Biocon Limited is India’s largest and fully-integrated, innovation-led biopharmaceutical company. As an emerging global biopharmaceutical enterprise serving customers in over 100 countries, it is committed to reduce therapy costs of chronic diseases like autoimmune, diabetes, and cancer. Through innovative products and research services it is enabling access to affordable healthcare for patients, partners and healthcare systems across the globe. It has successfully developed and taken a range of Novel Biologics, Biosimilars, differentiated Small Molecules and affordable Recombinant Human Insulin and Analogs from Lab to Market. Some of its key brands are INSUGEN® (rh-insulin), BASALOG® (Glargine), CANMAb (Trastuzumab), BIOMAb-EGFR (Nimotuzumab) and ALZUMAb (Itolizumab), a first in class anti- CD6 monoclonal antibody. It has a rich pipeline of Biosimilars and Novel Biologics at various stages of development including Insulin Tregopil, a high potential oral insulin analog. Biocon’s Herceptin derives about US$2bn in sales from Herceptin in international markets. It is believed that not all of Herceptin sales in international markets will be immediately accessible for biosimilar players because of different intellectual property or IP situations and regulatory bars across geographies. There are ways that biosimilars can look to play the emerging market potential. One is to cannibalise the existing market pie and the other is to expand access by discounting the prices to a level where affordability is significantly enhanced. For now, Biocon will discount its biosimilar by 60 % and get an 8 % share of the available pie i.e. 50 % of international markets’ sales and also expand the market by 20 % from the current level. This translates into incremental sales of US$75mn in international markets. Biocon’s has unexpired patents protecting Lantus, Biocon may enter the market only after a settlement with Sanofi and can reach the market in second-half of 2018. It is expected to have double-digit royalty payment from Biocon/Mylan to Sanofi. Biocon should be the third entrant after Eli Lilly and Merck. And there is a very low probability that pharmacists may be allowed to substitute Lantus with biosimilars. In a best-case scenario, pharmacy substitution for Lantus may be allowed for vials. However, the vial market is reducing every year and with the launch of Toujeo the cannibalisation of vial market (most of which is in US) will accelerate significantly. The recent run up in the stock price has discounted a greater proportion of the potential opportunity, but the risks are underappreciated. Direct competition from other biosimilar players and next generation molecules from innovators casts major uncertainty over realization of potential benefits in the near to mid-term. The investments that have been made so far are significant and the business would require further investments. This would limit free cash flow generation. Over the next 3-4 years, the larger part of the opportunity for Biocon will be driven by emerging markets, while regulated markets will have limited contribution. A better way to play the potential opportunity presented by the biosimilar space would be a large cap pharma company that is poised well in the biosimilar space. On financial side, Biocon during Q1 FY17 reported consolidated net profit of Rs. 166.60 Cr an increase of 31.97% from Q1 FY16. It reported its consolidated revenue for the quarter which rose by 17.94 % to Rs. 982.40 Cr. During Q1 FY17, Biocon reported consolidated EBIDTA of Rs. 304.00 Cr up by 28.98 %. During Q1 FY17, it reported its consolidated Profit before tax to Rs. 232.00 Cr. EPS of the company stood at Rs. 8.33 a share during the quarter, as against Rs. 6.31 per share over previous year period. Biocon’s gross R&D spend stood at Rs 92 Cr in Q1 FY17, reflecting the progress of Generic Formulations, Biosimilars and Novel programs. Net Sales and PAT of the company are expected to grow at a CAGR of 12 % and 13 % over 2015 to 2018E respectively. There’s significant capex towards biosimilar manufacturing and foray of Syngene into Contract manufacturing will limit free cash flow generation. With encouraging developments on biosimilars front in last six months have hogged the limelight especially the approval & launch of Glargine in Japan and presentation of Trastuzumab data to ASCO. And launches in emerging markets are also getting momentum. These developments are testimony to Biocon’s progress. With the Malaysian facility getting ready for global filings, it is believed that the future bodes well for it on the biosimilars front. It will also provide an extra lever for growth besides Syngene and branded formulations. Strong performance of the company during the quarter has been driven by an all- round growth of its business across Small Molecules, Biologics, Branded Formulations and Research Services. Biologics business delivered a growth of 53 % driven by the sales of biosimilars in emerging markets. The submission of Pegfilgrastim, Biocon’s first biosimilar filing in EU, is a critical milestone this quarter. Biocon Insulins business made a mark with the launch of Insulin Glargine in Japan. In addition the company received regulatory approvals from MoH, Malaysia, for rh-Insulin and Glargine which will enable commercialization of these products. Biocon is on track for filing some of its Biosimilars and Generic Formulations in the developed markets later this year. On SOTP (sum-of-the-parts) basis, the value of BIOCON alone comes at Rs. 534.40 per share valueing 22 x its FY18E EPS of Rs. 24.30. The valuation of the Syngene taking valueing Biocon's at 74.60 % stake comes to Rs. 372.26 per share. And valuing the whole gives us the value of BIOCON of Rs. 906 per share. At the current market price of Rs. 831.00, the stock is trading at a PE of 27.97 x FY17E and 24.93 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 29.70 in FY17E and Rs. 33.33 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
SOTP VALUATIONS : (FY18E)
Value Per Share (₹)
Syngene International (EPS Rs.18.5 x 27PE) Rs. 499.50
Biocon's value in Syngene per share (74.60%)
TOTAL Value per Share (Rs.)
|SALES (₹ Crs)||3,089.81||3,485.40||3,973.35||4,489.89|
|NET PROFIT (₹ Cr)||497.43||896.10||594.73||666.62|
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