The market is ignoring commercial risks to the biosimilar franchise, especially competition; valuations are stretched
Biocon (BIOS) announced the receipt of an establishment inspection report (EIR) for its Bengaluru facility for the May-June 2017 inspection that had received ten observations. The EIR now minimises the possibility of further quality related issues, and raises the probability of approvals for biosimilars Herceptin and Neulasta, in the coming months, though these will still be contingent on the status of the March-April 2017 inspection, which has resulted in additional data submission requirements for both the products. SELL.
cGMP clearance is a positive, though pre-approval inspection also needs to be cleared
BIOS announced the receipt of EIR for its Bengaluru facility for the May-June 2017 cGMP inspection. The EIR now closes the inspection with a VAI (voluntary action initiated) status. In October 2017, BIOS had received a CRL for biosimilar Neulasta, with the FDA requesting for additional CMC data from the ongoing corrective action plans (CAPA), while Herceptin’s target action date was earlier extended to December 2017, with the FDA requesting more time to review data submitted late in the review cycle, and most likely related to queries around the manufacturing processes highlighted in the March-April 2017 pre-approval inspection (PAI). The PAI now remains the only barrier for Herceptin and Neulasta approvals in the US.
Launch timelines unchanged
We expect BIOS to launch its biosimilar Herceptin around 4QCY18. In the meantime, we see several competitors lining up potential filings/launches for biosimilar Herceptin. We expect a majority, if not all, of these players to launch by CY2019. Given the strong oncology presence of the innovator as well as Amgen, Pfizer, Merck and even Teva, we believe Mylan will face tough competition in gaining market share, with pricing too potentially likely to come under pressure. We also expect Neulasta biosimilar to be launched in CY2019, though this is contingent on the outcome of the litigation on ’707 process patent against both Coherus (likely approval in CY2019) and Mylan, and the newly issued ’997 process patent against MYL. Given that AMGN has already converted 55% of the Neulasta market to OnPro, any further delays will also provide AMGN with additional time to shift volumes to OnPro. Similarly, Lantus is also likely to turn competitive with LLY’s Basaglar already making significant gains in the market, and Samsung/Merck having also filed in advance of BIOS/MYL, which is expected to launch its biosimilar in the US in 2HFY21.
We believe the market is ignoring both commercial risks to the biosimilar franchise, particularly, the increasing competitive intensity for key products. Even at 100% probability of success for the biosimilar franchise, we arrive at a valuation of Rs 270/share.