Biocon (BIOCON) Rs 567 - ICICI -final.pdf · Biocon India incorporated as 70:30 JV between Indian promoters…

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    Raghvendra Kumar raghvendra.kumar@icicidirect.com

    OUTPERFORMER

    Current price Rs 404

    Target price Rs 567

    Potential upside 40%

    Time Frame 12-15 months

    Biocon (BIOCON)

    Initiating coverage

    February 19, 2008| Pharmaceutical

    Analyst

    ICICIdirect | Equity Research

    Price Trend

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    Absolute buy

    Current Price

    Absolute Sell

    Biocon has re-oriented itself by moving out of enzymes to focus on biopharma. The stabilisation of statin (cholesterol-busting drugs) prices in the US is expected to improve its earnings visibility. A takeoff in bio-similar revenue, the likely turnaround in BBPL (a 51% JV), and Clinigene (a 100% subsidiary) in FY10E & FY09E, and ramp-up in Syngene operations are set to reverse the fortunes of Biocon.

    Two big triggers barely 12-24 months away Biocon may generate a windfall gain in next 12-24 months via out-licensing of its innovative oral insulin. Further, in a move to unlock value, Biocon plans to list its contract research arm, Syngene, within the next 12- 15 months. Robust growth in biopharmaceuticals revenue over FY07-10E

    Despite a flat outlook for statins, we expect a 16.88% CAGR in bio-pharma revenues over FY07-10E to Rs 1173.63 crore on the back of a 26.37% growth in sales of other-than-statin bio-pharma products and 23.31% growth in out-licensing and royalty income. Turnaround in Clinigene and BBPL in FY09E and FY10E

    We expect the 100% clinical research arm, Clinigene, and 51:49 joint venture with CIMAB SA Cuba, Biocon Biopharmaceutical Private Ltd (BBPL) to turnaround in FY09E and FY10E, respectively.

    Risks to our call Biocons innovative oral insulin is entering phase II clinical trials. As a new drug molecule, it could fail at any stage. The failure will lead no revenue inflow and the entire R&D expenditure on it would go in vain. Also, change in time lines for the launch of products in any market may impact valuations. Valuations We expect a 15.47% CAGR in Biocons consolidated top line and 17.79% CAGR in net profit (after-minority-interest) over FY07-10E. We have not factored in the windfall gain from out-licensing of oral insulin. A SOTP (sum-of-the-parts) valuation works out to Rs 567, fetching 40% return over the current market price of Rs 404. At the target price, the stock would discount its FY10E EPS of Rs 32.74 by 17.32x. The stock currently trades at 12.33x FY10E EPS. We rate the stock an OUTPERFORMER.

    Sales & EPS trend

    0200400600800

    1000120014001600

    FY07 FY08E FY09E FY10E05101520253035

    Sales (LHS, Rs crore) EPS (Rs)

    Stock metrics

    Promoters holding 60.90 Market Cap (Rs crore) 4300 52 Week H/L (Rs) 663 / 364 Sensex 17594 Average volume 62671

    Comparative return metrics Stock return 3 M 6M 12M Biocon 4.94 17.37 45.56 Ranbaxy -12.44 6.34 -14.74 Dr Reddys Lab 10.91 -0.26 -17.60 Glenmark 25.91 67.17 90.35

    Exhibit 1: Key Financials Year to March 31 FY06 FY07 FY08E* FY09E FY10E

    Net sales 789.14 985.73 1094.51 1245.66 1517.73 Net Profit 174.00 200.36 214.90 249.61 327.43 Shares in issue (crore) 10 10 10 10 10 EPS (Rs) 17.40 20.04 21.49 24.96 32.74 P/E (x) 23.22 20.16 18.80 16.19 12.34 Price/Book (x) 4.55 3.78 2.72 2.38 2.04 EV/EBIDTA 18.11 14.84 13.85 11.53 8.83 RoNW (%) 19.25% 18.12% 16.26% 16.54% 18.52% RoCE (%) 20.04% 16.19% 13.62% 14.11% 17.28% *FY08E earnings comprise profit on sale of enzyme business, which we we have excluded for calculations Source: Company, ICICIdirect Research

    Sweet spot on the anvil

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    INDEX OF CONTENT Particular Page No Company Background 3 The evolution 3 The transformation 3 Current status 3 Manufacturing capability 5 Investment Rationale 7 Big Triggers hardly 12-24 months away 7 Windfall gain from out-licensing of oral insulin 8 Value unlocking through listing of CRO business 8 Growth engine on a roll - Biopharmaceuticals 9 Strong discovery pipeline a goldmine for future 9 Faster growth in formulation revenue 9 Launch of insulin & GCSF in regulated markets: key growth driver 10 Immunosuppressant: Long-term strategy to enter regulated markets 11 Immunosuppressants & insulin to become largest revenue contributors 12 Monoclonal antibody Biomab EGFR likely to grow at 75% 12 Launching Abraxane in Q1FY09 13 Double digit growth in out-licensing revenue 13 CRO Business: DNA of EPS growth 15 Syngene: the top-line mover of CRO business 15 Clinigene: Likely to turnaround in FY09E 16 BBPL: Dark horse 17 Financial 18 Revenue mix is changing 18 Consolidated revenue to rise at 15.5% 19 Margin likely to improve FY10E onwards 20 Capital cost to keep pressure on net margin till FY10E 21 Substantial cash generation to induce inorganic growth 22 Improving return ratios 23 Return on invested capital shows a rising trend 24 Net profit is likely to see good growth in FY10E 25 Risks & Concerns 26 Valuations 27 Valuation band indicate imminent re-rating 27 SOTP Valuation 27 Manufacturing business (DCF Valuation) 28 CRO business (P/E Valuations) 28 Annexure 1: Statins 32 Annexure 2: Immunosuppressants 35 Annexure 3: BIOMAb EGFR 36 Annexure 4: Acquisition of Germany-based AxiCorp 38

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    COMPANY BACKGROUND Biocon was incorporated in 1978 to manufacture select enzymes for the breweries industry. In 1999, the company began its transformation to an innovation-led biopharmaceuticals company. The evolution In 1978, Biocon was promoted as a 70:30 joint venture (JV) between Indian promoters (70% stake) and an Ireland-based Biocon Biochemicals (30% stake) to manufacture and export few enzymes for breweries. In 1995, Unilever acquired Biocon Biochemicals stake in the JV and merged with Quest, Unilevers Food & Breweries subsidiary. Biocon was to supply enzymes to Quest of international standards. This led Biocon to invest heavily in creating world-class fermentation assets, which it exploited later to make a foray in the fermentation-based pharmaceutical products. In 1999, Unilever sold Quest to ICI. As Quest had 23% stake in Biocon, this was also up for transfer. At this point in time, Indian promoters used their first right of refusal and bought Quests 23% stake, which led to a 100% holding of the Indian promoters in the company. the transformation Post acquisition, the company moved from enzymes to fermentation-based pharmaceutical (Bio-pharma) products, which has now become the mainstay of Biocon. Biopharmaceutical business took off with identification and production of APIs (active pharmaceutical ingredients), which required advanced fermentation and had significant market potential in the regulated markets. The company started with statins and evolved as a significant player in statins API globally including regulated markets. Simultaneously, the company also started contract and clinical research services. Looking at the significant pricing pressure on statins during 2004-05, the company diversified to other products including insulin, immunosuppressant and bio-similars and launched Insugen, its brand of recombinant human insulin for diabetes in the Indian market. In a major breakthrough, under partnership with CIMAB, Cuba, the company launched a novel cancer drug, Biomab EGFR in September 2006. In 2006, the company bought the assets of Nobex IP, which boosted its patent assets greatly. Current status Biocon is now focused on its biopharma verticals that include APIs, biologicals and proprietary molecules both commercialized and under development. Currently, the company is a fully vertically-integrated biotech company with innovative research to commercialization. The interesting part is that Biocon has worked for each level of drug life cycle. While Biocon houses the biopharmaceutical manufacturing, its 100% subsidiary, Syngene, provides contract research for the molecules in pre-clinical stage and Clinigene, another 100% subsidiary, provides clinical research for the molecules aspiring to get commercialized. Its 51:49 JV with CIMAB, Cuba provides manufacturing services for the Biomab EGFR to Biocon.

    Share holding pattern Shareholder % holding Promoters 60.90 Institutional investors 16.61 Other investors 7.85 General public 14.64 Promoter & Institutional holding trend (%)

    60.9 60.9 60.9 60.9

    10.8 7.2 6.8 7.3

    0

    20

    40

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    Q3FY07 Q4FY07 Q1FY08 Q2FY08

    Promoters FII

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    Exhibit 2: Biocons business model * In FY07, the company has included the licensing income in contract research but we have taken

    it into the Biopharma segment as the income relates to Biopharma

    Exhibit 3: Biocons corporate structure

    51% 100% 100%

    22% 17% 61%

    BIOCON

    Syngene

    Clinigene

    BBPL

    Promoters

    Institutions

    Public & others

    Biocon (FY07 sales of Rs 986 crore)

    Biopharma Rs 755 crore

    Enzyme Rs 95 crore

    Contract research (CRO) Rs 136 crore*

    Statins Immunosuppressants Insulin Streptokinase EPO GCSF BIOMAb EGFR (Monoclonal antibody) Novel products Licensing income

    Sold

    Syngene (Contract research)

    Clinigene (Clinical research)

    BBPL (Manufacturing of

    Biomab EGFR)

    Likely listing in 12-15 months