from Pfizer.
Previously we treated this as part of other income. We cut our
earnings estimates by 15%- 41% due to increased R&D costs and a
longer revenue recognition period from the Pfizer deal.
Valuation & Risks
 Our new 12-month Director’s Cut-based TP of Rs318 implies a FY12E
P/E of 15.7X, which is a 1% premium to the sector. The stock currently
trades at 2% premium to peers on FY12E P/E of 16X.
 Risks: Upside: Biosimilar approvals, oral insulin partnership.
Downside: Regulatory delays, large clinical trial requirements
INVESTMENT LIST MEMBERSHIP
Neutral