Mylan-Biocon’s settlement with Roche allowing the former to launch its biosimilar trastuzumab takes litigation risk out of the picture, allows a date certain launch and places Mylan as the first potential biosimilar entrant. It also pitchforks Biocon into a small list of players with potential for tangible upside from biosimilars over next 18-24 months. We raise our NPV for trastuzumab in our target price to R195/share: earlier launch, higher peak market share & higher success probability. We also raise our value for its base biz to R800/share as we roll over to 20x June’18e from Mar’18e earlier.
Settlement paves way for potential trastuzumab biosimilar launch in H2CY18
Mylan announced a settlement with Genentech and Roche on Herceptin patents (‘213 and ‘415 patents)— providing it with global licences for all countries, except Japan, Brazil, and Mexico, on specified dates. Mylan/Biocon’s BLA for biosimilar trastuzumab has BsUFA date of Sept 3,’17. We anticipate that the launch date falls somewhere between the FDA target action date for approval and the expiry of Herceptin IP; likely in H2CY18 in our view. A meaningful opportunity, Mylan/Biocon could be first to market Herceptin generated global sales of $6.7 bn in 2016, mainly from US & EU. Based on publicly available information, it appears as though Mylan/Biocon is furthest ahead vs. the peer group, and could be the first to market with a biosimilar of the product. It does not appear to be overly crowded either.
Progress on biosimilars continues
Biocon is the most leveraged biosimilar player from India with tangible progress in regulated markets. It has TAD for both its filings (Herceptin and Neulasta) in the US and three filings (Herceptin, Neulasta and Glargine) are under review at EMA. It would also file Glargine (US) and Humira (US & EU) biosimilars over the next few months. A fifth biosimilar (Bevacizumab, Avastin) is currently in Ph-3. Besides, EM sales of biosimilars have gained good traction and there’s the three-year insulin supply contract from the Malaysian government.
We rate Biocon shares a Buy with a TP of R1,315. We believe that Biocon’s partnerships with Mylan (for MABs insulin analogues), recent approval for insulin glargine in Japan and the progress made on its leading candidates establish it as an interesting play on the global biosimilars opportunity. While Indian formulations and research services are likely to witness healthy growth, we expect growth rates in its larger biopharma business to gradually improve led by EM sales of biosimilars and commercialisation of ANDAs in the US. These should help offset the pressure on account of high R&D spend on a relatively smaller revenue base.
We set a target price of R1,315 for Biocon which is a sum of two parts. We assign a probability adjusted NPV of R515 to its lead biosimilar products. We assume 90% probability of launch for trastuzumab, 75% for pegfilgrastim and glargine, 60% for adalimumab and 50% for bevacizumab—guided by progress/ milestones on each. We value rest of the business (small molecule APIs, branded formulations, research services etc.) at R800 (20x June’18e EPS). This is at a c15% discount to our target PE multiple for its mid-cap peers such as Glenmark and Cadila. Since pharma is a growth sector, we prefer to use P/E v/s EPS CAGR as our primary valuation methodology for the base business of pharma companies.