Biocon :: Avendus 2012 top ideas

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Worst case likely priced in; upgrade to Buy

A slowdown in booking licensing income from the PFE contract, and
the threat of cannibalization in BIOS’ statin business, have likely led to
a c9% underperformance over the past six months, in our view. We
believe the CMP factors in the worst case – assuming a sharp
disappointment in fidaxomicin supplies and a fall in statin sales. Our
Dec12 TP of INR391 offers a potential return of c45%. Upgrade rating
to Buy. A successful licensing deal from the novel R&D pipeline could
be a catalyst for value unlocking. Lower than estimated growth in the
biopharma business is the biggest risk to our earnings call.
Potential upside of c45%
Our Dec12 TP of INR391 offers a potential return of c45% from the CMP. If the
P/E were to return to the two‐year average trading level of 19.8x, at a target of
INR480, BIOS can deliver c77% return from current levels.
Limited licensing income, statin cannibalizing fear likely led to u/p
The slowdown in booking licensing income from the Pfizer Inc (PFE, NR)
contract in the recent quarter, in our view, led BIOS to witness an absolute fall
of c23% over the past six months; and an underperformance of c9% to the
Sensex. Investors are also concerned about the sustainability of BIOS’s statin
API business, post generecization of Lipitor (atorvastatin).
Worst case likely to be priced in
Our assumptions factor in an addition to sales from FY12f from supply of
fidaxomicin to Optimer Pharmaceuticals (OPTR US, NR) – a key contributor to
growth, in our view (with the exception of fidaxomicin supplies, revenue
triggers are unclear). Should fidaxomicin supplies to fall short of estimates by
50% and revenues from statins miss our targets by 50%, our TP would likely fall
to INR330. At INR330 ‐ our worst case scenario ‐ BIOS offers a potential c22%
return from the CMP.
Success in novel research could be a catalyst for value unlocking
BIOS is scouting for licensing partners for its novel oral insulin drug candidate –
IN‐105. A successful licensing deal could be a catalyst for value unlocking. News
flow on product registrations under the PFE contract can be near‐term triggers.
Dec12 TP at INR391; upgrade rating to Buy
We raise our revenue and PAT estimates for FY12f‐FY14f by up to 3%, largely
on revised currency assumptions. We value BIOS, excluding the PFE contract, at
INR370/share. Our target multiple of 16.0x is at a 20% discount to the stock’s
two‐year forward average P/E. We value the PFE contract at INR21/share. We
roll over our TP to Dec12 and raise it to INR391; upgrade rating to Buy. Lower
than estimated growth in the biopharma business is the biggest risk to our
earnings call. Launch of generic atorvastatin could provide an upside to our
estimates; however, the market is likely to be highly competitive. The revenue
scale up in research services has not been particularly encouraging thus far.
Investor focus is likely to move towards this segment as BIOS lays the
groundwork for a long pending IPO.



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