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Biocon: Positive deals

Strategic alliances and product development improve prospects for the company

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The recent agreement between and US-based pharma major (BMS), as well as the private equity (PE) investment in Biocon’s contract research subsidiary, Syngene, are positives from a funding and perspective of the company’s research programme. While the deal with BMS gains importance, especially after called off its agreement, the increases expectations of further value unlocking via the listing of Syngene.

Though these steps are positive in the long term, there is little upside in the near term as there is no upfront fee from BMS, which analysts say is disappointing and the initial public offering (IPO) for Syngene is dependent on market conditions improving.

HSBC analysts, in a recent report, said while the self-financing deal with BMS was a positive, the lack of upfront fee was a dampener.
 

HIGHER GROWTH, MARGINS IN FY14
In Rs crore Q2FY13 FY13E FY14E
Net sales 592.40 2412.90 2915.10
% chg y-o-y 16.50 15.64 20.81
Ebitda 141.10 591.80 730.00
Ebitda(%) 23.81 24.53 25.04
Net profit  89.70 359.50 445.60
% chg y-o-y 4.60 6.23 23.95
PE (x)   15.77 12.72
Source- HSBC Research                                                       E: Estimates

“While the BMS tie-up instills confidence in the flagship oral insulin program, upsides are long-term and tied to outcomes of clinical trials,” they add. Due to this, the Street’s not impressed and the stock ended up losing eight per cent over the past two days, erasing most gains over the past month.

However, most analysts have a ‘buy’ rating on the stock, due to strong growth of its existing product range, as well as progress on the product development front. HSBC remains overweight on the stock on the back of potential triggers in the form of out-licensing of novel assets in the near term and realisation of a big insulin opportunity in emerging and regulated markets in the long term.

Bristol-Myers agreement
Biocon will conduct clinical studies for oral insulin product (IN-105) up to the completion of Phase II, after which Bristol-Myers will assume full responsibility for the development programme. This is a positive development, as drug development is a long-drawn and specialised process, requiring substantial funding. Given there is no oral insulin product currently (patients have to inject the same), if the product is taken to commercialisation, it will be a block buster for the company. After development, Bristol-Myers will have the right to exercise an option to obtain an exclusive worldwide licence for the product. Though Biocon will retain exclusive rights for the product in India, it will receive a licence fee in addition to potential regulatory and commercial milestone payments and royalties on commercial sales of the product in the international markets.

Syngene, product development
The PE investment by of Rs 125 crore for a 7.69 per cent stake values the company at Rs 1,625 crore. Analysts at observe this has increased expectations for value unlocking by Biocon in the firm through an IPO, even though the management feels market conditions are far from conducive. Nevertheless, the investment gives a positive outlook on the valuation of the business and increases confidence in the company’s outlook. On the product (generic insulins) front, the company has FY14 for filing dossiers in the European market for human insulin (phase III) and CY15-end for global phase III trials for another insulin, Glargine. The management, however, feels that emerging markets offer a larger opportunity than the US and European markets.

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