Synergy gains from stake purchase positive for pharma major Biocon

Brokerages say Biocon's move to fully acquire Biocon Biologics simplifies structure and unlocks value, but near-term stock pressure likely due to dilution and fundraising

The move by pharmaceutical major Biocon to acquire the minority stake in Biocon Biologics (BBL) and turn it into a wholly owned subsidiary is largely positive for the consolidated entity. While brokerages highlight near-term volatility given equity dilution and the qualified institutional placement (QIP) and have cut their near-term earnings estimates, they expect the company to gain from operational synergies over the medium term. The stock is down 7 per cent over the last four trading sessions, and could remain under pressure till the stake buy is completed over the next three months.

 

Biocon already holds over three-fourths of BBL, and is buying the rest (23.3 per cent) at $1.17 billion, which pegs the equity value of BBL at $5.5 billion while the enterprise value of the entity is at $6.6 billion. The minority stakes were held by Viatris, Serum Institute, True North, and Tata Capital. Biocon will issue its shares worth $773 million and have a QIP to the tune of $500 million. 

The deal structure involves a share swap, issuing 171.3 million shares to minority holders at ₹405.78, and a cash payout of $400 million specifically to Viatris. This makes the purchase consideration at ₹10,550 crore, valuing BBL at ₹45,300 crore ($5.09 billion) or at 13.4 times 2027-28 (FY28) BBL operating profit. PhillipCapital Research believes that the buyout of the minority stake has happened at a discounted value just before the monetisation of the robust US biosimilar portfolio/pipeline. This makes the scope of value-unlocking strong going ahead, say Surya Patra and Bhavya Sanghavi of the brokerage. 

While the deal will help eliminate the minority interest at BBL, simplify the holding structure, and lower the holding company discount, the addition of equity shares would result in dilution of earnings per share.

 

Given the earnings dilution, Motilal Oswal Research has trimmed its earnings estimates by 9 per cent in FY27 and 8 per cent in FY28. While the equity dilution and QIP process may create a near-term drag on stock price, business prospects remain encouraging on the back of product launches (namely insulin aspart) in the biologics segment and subsequent market share gain, scale-up of generics business, and growth/operating leverage in Syngene business, say analysts led by Tushar Manudhane of the brokerage. The brokerage has a “Buy” rating with a sum-of-the-parts (SOTP) target price of ₹460.

 

The company highlighted the operational synergies across supply chain, procurement, manufacturing, and infrastructure, which will add value to the consolidated entity.

 

JM Financial Research remains constructive on Biocon’s outlook driven by biosimilar scale-up (five launches over FY25-FY27), complex generic launches (including GLP-1), margin expansion, and improving leverage. Analysts led by Amey Chalke of the brokerage forecast a revenue growth of 14 per cent, operating profit improvement of 23 per cent, and net profit jump of 42 per cent over FY25-FY28. It retains a “Buy” rating with a SOTP target price of ₹476.

 

Some brokerages believe that the dilution will offset the synergy benefits of the combined entity.

 

Although the acquisition of the stake simplifies group structure, the 21 per cent resultant dilution in equity for Biocon (preferential + QIP), according to analysts led by Abdulkader Puranwala of ICICI Securities, offsets the benefits of profit accretion. The brokerage has a “Sell” rating on the stock with a target price of ₹320.