'Overweight' on Bicon, base business getting better: Morgan Stanley

Posted online: Monday, Dec 23, 2013 at 0000 hrs
Base business drivers: The share of faster-growing domestic formulations, insulin and immunosuppressants and contract research is rising in Biocon’s overall sales, which should foster midteen earnings growth for the next two-three years, in our view. We expect flat margins, as we anticipate rising research spend. We also note that Biocon is an API supplier to a few pharma companies for the upcoming sirolimus patent expiry in the US.

Steady progression in bio-similar portfolio: The company has met primary (Hba1c level) and secondary (hypoglycemia) endpoints in the EU insulin phase III trials. However, Biocon plans its EU regulatory submission in harmony with its US submission, which could happen in 2015. Biocon’s trastuzumab (Herceptin) has been approved for the Indian market (other EMs in 12-24 months), and the launch is planned for Q1FY14. Its clinical trial for US/EU markets is under way. The company launched its proprietary molecule—itolizumab (Alzumab) for psoriasis—in India in October.

Investment case

We see two key value drivers for Biocon:

(i) Improving base business, which should sustain midteen earnings growth for the next two-three years – driven by fast-growing domestic formulations, insulin and immunosuppressants & contract research.

(ii) Progression of biosimilar portfolio for global markets –

The company has met primary and secondary endpoints in the EU insulin phase III trials. However, Biocon plans its EU regulatory submission in harmony with its US submission, which could happen in 2015. Biocon’s trastuzumab (Herceptin) has been approved for the Indian market (other EMs in 12-24 months), and the launch is planned for Q1FY14. Its clinical trial for US/EU markets is under way. The company launched its Valuation: Biocon trades at 20.0x our FY2014 and 16.9x our FY2015 EPS (earnings per share) estimates, about a 10% discount to the industry average. We arrive at our new price target of R482 (up from R392) by applying a P/E multiple of 18x (unchanged) to our FY16 EPS estimate of R26. Revised price target of R482 implies 23% upside. Our price target increase is driven by rolling forward our target EPS to FY16 and raising our F16 earnings estimate by 4.4%.

We argue for 18x P/E (price-to-earnings ratio) target multiples for Biocon in view of…

o Steady base business fundamentals—lower statin dependence and domestic formulations scaling up—gives visibility of midteen earnings CAGR, FY14-16.

o Prospects of global biosimilar opportunities coming to fruition in ensuing years (2015-25).

o Biocon’s steady preparedness to monetise its biosimilar assets— human insulin phase III trials, steady drawdown in capex for dedicated Malaysian facility, partnership with significant global generic player (Mylan) …although these positive factors also imply challenges:

o Monetising biosimilar assets – These include clinical trials, regulatory approval, manufacturing scale-up and market acceptance. First EU filing (human insulin) in 2015.

o Base business is in large part API sales to institutional customers (i.e., limited retail branding) which carry risk of sudden loss of sales and/or margins.

Key downside risks to our price target include: Delays in development and regulatory approvals—especially human insulin and analogs for EU, and biosimilars in India and EM; litigation risk on pen devices; and failure of lead compounds in the proprietary pipeline. Manufacturing scale-up market access in EU for biosimilars are other credible. Slowdown in RoW sales of insulin and immunosuppressants is the key risk to earnings, in our view.