(Biocon) | 652content.icicidirect.com/mailimages/IDirect_Biocon_Q4FY18.pdf · revenue) includes finished dosages business in India and overseas including ... Biocon was established

April 30, 2018

ICICI Securities Ltd | Retail Equity Research

Result Update

Biologics, Syngene maintain momentum…

Revenues increased 26% YoY to | 1170 crore (I-direct estimate: |

1098 crore) mainly due to 48% YoY growth in Biologics to | 241

crore (I-direct estimate: | 179 crore) and 45% YoY growth in

Syngene to | 409 crore (I-direct estimate: | 359 crore).

EBITDA margins remained at 20%, however lower than I-direct

estimates of 22.0% mainly due to lower gross margins led by change

in product mix. EBITDA increased 24% YoY to | 233 crore

Net profit increased 2% YoY to | 130 crore (I-direct estimate: | 114

crore). Delta vis-a-vis operational growth was mainly due to higher

interest cost, depreciation and Tax rate (21.6% vs 6.7% in Q4FY17)

Well poised to capitalise on global biosimilars opportunity

Biologics segment (18% of FY18 in total revenues) includes biosimilars,

encompassing Rh-insulin, insulin analogs, monoclonal antibodies &

recombinant proteins. It is the first Indian pharmaceutical company to

receive biosimilar approval in US. The company has invested heavily in

this space in the last two to three years, especially the Malaysian facility.

So far, the progress has been encouraging with Trastuzumab approval in

the US, Glargine launch in Japan and approval in EU and Australia

besides launches in emerging markets. We expect biologics to grow at

~40% CAGR to | 1506 crore in FY18-20E.

Research services (Syngene) to maintain growth momentum

Biocon’s contract research organisation (CRO) arm Syngene contributes

33% of total revenues. The company caters to 316 clients including eight

out of global top 10 global players. This segment has consistently been

growing in double digits and has recently been the major growth driver

for the company as the small molecules segment is slowing down. We

expect revenues to grow at a CAGR of ~19% to | 2011 crore in FY18-20E.

Small molecules under pressure; branded formulations growing decently

Small molecules (35% of FY18 total revenue) comprise APIs like statins,

immunosuppressants, specialty APIs & also include generic formulations

business is witnessing steep pricing pressure in the US. The company is

exploring fewer opportunities but with higher profitability in this segment

like moving into formulations & filing own ANDAs, 505 (b)(2) filing, etc. It

has already filed few ANDAs, which include complex generics & injectables.

We expect small molecules segment to grow at a CAGR 7% CAGR to |

1685 crore in FY18-20E. The branded formulations (14% of FY18 total

revenue) includes finished dosages business in India and overseas

including UAE. It comprises Indian domestic formulations. The company

owns 80+ brands encompassing therapies like diabetology, oncology,

nephrology, cardiology, immunotherapy etc.

Biosimilar deals, approvals and launches to sustain investors interest

Apart from the strong performance in Biologics and Syngene, Key

highlight for FY18 was biosimilar approvals from developed markets.

Although these approvals do not imply immediate launch of the product

in these regions, it endorses the development and manufacturing

capabilities of Biocon in the realm of biosimilars. Partnership in the

biosimilars space with Sandoz for global development of next generation

biosimilars has once again vindicated its capability in biosimilars.

Progress on the biosimilars regulatory front in developed markets and

launches in the developed as well as emerging markets are likely to

maintain investors optimism for the company. We continue to value the

stock on SOTP basis. Accordingly, we arrive at a target price of | 740 per

share.

Rating matrix

Rating : Buy

Target : | 740

Target Period : 12 months

Potential Upside : 14%

What’s Changed?

Target Changed from | 680 to | 740

EPS FY18E Changed from | 8.4 to | 6.2

EPS FY19E Changed from | 11.9 to | 9.3

EPS FY20E Changed from | 16.9 to | 14

Rating Unchanged

Quarterly Performance

Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%)

Revenue 1,169.5 931.1 25.6 1,057.9 10.5

EBITDA 233.0 187.5 24.3 221.7 5.1

EBITDA (%) 19.9 20.1 -21 bps 21.0 -103 bps

Net Profit 130.4 127.5 2.3 91.9 41.9

Key Financials

(| Crore) FY17 FY18E FY19E FY20E

Revenues 3921.6 4129.7 5148.9 6115.5

EBITDA 851.2 829.1 1204.4 1583.8

Adj. Net Profit 508.7 372.4 558.2 839.2

Adj. EPS (|) 8.5 6.2 9.3 14.0

Valuation summary

FY17 FY18E FY19E FY20E

PE(x) 63.9 105.0 70.1 46.6

EV to EBITDA (x) 10.5 7.2 9.8 13.0

Price to book (x) 9.6 8.4 11.3 14.7

RoNW (%) 45.8 47.2 32.6 24.8

RoCE (%) 9.6 8.4 11.3 14.7

Stock data

Particular

Market Capitalisation

Debt (FY18)

Cash (FY18)

EV

52 week H/L 439/268

Equity capital (|Crore)

Face value (|) | 5

| 300 crore

| 39709 crore

Amount

| 39111 crore

| 1920 crore

| 1322 crore

Price performance (%)

1M 3M 6M 1Y

Biocon 15.0 8.7 79.2 76.1

Glenmark 5.8 -10.1 -4.7 -35.9

Torrent Pharma 12.0 -0.6 13.2 -0.8

Aurobindo Pharma 14.9 -0.9 -15.2 1.9

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

Biocon (Biocon) | 652

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis

Q4FY18 Q4FY18E Q4FY17 Q3FY18 YoY (%) QoQ (%) Comments

Revenue 1,169.5 1,098.1 931.1 1,057.9 25.6 10.5 YoY growth and beat I-Direct estimates was mainly due to robust growth in

Biologics and contract research segments

Raw Material cost 475.2 428.9 348.4 423.8 36.4 12.1 YoY 321 bps contraction in gross margins to 59.4% was mainly due to adverse

product mix

Employee cost 257.0 241.6 193.9 235.3 32.5 9.2 Increased mainly due to commissioning of Malaysian facility

R & D Expenditure 51.0 54.7 65.0 52.9 -21.5 -3.6

Other Expenditures 153.3 131.8 136.3 124.2 12.5 23.4

Total Expenditure 936.5 857.0 743.6 836.2 25.9 12.0

EBITDA 233.0 241.1 187.5 221.7 24.3 5.1

EBITDA (%) 19.9 22.0 20.1 21.0 -21 bps -103 bps Higher raw material and employee cost was largely offset by lower R&D spend and

other expenditure

Interest 16.9 14.7 5.0 14.7 238.0 15.0 Increased mainly due to commissioning of Malaysian facility

Depreciation 95.3 97.4 72.5 97.4 31.4 -2.2 Increased YoY mainly due to commissioning of Malaysian facility

Other income 67.5 43.4 43.2 33.9 56.3 99.1 Includes | 42 crore of forex gain against | 17 crore of forex loss in Q4FY17

EO 0.0 0.0 0.0 0.0 0.0 0.0

PBT 188.3 172.5 153.2 143.5 22.9 31.2

Tax 40.7 43.1 10.3 36.1 295.1 12.7

MI 22.3 22.0 20.9 21.7 6.7 2.8

PAT 130.4 113.6 127.5 91.9 2.3 41.9 Delta vis-à-vis EBITDA was due to higher Interest, Depreciation and Taxation. Beat

vis-à-vis I-Direct estimates mainly due to higher forex gain

Key Metrics

Small Molecules 424.0 379.3 379.0 357.0 11.9 18.8 YoY growth and beat I-Direct estimates was due to higher uptake in key statins

and rosuvastatin formulations and a steady performance by immunosuppressants

Biologics 241.0 178.5 163.0 189.8 47.9 27.0

YoY growth was due to strong growth in key Insulins business markets like

Mexico, Malaysia and the AFMET region and expansion of biosimilar Trastuzumab

footprint in emerging markets. Beat vis-à-vis I-Direct estimates mainly due to

awarded tender contract in some emerging markets

Branded Formulations 149.0 157.2 131.0 156.1 13.7 -4.5 YoY growth was mainly due to strong growth key products in India and robust

growth in UAE led by increase sales in key branded generic products

Contract Research 409.0 359.0 283.0 387.7 44.5 5.5 YoY growth lower base of Q4FY17 (fire incident impact) and strong growth in

chemical development and discovery services supported by biologics business.

Beat vis-à-vis I-Direct mainly due higher-than-expected growth in chemical

development and biologics business

Licensing income 2.0 12.0 16.0 11.8 -87.5 -83.1

Source: Company, ICICI Direct Research

Change in estimates

(| Crore) Old New % Change Old New % Change

Revenues 4,921.5 5,148.9 4.6 5,801.9 6,115.5 5.4 Increased mainly due to strong growth in Q4FY18

EBITDA 1,273.1 1,204.4 -5.4 1,557.8 1,583.8 1.7

EBITDA Margin (%) 25.9 23.4 -251 bps 26.8 25.9 -95 bps

Net Profit 711.3 558.2 -21.5 1,015.5 839.2 -17.4 Changed mainly due to change in expectation of other income

EPS (|) 11.9 9.3 -21.8 16.9 14.0 -17.2

FY19E FY20E


Assumptions

Current

Growth (%) FY17 FY18E FY19E FY20E FY19E FY20E

Biopharmaceuticals 2,230.0 2,256.1 2,635.7 3,190.8 2,460.3 2,956.3 Increased mainly due to strong growth in Q4FY18

Branded Formulations 548.9 611.5 689.8 793.2 699.2 804.1

Contract Research 1,192.7 1,423.1 1,703.4 2,011.4 1,602.1 1,874.5 Increased mainly due to strong growth in Q4FY18

Licensing income 144.2 22.8 120.0 120.0 120.0 120.0

Earlier

Source: Company, ICICI Direct Research; * excludes Licensing income


Company Analysis

Biocon was established in 1978 by first generation entrepreneur Dr Kiran

Mazumdar-Shaw. Unlike most pharma companies that are chemical

based, Biocon has carved out its niche in the more complex

biotechnology field. Over the decades, Biocon has successfully evolved

into an emerging global biopharma enterprise, serving its partners and

customers in over 75 countries. As a fully integrated biopharma company,

it delivers innovative biopharmaceutical solutions, ranging from discovery

to development & commercialisation. In 2004, it came out with its maiden

IPO.

Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab

and Insulin Glargine) have already reached the critical milestone of global

Phase III clinical trials. The company has initiated filings of biosimilars in

the US and EU besides launches in Japan. Biocon entered into a

partnership with Mylan for six biosimilar programs (Trastuzumab,

Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept and Filgrastim) and

three insulin analog programmes (Glargine, Lispro and Aspart).

The company has received approval for its Insulin Glargine from the

Japanese regulator in March 2016. Biocon has developed and

manufactured Insulin Glargine BS Injection Kit (FFP). FFP in Japan has

commercialised it. The company also achieved its first ANDA approval,

Rosuvastatin Calcium in US.

The company also entered in to a partnership with Sandoz, a Novartis

division and a global leader in biosimilars, for an exclusive portfolio of

next-generation biosimilars in the area of immunology and oncology. This

synergistic partnership will leverage the capabilities of both partners for

an ‘end to end’ play encompassing development, manufacturing,

regulatory approval and commercialization globally. This collaboration

addresses some of the long term biosimilars opportunities beyond the

near term opportunities being addressed by existing partnership with

Mylan.

Exhibit 1: Biosimilars: Insulin pipeline

Molecule Type Status Market Size (US$ billion)

Rh Insulin Regular Acting Insulin Pre-clinical (US), Marketed EM 3.2

Glargine Long Acting Insulin Global Phase III, Japan Aprvd. 6.4

Aspart Rapid Acting Insulin Analog Global Phase I 4.5

Lispro Rapid Acting Insulin Analog Preclinical/Scale Up 2.8

Total Market Size 16.9


Exhibit 2: Biosimilars: MAbs & biologics pipeline

Molecule Indication Status Market Size (US$ billion)

Adalimumab Chronic Plaque Psoriasis Global Phase III completed 16.1

Trastuzumab mBreast Cancer Aprovd in US, UR in EU 6.9

Pegfilgrastim Chemo-induced Neutropenia Under Review in EU 4.6

Bevacizumab mColorectal Cancer Global Phase III, RoW Phase III 6.9

Filgrastim Chemo-induced Neutropenia Preclinical/Scale Up 0.8

Etanercept Auto-immune Preclinical/Scale Up 8.9

Total Market Size 44.2



Exhibit 3: Revenues to grow at CAGR of 21.7% in FY18-20E

2485.3

2877.33089.8

3381.0

3921.64129.7

5148.9

6115.5

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Revenues

(|

crore)


Biocon has realigned its segments after the adoption of Ind-As. They are-

1) small molecules, 2) research services (Syngene), 3) branded

formulations and 4) biologics.

Small molecules- Small molecules (35% of FY18 total revenue) comprise

APIs like statins, immunosuppressants, specialty APIs & also include

generic formulations business witness steep pricing pressure. The

company is exploring fewer opportunities but with higher profitability in

this segment like moving into formulations & filing own ANDAs, 505 (b)(2)

filing, etc. It has already filed few ANDAs, which include complex generics

& injectables. We expect small molecules segment to grow at a CAGR 7%

CAGR to | 1685 crore in FY18-20E.

Biologics – The biologics segment includes novel biologics and

biosimilars, including Rh-insulin, insulin analogs, monoclonal antibodies

and recombinant proteins. This segment accounts for ~18% of FY18 total

revenue. Biocon is mainly focusing on the following therapies-

diabetology, oncology and immunology. This segment has been

specifically carved out to tap numerous biosimilar opportunities

especially in the next three to five years. Globally, the biosimilar space is

still in a nascent state for want of guidelines by most countries including

the US. The now defunct Pfizer deal was also based on biosimilar

opportunities. Biocon’s biosimilar pipeline currently includes 10 products

in different phases of completion. Out of these 10 products, the four

diabetic products- Rh Insulin, Glargine, Lispro and Aspart were the

subject matter of two deals first with Pfizer and then with Mylan

(excluding Rh Insulin). In Q3, Biocon has secured first ever biosimilar

approval (gTrastuzumab) by an Indian pharma company in the US.

Although Trastuzumab approval does not imply immediate launch of the

product in the US, it endorses the development and manufacturing

capabilities of Biocon in the realm of biosimilars. The company has also

announced second partnership in biosimilar space with Sandoz for global

development of next generation biosimilars. The company has invested

heavily in this space over the last two to three years, especially the

Malaysian facility, which is now functional. The progress, so far, has been

encouraging with launches in emerging markets, Glargine launch in Japan

and filing arrangements in the EU and US. We expect biologics to grow at

a CAGR of ~40% to | 1506 crore in FY18-20E.

10.7% CAGR

21.7% CAGR


Exhibit 4: Recent Progress on the biosimilars front

Date Event

Apr-18 Biocon/Mylan have in-licensed Humira biosimilar from Fujifilm and expects to launch in Europe in H2CY2018

Mar-18 Mylan and Biocon receive approval for Semglee Biosimilar Insulin Glargine in EU and Australia

Jan-18 Collaborates with Sandoz for a global partnership to develop, manufacture and commercialize a number of next generation biosimilars

Dec-17 USFDA approval for Ogivri, a biosimilar Trastuzumab co-developed by Biocon and Mylan

Jul-17 Biocon's partner Fujifilm launches insulin Glargine in Japan

Jul-17 USFDA Oncologic Drugs Advisory Committee (ODAC) recommended approval of Biocon-Mylan's proposed biosimilar Trastuzumab in all eligible indications

Jan-17 USFDA accepts Biocon’s biologics licence application for its biosimilar oncology drug Trastuzumab

Aug-16 European Medicines Agency has accepted Biocon-Mylan Proposed Biosimilar Trastuzumab (gHerceptin) for Review

Jul-16 European Medicines Agency has accepted Biocon-Mylan Proposed Biosimilar Pegfilgrastim (gNeulasta) for Review

Jul-16 Biocon's Insulin Glargine Launched in Japan

Jun-16 Biocon and Mylan to present Phase 3 Trastuzumab Biosimilar Data at the American Society of Clinical Oncology (ASCO) Annual Meeting

Mar-16 Biocon's Insulin Glargine Receives Regulatory Approval in Japan

Mar-16 Biocon inks co-development & commercialisation agreement with Lab PiSA for Rh-insulin in US

May-15 Biocon-Mylan's PEG-G-CSF and Adalimumab enter Phase III clinical trials; patient recruitment for one Insulin Glargine Phase III study completed


Exhibit 5: Small molecules & biologics to grow at CAGR of 19% in FY18-20E

1503.7

1732.0 1765.0 1729.0

2230.0 2256.1

2635.7

3190.8

0

500

1000

1500

2000

2500

3000

3500


(|

crore)

Small Molecules+Biologics


Branded formulations - It comprises India and UAE formulations. Biocon

owns 80+ brands encompassing seven therapeutic segments viz.

diabetology, oncology, nephrology, cardiology, immunotherapy,

comprehensive care and bio-products. However, with ~0.35% market

share (AIOCD MAT March 2018) and 56th

rank in the IPM market (AIOCD),

the company is still a marginal player in the Indian context. Among

therapies, diabetology is the largest therapy, which accounts for 58% of

branded formulations. Some of its unique launches are INSUPen (insulin

delivery device), Biomab (novel biologic for oncology) and Alzumab

(novel biologic for psoriasis). The list includes CANMAb (biosimilar

version of oncology product Herceptin). This segment constitutes ~14%

of total revenue (FY18).

8.5% CAGR 18.9% CAGR


Exhibit 6: Branded formulation sales to grow at CAGR of 14% in FY18-20E

347.9

391.4430.0 440.0

548.9

611.5

689.8

793.2

0

100

200

300

400

500

600

700

800

900


(|

crore)

Branded Formulations


Research services (Syngene) - Biocon’s research arm Syngene

contributed ~33% to FY18 total revenue. This is the CRO business of

Biocon, which deploys over 3500 scientists (FY18). The company

provides end-to-end discovery and development services for novel

molecular entities (NMEs) across industrial sectors including

pharmaceutical, biotechnology, agrochemicals, consumer health, animal

health, cosmetic and nutrition companies under one roof with a

distinctive economic advantage. It also provides support for biosimilar

and generic molecules development. The company provides variable cost

alternative like full-time equivalent (FTE) and fee-for-service (FFS) to the

traditionally fixed cost, in-house, resource intensive business model of

R&D focused organisations. Currently, the company has 316 clients

ranging from large multinational corporations to start-ups, including eight

of the top 10 global pharmaceutical companies. The company has

developed long-term relationships and has multi-year contracts with its

clients, including four long-duration multidisciplinary partnerships with

Bristol-Myers Squibb (BMS), Herbalife, Baxter International and Amgen.

This segment has consistently been growing at double digit and has

recently been the major growth driver for the company as the biopharma

segment is slowing down. We expect revenues to grow at a CAGR of

~19% to | 2011 crore in FY18-20E.

Research services revenues (FY17)

Dedicated

R&D

services

(34%)

Discovery

services

(26%)

Development

& Mfg

services

(40%)

11.9% CAGR

13.9% CAGR


Exhibit 8: Trends in overall R&D cost (Ex Capitalisation)

167.8

130.6

168.8

265.5 272.4

215.8

241.2

287.3

6.8

4.5

5.5

7.9

6.9

5.2

4.7

4.7

0

100

200

300

400


(|

crore)

3.0

4.5

6.0

7.5

9.0

(%

)

R & D cost R & D cost (% revenues)


Exhibit 9: Trends in EBITDA margins

543.0

687.1 695.8635.8

851.2 829.1

1204.4

1583.8

23.9

22.5

18.8

21.7

21.8

20.1 23.4

25.9

0

400

800

1200

1600


(|

crore)

18

20

22

24

26

28

(%

)

EBITDA EBITDA Margins (%)


Exhibit 7: Contract research to grow at CAGR of 17% in FY18-20E

558.0

714.7822.0

1060.0

1192.7

1423.1

1703.4

2011.4

0

500

1000

1500

2000

2500


(|

crore)

Contract Research


20.6% CAGR

18.9% CAGR


Exhibit 10: Net profit to grow at CAGR of 50% in FY18-20E

508.9

413.8

497.4550.4

612.1

372.4

558.2

839.2

14.4

20.516.1 16.3

15.6 9.0

10.8

13.7

0

200

400

600

800

1000

1200


(|

crore

)

4

6

8

10

12

14

16

18

20

22

(%

)

Net Profit Net Profit Margins (%)


Exhibit 11: Return ratios likely to improve on the back of better profitability…

11.9

10.4

6.5

9.6

8.4

11.3

11.7

14.7

12.6

13.7

12.5

7.8

10.5

7.2

9.8

13.0

6

10

14

18

22


(%

)

4

6

8

10

12

14

16

(%

)

RoCE (RHS) RoNW (LHS)


SWOT Analysis

Strengths – It is an early entrant in a more lucrative biotech space with

proven track records. The space has high entry barriers due to complexity

of the molecules and tougher trials requirement. Four dedicated centres

catering to the top global players.

Weakness - Its largest segment i.e. small molecules has been witnessing

constant pricing pressure and capacity constraints. Other emerging

segments such as biosimilars will take some time to scale up.

Opportunities – A huge opportunity beckons for biosimilars as globally

seven out of the top 10 drug brands are biologics. Some of them will lose

patent exclusivity in the next five to seven years. The price erosion in

biosimilars is much less than that of chemical compound based drugs.

Threats- (i) Backtracking by Mylan may increase the R&D cost sharply, (ii)

pricing pressure in branded formulations, (iii) increased scrutiny by

USFDA and other regulators worldwide.


Exhibit 12: Trends in quarterly performance

(| Crore) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 YoY (%) QoQ(%)

Revenues 837.3 813.9 796.2 807.1 945.0 992.0 954.1 1044.4 931.1 933.7 968.6 1057.9 1169.5 25.6 10.5

Raw Material Cost 337.5 293.9 326.3 303.1 322.6 400.2 353.8 374.7 348.4 365.8 377.6 423.8 475.2 36.4 12.1

% to revenues 40.3 36.1 41.0 37.6 34.1 40.3 37.1 35.9 37.4 39.2 39.0 40.1 40.6

Gross Profit 499.8 520.0 469.9 504.0 622.4 591.8 600.3 669.7 582.7 567.9 591.0 634.1 694.3 19.2 9.5

Gross Profit Margin (%) 59.7 63.9 59.0 62.4 65.9 59.7 62.9 64.1 62.6 60.8 61.0 59.9 59.4 -321 bps -57 bps

Employee cost 136.6 148.3 143.1 152.2 166.5 178.5 180.4 194.2 193.9 213.3 225.5 235.3 257.0 32.5 9.2

% to revenues 16.3 18.2 18.0 18.9 17.6 18.0 18.9 18.6 20.8 22.8 23.3 22.2 22.0 115 bps -27 bps

R & D 56.0 50.0 57.4 67.9 100.0 51.4 65.0 85.0 65.0 58.2 53.9 52.9 51.0

% to revenues 6.7 6.1 7.2 8.4 10.6 5.2 6.8 8.1 7.0 6.2 5.6 5.0 4.4 -262 bps -64 bps

Other Expenditure 122.4 113.4 100.3 99.1 159.0 98.8 114.9 114.4 136.3 104.3 129.3 124.2 153.3 12.5 23.4

% to revenues 14.6 13.9 12.6 12.3 16.8 10.0 12.0 11.0 14.6 11.2 13.3 11.7 13.1 -153 bps 137 bps

Total Expenditure 652.5 605.6 627.1 622.3 748.1 728.9 714.1 768.3 743.6 741.6 786.3 836.2 936.5 25.9 12.0

% to revenues 77.9 74.4 78.8 77.1 79.2 73.5 74.8 73.6 79.9 79.4 81.2 79.0 80.1

EBIDTA 184.9 208.3 169.1 184.8 196.9 263.1 240.0 276.1 187.5 192.1 182.3 221.7 233.0 24.3 5.1

EBITDA Margin (%) 22.1 25.6 21.2 22.9 20.8 26.5 25.2 26.4 20.1 20.6 18.8 21.0 19.9 -21 bps -103 bps

Depreciation 58.5 59.0 61.0 63.9 64.8 66.1 68.3 70.3 72.5 98.8 93.6 97.4 95.3 31.4 -2.2

Interest 0.0 4.4 2.9 1.5 16.6 5.7 6.5 8.8 5.0 16.1 13.8 14.7 16.9 238.0 15.0

OI 16.8 19.9 22.7 21.6 21.4 40.9 38.4 47.5 43.2 54.0 50.8 33.9 67.5 56.3 99.1

PBT 143.2 164.8 127.9 141.0 136.9 232.2 203.6 244.5 153.2 131.2 125.7 143.5 188.3 22.9 31.2

Tax 21.9 37.6 28.2 21.8 59.1 55.2 41.7 54.4 10.3 37.6 42.5 36.1 40.7 295.1 12.7

Tax Rate (%) 15.3 22.8 22.1 15.5 43.2 23.8 20.5 22.2 6.7 28.7 33.8 25.2 21.6

PAT 121.3 127.2 99.7 119.2 77.8 177.0 161.9 190.1 142.9 93.6 83.2 107.4 147.6 3.3 37.4

PAT Margin (%) 14.5 15.6 12.5 14.8 8.2 17.8 17.0 18.2 15.3 10.0 8.6 10.2 12.6

Exceptional Items (EI) -95.2 0.0 107.8 0.0 -268.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit before MI 216.4 127.2 -8.1 119.2 346.2 177.0 161.9 190.1 142.9 93.6 83.2 107.4 147.6 3.3 37.4

Add/(less) MI 15.3 7.1 12.5 17.7 21.1 15.8 19.8 19.5 20.9 16.4 20.3 21.7 22.3

Net Profit after MI 201.2 120.1 -20.6 101.5 325.1 161.2 142.1 170.6 122.0 77.2 62.9 85.7 125.3 2.7 46.2

Net Profit (excl.EI) 106.0 120.1 87.2 101.5 56.7 161.2 142.1 170.6 122.0 77.2 62.9 85.7 125.3 2.7 46.2



Conference call Highlights

Insulin Glargine (Semglee) co-developed by Biocon and Mylan, is

the first biosimilar from the partnered portfolio to be approved in

the developed markets of EU and Australia. Semglee is expected

to be launched by Mylan in Australia and Europe in the 2HFY18

Biocon also received Insulin Glargine approval in South Korea and

biosimilar Trastuzumab approval in Turkey

Biocon and Mylan agreed to accelerate the introduction of

biosimilar Adalimumab in Europe through Mylan’s in-licensing

arrangement with Fujifilm Kyowa Kirin Biologics (FKB), to enable

launch in EU, around market formation. FKB’s product is at an

advanced stage of review and could potentially obtain approval in

Europe in the 2HCY18, clearing the way for a potential launch by

Mylan around market formation. Biocon retains its economic

interest in this arrangement vis-a-vis Mylan.

Biocon and Mylan have expanded their long-standing

collaboration to add two new next-generation biosimilar

programs with Insulin Glargine 300 units/mL and Pertuzumab

In the US, Mylan’s application for Insulin Glargine under the NDA

pathway is under review by the USFDA

The company has completed Phase I study for Insulin Aspart and

expect comparative PK/PD results in H1FY19

In Europe, the regulatory review of the company’s Marketing

Authorization Applications (MAAs) for biosimilar Trastuzumab and

Pegfilgrastim are progressing well and it expects decisions by

CHMP by end of CY18

The review of Biologics License Application (BLA) for biosimilar

Pegfilgrastim by USFDA is in progress. The company has

responded to all information requests received till date and are

awaiting their response by June 4, 2018. As per the management,

the global Phase III trial of biosimilar Bevacizumab continues to

make good progress

Gross R&D expenses in FY18 were at | 401.9 crore, while net R&D

expenses reflected in the P&L were | 215.8 crore. The company

has guided for | 450-500 crore of gross R&D for FY19

Net loss (ex R&D) of Malaysian subsidiaries reported in P&L was

US$ 5 million in FY18. The company expects ~US$ 50 million

worth of expenses chargeable to P&L for FY19 (~US$ 48 million in

FY18)

Guided for mid teen growth of Branded formulation in FY19

Guided for | 1000 crore gross capex excluding Syngene in the

next two years

The company has guided for core margins at similar level of FY18

i.e. 27%


Valuation

Apart from the strong performance in Biologics and Syngene, Key

highlight for FY18 was biosimilar approvals from developed markets.

Although these approvals do not imply immediate launch of the product

in these regions, it endorses the development and manufacturing

capabilities of Biocon in the realm of biosimilars. Partnership in the

biosimilars space with Sandoz for global development of next generation

biosimilars has once again vindicated its capability in biosimilars.

Progress on the biosimilars regulatory front in developed markets and

launches in the developed as well as emerging markets are likely to

maintain investors optimism for the company. We continue to value the

stock on SOTP basis. Accordingly, we arrive at a target price of | 740 per

share.

Exhibit 13: Contract research to grow at CAGR of 17% in FY17-20E

Particulers FY19E EPS (| cr) Multiple (x) Per share (| )

Biocon (ex Syngene) 7.1 36.0 255.6

Syngene

Targeted Market Cap 14700

Biocon's Holding 74.5%

Holding Company Discount 20.0%

Syngene valuation 8762

Per share valuation 146

NPV (BIosimilars) 340

SOTP valuation 740

Source: ICICI Direct Research


Exhibit 14: One year forward PE

0.0

100.0

200.0

300.0

400.0

4/26/201

1

10/26/20

11

4/26/201

2

10/26/20

12

4/26/201

3

10/26/20

13

4/26/201

4

10/26/20

14

4/26/201

5

10/26/20

15

4/26/201

6

10/26/20

16

4/26/201

7

10/26/20

17

4/26/201

8

(|)

Series1 43.5x 33.5x 17.0x 10.4x 3.8x

[

Exhibit 15: One year forward PE of company vs. CNX Pharma Index

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.004/26/201

1

10/26/20

11

4/26/201

2

10/26/20

12

4/26/201

3

10/26/20

13

4/26/201

4

10/26/20

14

4/26/201

5

10/26/20

15

4/26/201

6

10/26/20

16

4/26/201

7

10/26/20

17

4/26/201

8

(x)

Biocon CNX Pharma


Exhibit 16: Valuation

Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY17 3922 16.0 8.5 61.6 63.9 45.8 10.5 9.6

FY18E 4130 5.3 6.2 -26.8 105.0 47.2 7.2 8.4

FY19E 5149 24.7 9.3 49.9 70.1 32.6 9.8 11.3

FY20E 6115 18.8 14.0 50.3 46.6 24.8 13.0 14.7



Recommendation history vs. Consensus

0.0

10.0

20.0

30.0

40.0

50.0

60.0

0

100

200

300

400

500

600

700

800

Apr-18Feb-18Nov-17Sep-17Jul-17Apr-17Feb-17Nov-16Sep-16Jun-16Apr-16Feb-16Nov-15Sep-15Jun-15Apr-15

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICI Direct Research

Key events

Date Event

Nov-13 Receives marketing approval from Drugs Controller General of India to launch its biosimilar Trastuzumab (anti-cancer) in Indian market.

Jan-14 Biocon launches its biosimilar CanMab in Indian market

Sep-14 Biocon Research buys back the 7.69% stake held by GE Equity International Mauritius valuing Syngene at | 2800 crore.

Jan-15 Silver Leaf Oak acquires 10% stake in Syngene International, Biocon's Research Services Subsidiary at a valuation of | 3800 crore

Jul-15 Syngene IPO starts from July 27, 2015 at a price range of | 240-250

Oct-15 Acquired API unit of Acacia Life Sciences Private Limited at Vizag

Jun-16 Biocon and Mylan to Present Phase 3 Trastuzumab Biosimilar Data at the American Society of Clinical Oncology (ASCO) Annual Meeting

Jul-16 Biocon's Insulin Glargine launched in Japan

Jul-16 European Medicines Agency accepts Biocon-Mylan proposed biosimilar Pegfilgrastim (gNeulasta) for review

Aug-16 European Medicines Agency accepts Biocon-Mylan proposed biosimilar Trastuzumab (gHerceptin) for review

Jan-17 USFDA accepts Biocon’s biologics licence application for its biosimilar oncology drug Trastuzumab

Jul-17 USFDA Oncologic Drugs Advisory Committee (ODAC) recommends approval of Biocon/Mylan’s proposed biosimilar Trastuzumab, a biologically similar version of

Roche's breast-cancer drug Herceptin

Dec-17 USFDA approval for Ogivri, a biosimilar Trastuzumab co-developed by Biocon and Mylan

Jan-18 Collaborates with Sandoz for a global partnership to develop, manufacture and commercialize a number of next generation biosimilars

Mar-18 Mylan and Biocon receive approval for Semglee Biosimilar Insulin Glargine in EU and Australia

Apr-18 Biocon/Mylan have in-licensed Humira biosimilar from Fujifilm and expects to launch in Europe in H2CY2018


Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S Position Position Change

1 Shaw (Kiran Mazumdar) 31-Dec-17 39.6 237.9m 0.0

2 Glentec International 31-Dec-17 19.8 118.6m 0.0

3 OppenheimerFunds, Inc. 31-Dec-17 3.7 22.2m 1.6

4 Biocon India Ltd Employee Welfare Trust 27-Mar-18 1.5 9.0m -0.2

5 Franklin Templeton Asset Management (India) Pvt. Ltd. 31-Mar-18 1.4 8.4m 0.0

6 Jupiter Asset Management Ltd. 31-Dec-17 1.4 8.4m -2.5

7 Templeton Asset Management Ltd. 31-Dec-17 1.1 6.7m 2.2

8 Chandavarkar (Arun Suresh) 31-Dec-17 1.1 6.6m 0.0

9 Aditya Birla Sun Life AMC Limited 31-Mar-18 0.8 5.0m 0.0

10 The Vanguard Group, Inc. 31-Mar-18 0.7 4.5m -0.3

(in %) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

Promoter 60.7 60.7 60.7 60.7 60.7

Public 39.3 39.3 39.3 39.3 39.3

Source: Reuters, ICICI Direct Research

Recent Activity

Investor Name Value ($ mn) Shares Investor Name Value ($ mn) Shares

Templeton Asset Management Ltd. 18.47 2.19 Jupiter Asset Management Ltd. -20.98 -2.49

OppenheimerFunds, Inc. 13.64 1.62 Fidelity International -18.86 -2.24

Mazumdar (Ravi Rasendra) 1.45 0.15 Reliance Nippon Life Asset Management Limited -3.23 -0.35

Dimensional Fund Advisors, L.P. 1.10 0.11 Causeway Capital Management LLC -2.38 -0.28

Charles Schwab Investment Management, Inc. 0.98 0.11 The Vanguard Group, Inc. -2.56 -0.28

BUYS SELLS

Source: Reuters, ICICI Direct Research


.

Financial summary

Profit and loss statement | Crore

Year-end March FY17 FY18E FY19E FY20E

Total Operating Income 3921.6 4129.7 5148.9 6115.5

Growth (%) 16.0 5.3 24.7 18.8

Raw Material Expenses 1477.1 1642.4 1996.4 2310.2

Employee Expenses 747.0 931.1 1109.3 1256.3

R&D Expenditure 272.4 215.8 241.2 287.3

Other Expenditures 573.9 511.3 597.6 677.9

Total Operating Expenditure 3070.4 3300.6 3944.4 4531.6

Operating Profit (EBITDA) 851.2 829.1 1204.4 1583.8

Growth (%) 33.9 -2.6 45.3 31.5

Depreciation 277.2 385.1 441.7 518.8

Interest 26.0 61.5 42.6 27.6

Other Income 157.1 206.2 103.0 91.7

PBT before Exceptional Items 705.1 588.7 823.1 1129.1

Less: Exceptional Items -128.3 0.0 0.0 0.0

Total Tax 161.6 156.9 181.1 248.4

PAT before MI 671.8 431.8 642.0 880.7

Minority Interest 76.0 80.7 104.2 123.1

Adjusted PAT 508.7 372.4 558.2 839.2

Growth (%) 61.6 -26.8 49.9 50.3

EPS (Adjusted) 8.5 6.2 9.3 14.0


Cash flow statement | Crore


Profit/(Loss) after taxation 612.1 372.4 558.2 839.2

Add: Depreciation & Amortization 277.2 385.1 441.7 518.8

Net Increase in Current Assets -380.8 -276.0 -106.2 -349.7

Net Increase in Current Liabilities 310.4 526.3 209.2 239.9

Other Operating Activities 26.0 61.5 42.6 27.6

CF from operating activities 844.9 1069.3 1145.5 1275.9

(Increase)/Decrease in Investments -394.0 707.5 0.0 0.0

(Purchase)/Sale of Fixed Assets -632.2 -923.6 -1100.0 -1100.0

Increase/ (Decrease) in Minority Interest 110.3 91.6 -93.1 0.0

Other Investing Activities -65.2 -290.7 -27.6 -11.9

CF from investing activities -981.1 -415.2 -1220.7 -1111.9

Proceeds from issues of Equity Shares 0.0 0.0 0.0 0.0

Inc/(dec) in loan funds -261.9 -285.3 -500.0 -500.0

(Payment) of Dividend and Dividend Tax -70.2 -29.8 -56.2 -83.9

Interest Paid -26.0 -61.5 -42.6 -27.6

Other Financing Activities 0.0 0.0 0.0 0.0

CF from financing activities -358.1 -376.6 -598.8 -611.5

Net Cash flow -494.3 277.5 -674.0 -447.5

Opening Cash 1538.6 1044.3 1321.8 647.8

Closing Cash 1044.3 1321.8 647.8 200.4

Free Cash Flow 212.7 145.7 45.5 175.9


Balance sheet | Crore


Liabilities

Equity Capital 100.0 300.0 300.0 300.0

Reserve and Surplus 4737.7 4880.3 5382.4 6137.7

Total Shareholders funds 4837.7 5180.3 5682.4 6437.7

Total Debt 2205.4 1920.1 1420.1 920.1

Deferred Tax Liability (Net) -190.6 -193.4 -212.7 -234.0

Minority Interest 376.1 467.7 374.6 374.6

Other NCL & LT Provisions 393.9 410.1 392.3 392.3

Source of Funds 7622.5 7784.8 7656.6 7890.6

Assets

Gross Block - Fixed Assets 5409.7 5869.7 6794.7 7982.0

Accumulated Depreciation 1811.0 2196.1 2637.8 3156.6

Net Block 3598.7 3673.6 4156.9 4825.4

Capital WIP 839.2 1302.8 1477.8 1390.5

Total Fixed Assets 4437.9 4976.4 5634.7 6215.9

Goodwill on Consolidation 26.4 26.4 26.4 26.4

Investments 1382.7 675.2 675.2 675.2

Inventory 635.3 722.5 794.8 944.0

Debtors 883.2 1063.9 1104.9 1312.3

Cash 1044.3 1321.8 647.8 200.4

Other Current Assets 419.9 428.0 421.0 414.0

Total Current Assets 2982.7 3536.2 2968.4 2870.6

Creditors 739.7 1005.3 1200.1 1425.4

Provisions 46.8 46.5 76.7 106.8

Other Current Liabilities 698.2 959.2 943.4 927.9

Total Current Liabilities 1484.7 2011.0 2220.2 2460.1

Net Current Assets 1498.0 1525.2 748.2 410.5

Other Non Current assets 277.5 581.6 572.0 562.6

Application of Funds 7622.5 7784.8 7656.6 7890.6


Key ratios


Per share data (|)

Reported EPS 10.2 6.2 9.3 14.0

BV per share 80.6 86.3 94.7 107.3

Dividend per share 1.2 0.5 0.9 1.4

Cash Per Share 17.4 22.0 10.8 3.3

Operating Ratios (%)

Gross Margin 62.3 60.2 61.2 62.2

EBITDA margin 21.7 20.1 23.4 25.9

EBIT Margin 14.6 10.8 14.8 17.4

PAT Margin 13.0 9.0 10.8 13.7

Inventory days 59.1 63.9 56.3 56.3

Debtor days 82.2 94.0 78.3 78.3

Creditor days 68.8 88.9 85.1 85.1

Asset Turnover 0.5 0.5 0.7 0.8

EBITDA Conversion Ration 99.3 129.0 95.1 80.6

Return Ratios (%)

RoE 10.5 7.2 9.8 13.0

RoCE 9.6 8.4 11.3 14.7

RoIC 13.1 9.8 15.6 18.8

Valuation Ratios (x)

P/E 63.9 105.0 70.1 46.6

EV / EBITDA 45.8 47.2 32.6 24.8

EV / Net Sales 9.9 9.5 7.6 6.4

Market Cap / Sales 10.0 9.5 7.6 6.4

Price to Book Value 8.1 7.5 6.9 6.1

Solvency Ratios

Debt / EBITDA 2.6 2.3 1.2 0.6

Debt / Equity 0.5 0.4 0.2 0.1

Current Ratio 1.3 1.1 1.0 1.1

Quick Ratio 0.9 0.7 0.7 0.7



ICICI Direct coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Ajanta Pharma AJAPHA 1363 1,515 Hold 11994.6 57.4 57.0 63.5 75.7 23.8 23.9 21.5 18.0 42.3 34.6 31.5 30.2 33.7 26.8 24.4 23.9

Alembic Pharma ALEMPHA 520 570 Hold 9802.8 21.2 23.7 23.0 28.6 24.5 22.0 22.6 18.2 25.3 19.6 17.6 19.7 21.0 19.9 16.8 18.0

Apollo Hospitals APOHOS 1069 1,230 Hold 14865.5 15.9 10.3 23.8 31.6 67.3 103.9 44.9 33.9 6.1 6.8 9.3 10.8 6.0 3.8 8.2 10.0

Aurobindo Pharma AURPHA 631 665 Hold 36941.5 38.8 42.6 38.0 41.5 16.3 14.8 16.6 15.2 24.4 23.5 18.4 17.9 24.2 21.3 16.1 15.2

Biocon BIOCON 652 740 Buy 39111.0 8.5 6.2 9.3 14.0 76.9 105.0 70.1 46.6 9.6 8.4 11.3 14.7 10.5 7.2 9.8 13.0

Cadila Healthcare CADHEA 405 405 Hold 41466.7 14.5 16.6 18.1 20.3 27.9 24.3 22.4 19.9 13.1 17.6 16.7 17.3 21.4 20.7 19.2 18.6

Cipla CIPLA 595 640 Hold 47876.4 12.5 19.6 26.8 32.1 47.4 30.4 22.2 18.5 7.7 9.7 14.5 16.0 8.0 11.4 13.9 14.7

Divi's Lab DIVLAB 1160 1,070 Hold 30797.0 39.9 32.7 40.7 48.7 29.0 35.4 28.5 23.8 25.3 19.3 21.2 22.2 19.8 14.7 16.2 16.9

Dr Reddy's Labs DRREDD 2130 2,520 Hold 35336.1 78.0 59.4 93.4 140.2 27.3 35.9 22.8 15.2 7.3 6.8 9.5 12.1 10.5 7.5 10.8 14.2

Glenmark Pharma GLEPHA 568 535 Hold 16027.2 42.2 33.4 31.5 38.2 13.4 17.0 18.0 14.9 19.5 16.2 14.3 15.5 26.5 17.5 14.3 14.9

Indoco Remedies INDREM 205 280 Hold 1889.1 8.4 4.8 12.2 15.4 24.5 42.5 16.8 13.3 8.7 5.4 11.2 13.8 11.8 6.5 14.5 16.0

Ipca Laboratories IPCLAB 626 715 Buy 8976.5 15.4 21.4 37.6 44.7 40.6 29.2 16.7 14.0 8.7 9.6 15.5 16.7 7.9 10.1 15.4 15.9

Jubilant Life JUBLIF 871 1,090 Buy 13873.4 36.1 46.9 68.0 85.3 24.1 18.6 12.8 10.2 13.8 14.7 18.4 20.4 16.8 18.1 21.0 21.0

Lupin LUPIN 813 850 Hold 36754.3 56.7 30.2 35.1 45.2 14.3 26.9 23.1 18.0 16.6 10.0 10.9 13.7 19.0 9.3 10.0 11.6

Narayana Hrudalaya NARHRU 274 360 Buy 5607.7 4.1 3.8 6.4 9.7 66.4 72.6 42.6 28.3 12.5 10.5 14.1 18.4 8.8 7.4 11.2 14.5

Natco Pharma NATPHA 821 910 Hold 15149.7 26.3 34.8 41.5 26.7 31.2 23.6 19.8 30.7 33.6 26.7 28.1 16.7 29.5 21.4 21.9 12.9

Sun Pharma SUNPHA 519 530 Hold 124485.8 29.0 12.2 18.6 22.4 17.9 42.5 27.8 23.2 20.3 10.5 12.4 13.7 19.0 7.6 10.7 11.6

Syngene Int. SYNINT 627 715 Buy 12532.0 14.4 15.3 18.6 20.4 43.2 43.2 33.4 30.4 16.8 16.6 18.5 18.7 20.3 18.0 18.1 16.7

Torrent Pharma TORPHA 1403 1,390 Hold 23740.9 55.2 38.8 51.1 69.6 25.4 36.2 27.5 20.2 18.9 12.6 14.2 17.4 21.5 13.6 15.7 18.5

RoE (%)EPS (|) PE(x) RoCE (%)



RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong

Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is

defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


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to observe such restriction.

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(Biocon) | 652content.icicidirect.com/mailimages/IDirect_Biocon_Q4FY18.pdf · revenue) includes finished dosages business in India and overseas including ... Biocon was established