Biocon Rating: Hold – Vaccines to complement biosimilar portfolio

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September 21, 2021 2:00 AM

Deal with SILS could add NPV of `21/share to TP; better biosimilar execution remains key; ‘Hold’ retained

An employee in protective clothing works inside the research and development center at the Biocon Ltd. campus in Bengaluru, India, on Wednesday, Nov. 16, 2016. This year Biocon's stock has rallied almost 80 percent with the best return among shares of generic drugmakers worldwide, after one of the company’s copies of a top-selling biologic drug had its first breakthrough in a developed market. Photographer: Dhiraj Singh/Bloomberg

Biocon Biologics Ltd. (BBL), a subsidiary of Biocon Ltd, has entered into a strategic alliance with Serum Institute Life Sciences Private Ltd (SILS) under which SILS would become a 15% stakeholder in BBL upon the merger of Covishield Technologies Pvt Ltd (CTPL), a wholly owned subsidiary of SILS, into BBL. Through CTPL, BBL would obtain committed access to 100 m doses of vaccines per annum for 15 years, primarily from SILS’s upcoming vaccine plant in Pune with commercialisation rights for global markets.

This deal is subject to receipt of regulatory and other approvals. Other investors in BBL who own a 10.11% stake in BBL have approved the deal. The SILS deal values BBL at ~$4.9 bn.

Deal complementary to Biocon’s biosimilar portfolio: According to Biocon, vaccines are complementary to its biosimilar portfolio under BBL and the alliance offers attractive economics in view of the pricing of $3-10 per dose and related operating margins of mid-30%s for vaccines in the global markets. The profit-sharing deal with SILS would provide business visibility for the next 15 years. Biocon expects vaccine revenue would start in H2FY23 with initial supplies mainly for COVID-19 vaccines. Eventually, supplies would include multiple vaccines for infectious diseases, such as dengue, chikungunya, etc.

Biocon plans to leverage its existing commercial infrastructure for biosimilars for distribution of vaccines in global markets.

We do not yet include vaccines in our financials as we await statutory closure of the deal. Nonetheless, our back-of-envelope analysis indicates that vaccines could add a NPV of Rs 21 per share to our TP, which would raise our target price by 5%, under our base case scenario. The alliance would also develop antibodies for dengue, HIV, etc.

Step-up in execution of biosimilars remains key: Biosimilars remain the core focus for Biocon where it is looking to step up execution with key launches in the US and EU. As COVID-19 has disrupted market uptake of biosimilars, commercial execution by Biocon and partner Viatris so far have been less impressive than that of competitors.

Biocon/VTRS are hoping for better execution ahead, and the planned launch of “interchangeable” Semglee (insulin glargine) in the US towards end-2021 could be a big boost for their biosimilars portfolio.

Retain Hold and TP of Rs 415: We retain Hold rating as we await improved execution for biosimilars. The launch of “interchangeable” Semglee in the US and market share gains for launched biosimilars could be key catalysts for Biocon.

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