Biocon: Insulin turnaround awaited  TP of INR405::HSBC Research,

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Biocon: Insulin
turnaround awaited
 Biopharma business growth potential hinges on insulin
turnaround; Pfizer deal heightens expectations
 Syngene has seen good traction post BMS commencement and is
likely to support margins
 Initiate as a Neutral with a TP of INR405
Investment thesis
Over the last few years, Biocon has evolved from
a low-cost statin manufacturer to focusing on drug
discovery and high value generic products,
including biologics like insulin and
immunosuppressants. We expect Biocon to gain
traction in its insulin business since the Pfizer deal
in October 2010.
While its insulin portfolio contributes less than
20% to overall sales, potential entry into other
emerging markets and eventually regulated
markets like the EU and US is a positive. At the
current price, the stock reflects heightened
expectations from the Pfizer deal and valuation
seems reasonable.
Insulin at centre-stage: Biocon has adapted its
strategy to the changing market environment.
With initiatives from the Pfizer deal starting to
take shape, the launch of insulin is awaited in
emerging markets, followed by the EU and US.
Pfizer deal: While the deal adds credibility to the
portfolio of biosimilar insulins, timelines are still
hazy. The licensing income from the deal has
started flowing but we believe sales from Pfizer
will start to make a real impact in FY13-14 once
products are launched in regulated markets.
Contract research business – c25% CAGR
over last five years: Syngene has seen strong
growth especially in the last few years since the
deal with BMS. We expect strong traction to
continue with the addition of new customers.
AxiCorp exit to show better margins: Biocon
has decided to sell its stake in German subsidiary
AxiCorp which it acquired in 2008, given that it
has little relevance in terms of the move into
biosimilar insulins. After the disposal we expect
EBITDA margins to return to c30% on a
sustainable basis.
Initiate with Neutral, awaiting more catalysts:
We value Biocon’s base business at 17x FY13e
EPS of INR23.8 to arrive at our TP of INR405.
While biosimilar insulin launches in the EU are a
major catalyst, we believe near-term opportunities
in the rest of the world may be largely priced in.
Key risks remain delayed entry into big markets
and failure of oral insulin. Any out licensing deal
on oral insulin/NCEs is an upside risk.