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Wednesday, August 3, 2016


Scrip Code: 532523 BIOCON
CMP:  Rs. 831.00; Market Cap: Rs. 16,620 Cr; 52 Week High/Low: Rs. 846.80 / Rs. 395.30
Total Shares: 20,00,00,000 shares; Promoters : 12,13,57,446 shares – 60.68 %; Total Public holding : 7,86,42,554 shares – 39.32 %; Book Value: Rs. 202.74; Face Value: Rs. 5.00; EPS: Rs. 46.82; Dividend: 100.00 % ; P/E: 17.74 times; Ind. P/E: 27.59; EV/EBITDA: 11.75 times. Total Debt: Rs. 2,477.70 Cr; Enterprise Value: Rs. 17,970.70 Cr.
BIOCON LTD: The Company was incorporated as Biocon India Private Limited on November 29, 1978 and is based in Bengaluru. Biocon Limited is a biopharmaceutical company, which is engaged in the manufacture of pharmaceuticals, medicinal chemical and botanical products. The company came with an IPO in February 2004 with an offer of 1,00,00,000 equity shares of Rs. 5 each at Rs. 315.00 per share, raising Rs. 315 Cr. It got listed on April 7, 2004 at Rs. 425 and made high of Rs. 506.70 with a low of Rs. 425 on listing day. The objects of the issue were to achieve the benefits of listing on the Stock Exchanges and raising capital for financing to setting up new facilities to augment our capacities for submerged fermentation and chemical synthesis operations & for the other corporate purposes. The company gave bonus in April 2008 in ratio of 1:1, and has not given any in its shares. The Company operates through two segments: Active pharmaceutical ingredients (Pharma), and Contract Research And Manufacturing services (CRAMS Contract Research). It is engaged in manufacture of biotechnology products for the pharmaceutical sector, and also engaged in research and development in the biotechnology sector. The Company is also engaged in providing contract research and manufacturing services to overseas customers in the field of synthetic chemistry and molecular biology and undertakes clinical research activities on discovering new biomarkers and is discovering new diseases subsets and data-based on pharmacogenomics. Biocon’s presence straddles in four main therapeutic areas: Diabetology, Cardiology, Nephrology and Oncology and plans to introduce two new divisions, Comprehensive Care, and Immunotherapy. It offers a portfolio of bio similar insulins, recombinant proteins and monoclonal antibodies. Its products include Insugen, BASALOG, BIOMAb EGFR, Abraxane, CANMAb, ALZUMAb, ERYPRO, BLISTO, Cytosorb and Cimivir. In research services, Syngene International Limited (Syngene) is engaged in the business of custom research in drug discovery while the other fully owned subsidiary Clinigene International Limited (Clinigene) is in the clinical development space. Syngene is a now a listed entity in Indian Capital Market. In December 2009, Biocon acquired the Active Pharma Ingredients (API) undertaking from IDL Speciality Chemicals Ltd., a subsidiary of Gulf Oil Corporation Limited. BIOCON Ltd is locally compared with Alpa Laboratories Ltd, Panacea Biotech Ltd, Hester Bioscience Ltd, Wockhardt Ltd, GlaxoSmithKline Pharma Ltd, Jubliant Life Sciences Ltd, Wyeth Ltd, Lyka Labs Ltd, Cadila Healthcare Ltd, Novartis India Ltd, Syngene International, Vivo Biotech Ltd, Celestial Biolabs and Globally with Anavex Life Sciences Corp of USA, Bayhill Therapeutics, Inc. of USA, Cephalon Inc of USA, Halozyme Therapeutics Inc of USA, Immunex of Denmark, Myriad Genetics, Inc of USA., OncoMed of USA, Proteolix of USA, Tanox , Xoma Corporation, Taconic of Denmark, QPS of Austria, Baxalta (Shire) of Austria, Pfizer of Belgium, Sanofi Genzyme of Belgium, Ergomed of Bosnia, Allergan of Bulgaria, Lonza of Cezch Republic, Novozymes of Denmark, Novo Nordisk of Denmark, Medix Biochemica of Finland, Graftys of France, Allecra Therapeutics of Germany, Bioaxis Healthcare of Greece, Omixon of Hungary, Pinewood (Wockhardt) of Ireland, GlaxoSmithKline Pharma of UK.

Investment Rationale:
Biocon started as a niche player with its unique expertise in fermentation technology to build global leadership in manufacturing and supply of statins. Over time, the statin business was commoditised, but the company leveraged its expertise in fermentation to build its presence in high-entry barrier biosimilar space. The company has accelerated its biosimilar development efforts to emerge as a front-runner in the race to launch biosimilar products in regulated and developed markets. The company has four biosimilar products (Insulin Glargine, Trastuzumab, Pegfilgrastim, and Adalimumab) in late stage clinical trials intended for approval in developed markets (US and EU). Besides having a front-end product business, Biocon also successfully nurtured and developed contract research and manufacturing business, which was recently listed on the bourses as Syngene International. By virtue of its strong client relationship and full service offering in the contract research and manufacturing space, Syngene continues to grow at a notably fast pace at more than 20 %. The characterisation capabilities that the company has developed by virtue of its developmental efforts on the biosimilar front is being leveraged for filing of Abbreviated New Drug Application (ANDA) application on complex chemical drugs products like Copaxone. The company so far has made 7-8 ANDA applications and is looking for 5-6 filings each year. The company potentially runs a cost advantage on these products by virtue of Global scale in APIs of these products. Biocon is aspiring to reach US$1bn in annual revenues by FY19 and believes that a large part of the potential growth will came from sale of biosimilars, and there will be growth in branded formulations business and research services business. The biotechnology sector of India is highly innovative and is on a strong growth trajectory. This sector, with its immense growth potential, will continue to play a significant role as an innovative manufacturing hub. The sector is one of the most significant sectors in enhancing India's global profile as well as contributing to the growth of the economy. India is among the top 12 biotech destinations in the world and ranks third in the Asia-Pacific region. India has the Second-highest number of US Food and Drug Administration (USFDA) approved plants, after the USA and is the largest producer of recombinant Hepatitis B vaccine. Out of the top 10 biotech companies in India (by revenue), seven have expertise in bio-pharmaceuticals and three specialise in agri-biotech. The Indian biotech industry holds about 2 % share of the global biotech industry. The biotechnology industry in India, comprising about 800 companies, is growing at an average rate of about 20 %. The Indian biotechnology sector is expected to grow from the current US$ 5-7 billion to US$ 100 billion by 2025, growing at an average rate of 30 %. Biopharma is the largest sector contributing about 64 % of the total revenue followed by bioservices at 18 %, bioagri at 14 %, bioindustry at 3 %, and bioinformatics contributing to 1 %. With the country offering numerous comparative advantages in terms of R&D facilities, Knowledge, skills, and cost effectiveness, the biotechnology industry in India has immense potential to emerge as a global key player. India constitutes around 8 % of the total global generics market, by volume, indicating a huge untapped opportunity in the sector. Outsourcing to India is projected to spike up after the discovery and manufacture of formulations. Hybrid seeds, including GM seeds, represent new business opportunities in India based on yield improvement. India currently has a marginal share in the global market for industrial enzymes that is estimated to reach about US$ 4.4 billion by 2015. Hence, there is an opportunity in focused R&D and knowledge-based innovation in the field of industrial enzymes, which can innovatively replace polluting chemical processes into eco-friendly processes that also deliver environmental sustainability. India has all the ingredients to become a global leader in affordable healthcare. If there is an annual investment of US$ 4.01 billion to US$ 5.02 billion in the next five years, the biotech industry can grow to US$ 100 billion by 2025, with a 25 % return on investment, and set a growth rate of 30 % year-on-year. For Biocon, the small molecules segment accounts for 42 % of the turnover and comprises Active Pharmaceutical Ingredients (API) like statins, immune-suppressants and specialty APIs and also includes generic formulations business. This vertical is witnessing pricing pressure in some products. The company is exploring fewer opportunities but with higher profitability in this segment such as moving into formulations and filing own ANDAs, 505 (b) (2) filings, etc. It has already filed seven or eight ANDAs cumulatively. These include complex generics and injectable. It is expected that the small molecules segment can grow at a CAGR of 13.5 % to Rs. 1,787 crore in FY16-18E. The biologics segment includes novel biologics and biosimilars, including rh-insulin, insulin analogs, monoclonal antibodies and recombinant proteins. This segment accounts for 12 % of the Biocon turnover. Biocon is mainly focusing on following therapies -diabetology, oncology and immunology. The company has invested heavily in this space over the last two or three years, especially the Malaysian facility. The progress, so far, is encouraging with launches in emerging markets, Glargine launch in Japan and filing arrangements in the EU and US. Biologics is expected to grow at a CAGR of 40 % in FY16-18E. Biocon’s research arm SyngeneInternational Ltd contributes 32 % to its turnover. Syngene is the contract research organisation (CRO) arm of Biocon with proven capabilities. The company caters to 256 clients including eight out of global top 10 global players. This segment has been consistently growing at 20 %+ rate. Syngene provides variable cost alternative like full-time equivalent (FTE) and fee-for-service (FFS) to the traditionally fixed cost, in-house, resource intensive business model of R&D focused organisations. The company has developed long-term relationships and has multi-year contracts with its clients, including three long-duration multidisciplinary partnerships with Bristol-Myers Squibb (BMS), Abbott Laboratories (Singapore) and Baxter International. The company also provides clinical research and clinical trial services through its subsidiary Clinigene. In August 2015, Syngene had raised Rs. 550 crore through IPO. Recently, it has been the major growth driver for the company as biopharma segment has seen some slow down. It is expected that the revenues from it to grow at a CAGR of 25 % in FY16-18E. The branded formulations business includes the finished dosage business in India and overseas including UAE. It constitutes 15 % of the Biocon turnover. It comprises Indian domestic formulations. Biocon owns 80+ brands encompassing therapies like diabetology, oncology, nephrology, cardiology, immunotherapy, comprehensive care and bio-products. Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab and Insulin Glargine) have already reached the critical milestone of global Phase III clinical trials. The company is also planning to start US and EU filings from FY17 with Mylan. Biocon entered into a partnership with Mylan for six biosimilar programs (Trastuzumab, Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept and Filgrastim) and three insulin analog programs (Glargine, Lispro and Aspart). Biocon’s Japanese partner Fujifilm Pharma (FFP) has launched Insulin Glargine in Japan. The company has received approval for its Insulin Glargine from the Japanese regulator in March 2016. Insulin Glargine BS Injection Kit (FFP) has been developed and manufactured by Biocon and is being commercialised by FFP in Japan. Among therapies, diabetology is the largest therapy, which accounts for 60% of branded formulations. Some of its unique launches are INSUPen (insulin delivery device), Biomab (novel biologic for oncology) and Alzumab (novel biologic for Psoriasis). The pipeline includes CANMAb (biosimilar version of oncology product Herceptin). This segment constitutes 15 % of overall sales. Biocon is India’s premium biopharmaceutical company, which has demonstrated industry-leading capabilities in developing the most complex biosimilar products. The company is a frontrunner in the race to introduce biosimilar products for developed markets. In recent weeks, Biocon’s stock price has run up notably in anticipation of growth presented by the launch of biosimilars in regulated markets. And it is believed that Biocon will continue to post growth in coming future.

Outlook and Valuation: 
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, Biocons 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.   

Business Subsidiary 
Value Per Share ()
BIOCON Standalone
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) 3,089.813,485.403,973.354,489.89
NET PROFIT (₹ Cr)497.43896.10594.73666.62
EPS () 24.8744.8129.7033.33
PE (x)32.5218.0527.2324.26
P/BV (x)4.953.993.483.05
EV/EBITDA (x)21.4118.0115.4014.01
ROE (%) 16.16 23.9413.8013.38
ROCE (%)22.5517.5817.5316.78

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*As the author of this blog I disclose that I do not hold  BIOCON LTD in my any of the portfolios.

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  1. A very detailed & comprehensive perspective! Thanks for sharing... Have a great week ahead.

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