january iocon) ) biocon (b -...

January 27, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

Biologics, licensing income propel numbers… • Revenues grew 29% YoY to | 1044 crore (I-direct estimate: | 996

crore) mainly due to a sharp jump in licensing income and robust growth in biologics. Licensing income increased to | 79 crore from | 32 crore in Q3FY16. Biologics revenues grew 60% to | 120 crore

• EBITDA margins improved 354 bps YoY to 26.4% (I-direct estimate: 24.2%) mainly due to lower raw material & other expenses. Higher licensing income was also contributed to EBITDA

• PAT increased 68% to | 171 crore (I-direct estimate: | 136 crore) on account of a strong operational performance & higher other income

Small molecules segment likely to get boost from ANDA launches The small molecules segment accounts for ~42% of turnover and comprises APIs like statins, immunosuppressants, specialty APIs and also includes generic formulations business. This vertical is seeing pricing pressure in some products. The company is exploring fewer opportunities but with higher profitability in this segment like moving into formulations and filing own ANDAs, 505 (b)(2) filings, etc. It has already filed seven or eight ANDAs cumulatively. These include complex generics and injectables. We expect small molecules segment to grow at 11% CAGR to | 1897 crore in FY16-19E. Well poised to capitalise on global biosimilars opportunity The biologics segment includes novel biologics and biosimilars, including Rh-insulin, insulin analogs, monoclonal antibodies and recombinant proteins. This segment accounts for ~12% of turnover. Biocon is mainly focusing on following therapies - diabetology, oncology and immunology. The company has invested heavily in this space in the last two or three years, especially the Malaysian facility. So far, the progress has been encouraging with launches in emerging markets, Glargine launch in Japan and filing arrangements in EU and US. We expect biologics to grow at a CAGR of ~43% to | 1008 crore in FY16-19E. Research Services (Syngene) to maintain growth momentum Biocon’s research arm Syngene contributes ~32% to its turnover. Syngene is the contract research organisation (CRO) arm of Biocon with proven capabilities. The company caters to 256 clients including eight out of global top 10 global players. This segment is consistently growing at 20%+ rate and recently has been the major growth driver for the company as biopharma segment is slowing down. We expect revenues to grow at a CAGR of ~21% to | 1883 crore in FY16-19E. Branded formulations growth space The branded formulations business includes finished dosages business in India and overseas including UAE. It constitutes 15% of turnover. It comprises Indian domestic formulations. Biocon owns 80+ brands encompassing therapies like diabetology, oncology, nephrology, cardiology, immunotherapy, comprehensive care and bio-products. Biosimilars progress getting momentum; upgrade to BUY Encouraging developments on the biosimilars front in the last nine months have demonstrated the capability in the biosimilars space. What has cemented Biocon’s position as perhaps the best placed candidate among Indian companies in the series of positive outcomes from developed markets. It will also provide an extra lever for growth besides Syngene and branded formulations. Apart from this, increase in biosimilar licensing deal in emerging markets would further improve the overall performance. As for developed markets foray, the current institutional acceptance of various biologics assets may set the launch pad two years hence. We have ascribed a target price of | 1120 (SOTP basis).

Rating matrix Rating : BuyTarget : | 1120Target Period : 12-15 monthsPotential Upside : 13%

What’s Changed?

Target Changed from | 1030 to | 1120EPS FY17E Changed from | 31 to | 32.6EPS FY18E Changed from | 34 to | 34.4

EPS FY19E Changed from | 45.2 to | 44.2Rating Changed from Hold to Buy

Quarterly Performance

Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%)Revenue 1,044.4 807.1 29.4 954.1 9.5EBITDA 276.1 184.8 49.4 240.0 15.0EBITDA (%) 26.4 22.9 354 bps 25.2 128 bpsNet Profit 170.6 101.5 68.1 142.1 20.1

Key Financials (| Crore) FY16 FY17E FY18E FY19ERevenues 3485.4 4041.2 4684.8 5657.8EBITDA 820.0 1052.3 1199.3 1477.7Adj. Net Profit 462.9 652.9 688.4 884.8Adj. EPS (|) 23.1 32.6 34.4 44.2

Valuation summary

FY16 FY17E FY18E FY19EPE(x) 21.6 30.3 28.8 22.4EV to EBITDA (x) 11.4 14.4 13.7 15.4Price to book (x) 9.1 13.0 13.7 16.5RoNW (%) 24.8 19.2 16.6 13.2RoCE (%) 4.9 4.4 3.9 3.5

Stock data ParticularMarket Capitalisation Debt (FY16)Cash (FY16)EV 52 week H/L 1052/431Equity capital (|Crore)Face value (|) | 5

| 100 crore

| 20336 crore

Amount| 19800 crore| 2457 crore| 1921 crore

Price performance (%)

1M 3M 6M 1YBiocon -6.7 4.0 40.5 100.5Glenmark -4.8 5.8 2.8 -7.1Torrent Pharma -19.9 -11.8 -5.7 -17.4Aurobindo Pharma -9.9 3.0 -5.5 -7.8

Research Analyst

Siddhant Khandekar [email protected] Mitesh Shah [email protected]

Biocon (BIOCON)) | 990


Variance analysis

Q3FY17 Q3FY17E Q3FY16 Q2FY17 YoY (%) QoQ (%) CommentsRevenue 1,044.4 996.3 807.1 954.1 29.4 9.5 YoY growth mainly on the back of a sharp jump in licensing income and strong

growth in biologics segment. Beat vis-à-vis I-direct was mainly due to higher-than-expected licensing income and biologics sales

Raw Material cost 374.7 369.5 303.1 353.8 23.6 5.9Employee cost 194.2 180.0 152.2 180.4 27.6 7.6R & D Expenditure 85.0 85.7 67.9 65.0 25.2 30.8Other Expenditures 114.4 119.6 99.1 114.9 15.4 -0.4Total Expenditure 768.3 754.8 622.3 714.1 23.5 7.6EBITDA 276.1 241.5 184.8 240.0 49.4 15.0EBITDA (%) 26.4 24.2 22.9 25.2 354 bps 128 bps YoY improvement was mainly due to lower raw material and other expenses.

Higher licensing income also contributed to EBITDA. Beat vis-à-vis I-direct was mainly due to higher-than-expected licensing income

Interest 8.8 6.5 1.5 6.5 486.7 35.4Depreciation 70.3 68.3 63.9 68.3 10.0 2.9Other income 47.5 31.5 21.6 38.4 119.9 23.7 YoY increase was mainly due to higher interest income registered in Syngene

EO 0.0 0.0 0.0 0.0 0.0 0.0PBT 244.5 198.2 141.0 203.6 73.4 20.1Tax 54.4 40.6 21.8 41.7 149.5 30.5MI 19.5 22.0 17.7 19.8 10.2 -1.5Adj. Net Profit 170.6 135.5 101.5 142.1 68.1 20.1 YoY increase was mainly due to strong operational performance and higher other

incomeKey MetricsBiopharmaceuticals 390.0 400.5 315.0 389.0 23.8 0.3 YoY growth was mainly due to strong demand for Rosuvastatin API in the US

market Biologics 120.0 101.0 75.0 96.0 60.0 25.0 YoY growth was led by the expansion of commercial footprint and increased

traction in some of the key emerging markets Branded Formulations 123.0 137.9 104.0 137.0 18.3 -10.2 Sequental de-growth in branded business due to discontinuation of in-licensing of

Abraxane Contract Research 317.0 324.1 270.1 286.0 17.4 10.8 Strong YoY growth was on the back of robust growth registered across all verticals

Licensing income 79.0 20.0 32.0 32.0 146.9 146.9 Sharp jump in licensing income was mainly related to rights assignment for biosimilar products in emerging markets

Source: Company, ICICIdirect.com Research Change in estimates

(| Crore) Old New % Change Old New % ChangeRevenues 4,009.2 4,041.2 0.8 4,678.9 4,684.8 0.1

EBITDA 1,013.0 1,052.3 3.9 1,182.8 1,199.3 1.4EBITDA Margin (%) 25.3 26.0 74 bps 25.3 25.6 30 bpsNet Profit 619.6 652.9 5.4 680.0 688.4 1.2EPS (|) 31.0 32.6 5.3 34.0 34.4 1.2 Changed in FY17E due to higher-than-expected operational performance and increase

in other income

FY17E FY18E

Source: Company, ICICIdirect.com Research Assumptions

CurrentGrowth (%) FY15 FY16 FY17E FY18E FY17E FY18E CommentsBiopharmaceuticals 1,765.0 1,729.0 2,057.0 2,396.4 2,018.2 2,342.3

Branded Formulations 430.0 440.0 541.9 555.2 567.4 628.8 Changed mainly due to slower-than-expected growth in Q3FY17 and discontinuation of in-licensing product Abraxane

Contract Research 822.0 1,060.0 1,239.9 1,544.0 1,280.9 1,585.1Licensing income 43.0 108.0 148.0 120.0 89.0 60.0 Increased mainly due to growth in rights assignment for biosimilar products in

emerging markets

Earlier

Source: Company, ICICIdirect.com 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 programs (Glargine, Lispro and Aspart). Biocon’s Japanese partner Fujifilm Pharma (FFP) has launched Insulin Glargine in Japan. The company received approval for its Insulin Glargine from the Japanese regulator in March 2016. Insulin Glargine BS Injection Kit (FFP) has been developed and manufactured by Biocon and is being commercialised by FFP in Japan. Exhibit 1: Biosimilars: Insulin pipeline Molecule Type Status Market Size (US$ billion)Rh Insulin Recombinant Human Insulin EU Phase III complete 3.1Glargine Long Acting Basal Insulin Global Phase III 7.1Aspart Rapid Acting Insulin Analog Preclinical/Scale Up 4.7Lispro Rapid Acting Insulin Analog Preclinical/Scale Up 2.8

Total Market Size 18.0 Source: Company, ICICIdirect.com Research Exhibit 2: Biosimilars: MAbs & biologics pipeline Molecule Indication Status Market Size (US$ billion)Adalimumab Chronic Plaque Psoriasis Global Phase III 14.0Trastuzumab mBreast Cancer Global Phase III 6.8Pegfilgrastim Chemo-induced Neutropenia Global Phase III 4.7Bevacizumab mColorectal Cancer EU Phase 1, RoW Phase III 6.9Filgrastim Chemo-induced Neutropenia Preclinical/Scale Up 1.0Etanercept Auto-immune Preclinical/Scale Up 8.7

Total Market Size 42.0 Source: Company, ICICIdirect.com Research Exhibit 3: Revenues to grow at CAGR of 17.5% in FY16-19E

2086.52485.3

2877.33089.8

3485.4

4041.2

4684.8

5657.8

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19ERevenues

(| c

rore

)

Source: Company, ICICIdirect.com Research


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- The small molecules segment accounts for ~42% of the turnover and comprises APIs like statins, immunosuppressants, specialty APIs and also includes generic formulations business. This vertical is witnessing pricing pressure in some products. The company is exploring fewer opportunities but with higher profitability in this segment such as moving into formulations and filing own ANDAs, 505 (b)(2) filings etc. It has already filed seven to eight ANDAs cumulatively. These include complex generics and injectables. We expect the small molecules segment to grow at a CAGR of 11% to | 1897 crore in FY16-19E. Biologics – The biologics segment include novel biologics and biosimilars, including Rh-insulin, insulin analogs, monoclonal antibodies and recombinant proteins. This segment accounts for ~12% of the turnover. 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). The company has invested heavily in this space over the last two to three years, especially the Malaysian facility. 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 ~43% CAGR to | 1008 crore in FY16-19E.


Exhibit 4: Small molecules & biologics to grow at CAGR of 18.9% in FY16-19E

1259.31503.7

1732.0 1765.0 1729.02057.0

2396.4

2904.8

0

500

1000

1500

2000

2500

3000

3500

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

(| c

rore

)Small Molecules+Biologics


Exhibit 5: Licensing income

126.5

25.015.4

43.0

108.0 108.0120.0 120.0

0

20

40

60

80

100

120

140


(| c

rore

)

Licensing income


Branded formulations - It comprises Indian domestic formulations. Biocon owns 80+ brands encompassing seven therapeutic segments viz. diabetology, oncology, nephrology, cardiology, immunotherapy, comprehensive care and bio-products. However, with ~0.38% market share and 57th 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 60% of branded formulations. Some of its unique launches are INSUPen (insulin delivery device), Biomab (novel biologic for Oncology) and Alzumab (novel biologic for Psoriasis) and the pipeline includes CANMAb (biosimilar version of oncology product Herceptin). This segment constitutes ~15% of overall sales.


Exhibit 6: Branded formulations sales to grow at CAGR of 14.8% in FY16-19E

256.5

347.9391.4

430.0 440.0 440.0

555.2

666.3

0

100

200

300

400

500

600

700

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E(|

cro

re)

Branded Formulations


Research services (Syngene) - Biocon’s research arm Syngene contributes ~32% to its turnover. This is the CRO business of Biocon, which deploys over 2570 scientists. 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 256 clients ranging from large multinational corporations to start-ups, including seven 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), Abbott Laboratories (Singapore), Baxter International and Amgen. The company also provides clinical research and clinical trial services through its subsidiary Clinigene. In August 2015, Syngene had raised | 550 crore through an IPO.

Research services revenues (FY16)

Dedicated33%

Others (FTEs+FFS)

67%

Exhibit 7: Contract research to grow at CAGR of 21.1% in FY16-19E

411.2558.0

714.7822.0

1060.0 1060.0

1544.0

1883.1

0200

400600800

1000120014001600

18002000


(| c

rore

)

Contract Research



Exhibit 8: Trends in overall R&D cost

156.9 167.8130.6

168.8

275.3

329.5

399.3

7.5

6.8

4.5

5.5

7.98.2

8.58.5

0

100

200

300

400

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E(|

cro

re)

3.0

4.5

6.0

7.5

9.0

(%)

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


Exhibit 9: Trends in EBITDA margins

517.3 543.0

687.1 695.8820.0

1052.31199.3

21.8

23.9

22.523.524.8

26.0

25.626.1

0

200

400

600

800

1000

1200


(| c

rore

)

18

20

22

24

26

28

(%)

EBITDA EBITDA Margins (%)


Exhibit 10: Net profit to de-grow at CAGR of 1.2% in FY16-19E

338.4

508.9413.8

497.4

917.8

652.9 688.4

884.8

20.5

16.214.4

16.1

26.316.2

14.7 15.6

0

200

400

600

800

1000

1200


(| c

rore

)

46810121416182022242628

(%)

Net Profit Net Profit Margins (%)



Exhibit 11: Return ratios likely to be under pressure on the back of reduced profitability…

13.011.7

10.49.1

13.0 13.7

11.9

16.5

14.9

12.613.7

12.511.4

14.413.7

15.4

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 is witnessing constant pricing pressure and capacity constraints. Other emerging segments such as biosimilars will take some time to scale up. Opportunities - 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.


Exhibit 12: Trends in quarterly performance (| Crore) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 YoY (%) QoQ(%)

Revenues 707.3 728.5 725.3 757.6 769.1 837.3 813.9 796.2 807.1 945.0 982.4 954.1 1044.4 29.4 9.5

Raw Material Cost 294.8 292.6 291.1 309.8 317.6 337.5 293.9 326.3 303.1 322.6 357.3 353.8 374.7 23.6 5.9

% to revenues 41.7 40.2 40.1 40.9 41.3 40.3 36.1 41.0 37.6 34.1 36.4 37.1 35.9

Gross Profit 412.5 435.9 434.2 447.8 451.5 499.8 520.0 469.9 504.0 622.4 625.1 600.3 669.7 32.9 11.6

Gross Profit Margin (%) 58.3 59.8 59.9 59.1 58.7 59.7 63.9 59.0 62.4 65.9 63.6 62.9 64.1 168 bps 121 bps

Employee cost 115.5 122.4 125.5 135.4 136.0 136.6 148.3 143.1 152.2 166.5 178.5 180.4 194.2 27.6 7.6

% to revenues 16.3 16.8 17.3 17.9 17.7 16.3 18.2 18.0 18.9 17.6 18.2 18.9 18.6 -26 bps -31 bps

R & D 20.0 29.0 31.0 35.0 46.9 56.0 50.0 57.4 67.9 100.0 93.3 65.0 85.0

% to revenues 2.8 4.0 4.3 4.6 6.1 6.7 6.1 7.2 8.4 10.6 9.5 6.8 8.1 -27 bps 133 bps

Other Expenditure 101.3 109.0 103.8 104.3 108.7 122.4 113.4 100.3 99.1 159.0 90.2 114.9 114.4 15.4 -0.4

% to revenues 14.3 15.0 14.3 13.8 14.1 14.6 13.9 12.6 12.3 16.8 9.2 12.0 11.0 -132 bps -109 bps

Total Expenditure 531.5 553.0 551.4 584.5 609.2 652.5 605.6 627.1 622.3 748.1 719.3 714.1 768.3 23.5 7.6

% to revenues 75.1 75.9 76.0 77.1 79.2 77.9 74.4 78.8 77.1 79.2 73.2 74.8 73.6

EBIDTA 175.8 175.6 173.9 173.1 160.0 184.9 208.3 169.1 184.8 196.9 263.1 240.0 276.1 49.4 15.0

EBITDA Margin (%) 24.9 24.1 24.0 22.9 20.8 22.1 25.6 21.2 22.9 20.8 26.8 25.2 26.4 354 bps 128 bps

Depreciation 51.3 54.0 51.9 54.2 56.3 58.5 59.0 61.0 63.9 64.8 66.1 68.3 70.3 10.0 2.9

Interest 0.3 0.7 0.6 5.0 4.8 0.0 4.4 2.9 1.5 16.6 5.7 6.5 8.8 486.7 35.4

OI 12.3 17.2 16.6 15.0 9.8 16.8 19.9 22.7 21.6 21.4 40.9 38.4 47.5 119.9 23.7

PBT 136.6 138.1 138.1 128.9 108.6 143.2 164.8 127.9 141.0 136.9 232.2 203.6 244.5 73.4 20.1

Tax 26.2 19.2 30.9 21.8 11.2 21.9 37.6 28.2 21.8 59.1 55.2 41.7 54.4 149.5 30.5

Tax Rate (%) 19.2 13.9 22.4 16.9 10.3 15.3 22.8 22.1 15.5 43.2 23.8 20.5 22.2

PAT 110.4 118.9 107.2 107.1 97.5 121.3 127.2 99.7 119.2 77.8 177.0 161.9 190.1 59.5 17.4

PAT Margin (%) 15.6 16.3 14.8 14.1 12.7 14.5 15.6 12.5 14.8 8.2 18.0 17.0 18.2

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

Net Profit before MI 110.4 118.9 107.2 107.1 97.5 216.4 127.2 -8.1 119.2 346.2 177.0 161.9 190.1 59.5 17.4

Add/(less) MI 5.4 5.8 4.3 5.0 6.6 15.3 7.1 12.5 17.7 21.1 15.8 19.8 19.5

Net Profit 105.0 113.1 102.9 102.1 90.9 201.2 120.1 -20.6 101.5 325.1 161.2 142.1 170.6 68.1 20.1

Net Profit (excl.EI) 105.0 113.1 102.9 102.1 90.9 106.0 120.1 87.2 101.5 56.7 161.2 142.1 170.6 68.1 20.1



Conference call Highlights

• USFDA accepted for review of biologics license application (BLA) for proposed biosimilar Trastuzumab co-developed by Biocon and Mylan; this marks first US regulatory submission through the Mylan/Biocon collaboration

• Higher licensing income was primarily due to incremental Trastuzumab contribution (for emerging markets) whereas higher statins sales contributed to the higher revenues from small molecules segment

• Revenues from branded formulations QoQ were impacted due to discontinuance of in-licensed Abraxane. However, the management plans to strengthen the segment by taking measures such as change in product leadership, new customer relationship management (CRM) tool and by talking to multiple companies for in-licensing opportunities

• The company has received USFDA approval for Generic Rosuvastatin Calcium tablets. Rosuvastatin is the first generic approval received by the company from USFDA

• Biocon’s Malaysian plant received a three-year contract for supplying Rh-Insulin cartridges & re-usable insulin pens by Ministry of Health (MoH) Malaysia, for MYR300 million (~| 460 crore)

• The Malaysian plant has been commissioned. The company expects additional US$17-18 million of depreciation and US$30 of additional Opex due commissioning of this plant from FY18. It expects revenue from this facility would be US$50-60 million. It also expects a minor loss in FY18 for this facility. The Malaysian plant will be depreciated over 14 years

• The R&D spend for 9MFY17 was at | 201 crore. The management has guided for less than | 300 crore spend in FY17E

• The management has guided for 32-33% of EBITDA margins (including other income), going forward

• The capex for oral solid dosage facility is largely complete. The management has guided for a maintenance capex of | 75-100 crore, going forward. It has also planned for MAb facility at Bangalore in partnership with Mylan, for which it is yet to disclose details

• Major part of the capex funding would be from operating profits, going forward

• The company is still responding to USFDA queries on Copaxone 20 mg

• The company has guided for single digit growth in the biopharma business. It expects single digit price erosion in the US

• The Indian facility is currently operating at full capacity for insulin production


Valuation Encouraging developments on the biosimilars front in the last nine months have demonstrated the capability in the biosimilars space. What has cemented Biocon’s position as perhaps the best placed candidate among Indian companies in the series of positive outcomes from developed markets. It will also provide an extra lever for growth besides Syngene and branded formulations. Apart from this, increase in biosimilar licensing deal in emerging markets would further improve the overall performance. As for developed markets foray, the current institutional acceptance of various biologics assets may set the launch pad two years hence. We have ascribed a target price of | 1120 (SOTP basis). Exhibit 13: Valuation Particulers FY19E EPS (| cr) Multiple (x) Per share (| )Biocon (ex Syngene) 30.0 26.0 780.0Syngene

Targeted Market Cap 11400Biocon's Holding 74.6%Holding Company Discount 20.0%Syngene valuation 6799Per share valuation 340

SOTP valuation 1,120[

Source: ICICIdirect.com Research

Exhibit 14: One year forward PE

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(|)

Price 23.2x 19.8x 14.0x 11.7x 9.4x[


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

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(x)

Biocon CNX Pharma

29% Premium


Exhibit 16: Valuation Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)FY16 3485 12.8 23.1 13.3 21.6 24.8 11.4 9.1FY17E 4041 15.9 32.6 41.1 30.3 19.2 14.4 13.0FY18E 4685 15.9 34.4 5.4 28.8 16.6 13.7 13.7FY19E 5658 20.8 44.2 28.5 22.4 13.2 15.4 17.7



Recommendation history vs. Consensus

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1,200

Jan-17Nov-16Aug-16Jun-16Mar-16Jan-16Oct-15Aug-15Jun-15Mar-15Jan-15

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Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICIdirect.com Research Key events Date EventMay-09 Launches long lasting human insulin Basalog in Indian market. The drug is similar to Sanofi's Lantus

Oct-10 Enters into an agreement with Pfizer for worldwide commercialisation of biosimilar versions of insulin and insulin analogue products: Recombinant human insulin, Glargine, Aspart and Lispro

Jan-11 Novel oral insulin IN-105 fails to meet its primary end point of lowering HbA1c levels compared to available drugs in the market (placebo)

Mar-12 Biocon and Pfizer conclude their alliance to commercialise Biocon's biosimilar versions of insulin and insulin analogue products worldwide

Nov-12 Enters into an option agreement with Bristol-Myers Squibb (BMS) for Biocon's IN-105 (oral insulin product candidate)

Feb-13 Out-licenses three insulin analogue products to Mylan. Mylan will have the rights to develop and market Biocon's Glargine, Lispro and Aspart.

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

Source: Company, ICICIdirect.com Research Top 10 Shareholders Shareholding Pattern Rank Investor Name Latest Filing Date % O/S Position Position Chan1 Shaw (Kiran Mazumdar) 30-Sep-16 41.4 82.8m 0.02 Glentec International 30-Sep-16 19.8 39.5m 0.03 OppenheimerFunds, Inc. 30-Nov-16 2.3 4.5m 2.24 Templeton Asset Management Ltd. 30-Sep-16 2.1 4.1m -3.15 Biocon India Ltd Employee Welfare Trust 21-Nov-16 1.9 3.7m -0.26 Dimensional Fund Advisors, L.P. 31-Oct-16 1.1 2.2m -0.17 Chandavarkar (Arun Suresh) 30-Sep-16 1.1 2.2m 0.08 Krishnan (Murali K N) 30-Sep-16 1.1 2.1m 0.09 ICICI Prudential Asset Management Co. Ltd. 30-Nov-16 1.0 2.0m 0.210 Birla Sun Life Asset Management Company Ltd. 31-Dec-16 0.9 1.7m 0.0

(in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16Promoter 60.7 60.7 60.7 60.7 60.7Public 39.3 39.3 39.3 39.3 39.3

Source: Reuters, ICICIdirect.com Research Recent Activity

Investor Name Value ($ mn) Shares Investor Name Value ($ mn) SharesOppenheimerFunds, Inc. 29.59 2.21 Templeton Asset Management Ltd. -43.71 -3.12Waddell & Reed Investment Management Company 8.66 0.62 Reliance Nippon Life Asset Management Limited -22.39 -1.60Franklin Templeton Asset Management (India) Pvt. Ltd. 4.65 0.35 Tata Asset Management Limited -4.11 -0.30ICICI Prudential Asset Management Co. Ltd. 2.62 0.20 Biocon India Ltd Employee Welfare Trust -2.51 -0.19Prasad (B S V) 1.20 0.09 IDFC Asset Management Company Private Limited -2.06 -0.15

BUYS SELLS


.

Financial summary

Profit and loss statement | Crore Year-end March FY16 FY17E FY18E FY19ETotal Operating Income 3485.4 4041.2 4684.8 5657.8Growth (%) 12.8 15.9 15.9 20.8Raw Material Expenses 1330.1 1463.2 1680.8 1985.9Employee Expenses 636.3 750.4 866.7 1035.4R&D Expenditure 275.3 329.5 399.3 479.8Other Expenditures 423.7 445.7 538.8 678.9Total Operating Expenditure 2665.4 2988.9 3485.5 4180.0Operating Profit (EBITDA) 820.0 1052.3 1199.3 1477.7Growth (%) 17.8 28.3 14.0 23.2Depreciation 242.3 272.9 371.8 421.3Interest 10.2 27.4 20.4 13.4Other Income 84.5 168.3 184.6 223.0PBT before Exceptional Items 652.0 920.3 991.7 1266.0Less: Exceptional Items -575.4 0.0 0.0 0.0Total Tax 256.9 197.6 198.3 253.2PAT before MI 970.5 722.6 793.4 1012.8Minority Interest 74.4 80.5 105.0 128.1

Adjusted PAT 462.9 652.9 688.4 884.8Growth (%) 13.3 41.1 5.4 28.5EPS (Adjusted) 23.1 32.6 34.4 44.2


Cash flow statement | Crore Year-end March FY16 FY17E FY18E FY19EProfit/(Loss) after taxation 896.1 652.9 688.4 884.8Add: Depreciation & Amortization 242.3 272.9 371.8 421.3Net Increase in Current Assets -204.5 -297.5 -316.4 -445.5Net Increase in Current Liabilities -159.7 92.4 177.8 223.1Other Operating Activities -247.9 27.4 20.4 13.4CF from operating activities 526.4 748.1 942.0 1097.1(Increase)/Decrease in Investments -198.2 -200.0 -500.0 -500.0(Purchase)/Sale of Fixed Assets -957.7 -300.0 -100.0 -100.0Increase/ (Decrease) in Minority Int 139.0 80.5 105.0 128.1Other Investing Activities 62.9 0.0 0.0 0.0CF from investing activities -954.0 -419.5 -495.0 -471.9Proceeds from issues of Equity Sha 0.0 0.0 0.0 0.0Inc/(dec) in loan funds 1432.7 -500.0 -500.0 -500.0(Payment) of Dividend and Dividend -116.5 -187.0 -172.1 -185.8Interest Paid -10.2 -27.4 -20.4 -13.4Other Financing Activities 105.4 0.0 0.0 0.0CF from financing activities 1411.4 -714.4 -692.5 -699.2Net Cash flow 983.8 -385.8 -245.4 -74.0Opening Cash 937.5 1921.3 1535.5 1290.1Closing Cash 1921.3 1535.5 1290.1 1216.0Free Cash Flow -431.3 448.1 842.0 997.1


Balance sheet | Crore Year-end March FY16 FY17E FY18E FY19ELiabilitiesEquity Capital 100.0 100.0 100.0 100.0Reserve and Surplus 3955.6 4421.5 4937.8 5636.8Total Shareholders funds 4055.6 4521.5 5037.8 5736.8Total Debt 2456.9 1956.9 1456.9 956.9Deferred Tax Liability (Net) 34.6 34.6 34.6 34.6Minority Interest 311.2 391.7 496.7 624.8Other NCL & LT Provisions 380.2 380.2 380.2 380.2Source of Funds 7238.5 7284.9 7406.2 7733.2AssetsGross Block 3489.1 3739.1 4957.9 5617.2Accumulated Depreciation 1766.5 2039.4 2411.3 2832.6Net Block 1722.6 1699.7 2546.6 2784.7Capital WIP 2187.5 2237.5 1118.8 559.4Total Fixed Assets 3910.1 3937.2 3665.3 3344.0Other Investments 428.5 628.5 1128.5 1628.5Inventory 511.4 578.0 669.2 808.2Debtors 822.9 983.8 1139.0 1375.5Loans and Advances 597.6 647.6 697.6 747.6Cash 1921.3 1535.5 1290.1 1216.0Other Current Assets 123.8 143.8 163.8 183.8Total Current Assets 3977.0 3888.7 3959.6 4331.1Creditors 547.1 548.1 634.6 766.4Provisions 87.7 117.9 148.0 178.2Other Current Liabilities 608.3 669.5 730.7 791.8Total Current Liabilities 1243.1 1335.5 1513.3 1736.4Net Current Assets 2733.9 2553.2 2446.3 2594.7Other Non Current assets 166.0 166.0 166.0 166.0Application of Funds 7238.3 7284.7 7406.2 7733.2


Key ratios Year-end March FY16 FY17E FY18E FY19EPer share data (|)Reported EPS 45.9 32.6 34.4 44.2BV per share 202.8 226.1 251.9 286.8Dividend per share 6.0 9.4 8.6 9.3Cash Per Share 96.1 76.8 64.5 60.8Operating Ratios (%)Gross Margin 61.8 63.8 64.1 64.9EBITDA margin 23.5 26.0 25.6 26.1EBIT Margin 16.6 19.3 17.7 18.7PAT Margin 13.3 16.2 14.7 15.6Inventory days 53.6 52.2 52.1 52.1Debtor days 86.2 88.9 88.7 88.7Creditor days 57.3 49.5 49.4 49.4Asset Turnover 0.5 0.6 0.6 0.7EBITDA Conversion Ration 64.2 71.1 78.5 74.2Return Ratios (%)RoE 11.4 14.4 13.7 15.4RoCE 9.1 13.0 13.7 16.5RoIC 18.5 22.2 16.6 17.7Valuation Ratios (x)P/E 21.6 30.3 28.8 22.4EV / EBITDA 24.8 19.2 16.6 13.2EV / Net Sales 5.8 5.0 4.3 3.5Market Cap / Sales 5.7 4.9 4.2 3.5Price to Book Value 4.9 4.4 3.9 3.5Solvency RatiosDebt / EBITDA 3.0 1.9 1.2 0.6Debt / Equity 0.6 0.4 0.3 0.2Current Ratio 1.7 1.8 1.8 1.8



ICICIdirect.com coverage universe (Healthcare) Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E

Ajanta Pharma AJAPHA 1757 1,960 Buy 15458.1 45.4 59.7 66.3 75.3 38.7 29.4 26.5 23.3 42.9 39.2 34.9 31.7 34.2 33.1 28.4 25.6

Apollo Hospitals APOHOS 1173 1,440 Buy 16324.3 22.2 23.1 33.0 47.1 52.9 50.7 35.6 24.9 8.2 8.4 10.7 13.7 8.9 8.7 11.2 14.0

Aurobindo Pharma AURPHA 711.4 1,100 Buy 41629.0 33.9 41.5 48.0 54.8 21.0 17.2 14.8 13.0 23.3 24.5 25.4 25.1 28.1 26.0 23.5 21.5

Alembic Pharma ALEMPHA 585 700 Hold 11034.8 38.2 20.3 24.3 31.9 15.3 28.8 24.1 18.4 51.5 23.7 23.1 25.9 44.9 20.4 20.8 22.9

Biocon BIOCON 990 1,120 Buy 19800.0 23.1 32.6 34.4 44.2 42.8 30.3 28.8 22.4 9.1 13.0 13.7 16.5 11.4 14.4 13.7 15.4

Cadila Healthcare CADHEA 359 450 Buy 36778.0 15.0 13.8 18.2 22.7 24.0 26.0 19.7 15.9 26.7 19.6 24.1 27.2 28.6 22.1 23.9 24.4Cipla CIPLA 579.8 575 Hold 46639.9 18.5 19.0 25.2 31.9 31.3 30.5 23.0 18.2 12.0 11.3 14.1 16.4 12.5 11.6 13.5 14.9

Divi's Lab DIVLAB 683 1,415 Buy 18130.2 41.8 43.6 51.9 59.3 16.3 15.7 13.2 11.5 30.7 28.0 28.4 27.1 25.9 22.6 22.3 21.2

Dr Reddy's Labs DRREDD 2974 3,300 Hold 49248.3 142.1 61.1 133.0 164.9 20.9 48.7 22.4 18.0 17.3 5.6 13.3 16.0 20.7 8.3 15.7 16.7

Glenmark Pharma GLEPHA 858 1,200 Buy 24720.8 32.2 44.0 54.4 62.4 26.7 19.5 15.8 13.8 16.2 19.0 21.9 22.6 21.2 22.7 22.2 20.4

Indoco Remedies INDREM 273 365 Buy 2515.7 9.4 11.0 15.4 20.2 29.1 24.8 17.7 13.5 12.9 12.0 16.5 20.0 14.8 15.3 18.2 20.1

Ipca Laboratories IPCLAB 550 605 Buy 6935.3 10.0 15.3 25.7 33.7 54.8 36.0 21.4 16.3 5.7 10.0 12.7 14.9 5.5 7.9 12.0 13.9

Jubilant Life VAMORG 694.2 795 Buy 11058.6 26.0 43.2 53.8 66.3 26.7 16.1 12.9 10.5 12.0 15.7 17.4 19.0 14.2 19.4 19.7 19.8

Lupin LUPIN 1504 1,890 Buy 67894.4 50.4 62.9 67.1 85.7 29.8 23.9 22.4 17.5 18.6 19.6 20.6 24.3 20.7 21.3 19.1 20.3

Natco Pharma NATPHA 638.6 750 Buy 11131.3 8.5 14.9 13.4 15.5 75.2 42.9 47.7 41.3 16.0 22.2 17.5 17.9 11.9 17.7 14.0 14.2

Sun Pharma SUNPHA 642 850 Buy 154550.8 23.4 30.1 31.9 38.7 27.4 21.3 20.1 16.6 18.6 19.6 18.2 18.8 18.0 19.4 17.6 18.1

Syngene Int. SYNINT 565 570 Hold 11307.0 11.1 15.5 18.9 23.0 51.1 36.5 29.9 24.6 13.2 17.8 19.6 22.3 21.0 23.3 22.6 22.0

Torrent Pharma TORPHA 1295 1,700 Buy 21914.8 107.8 57.4 68.4 84.9 12.0 22.6 18.9 15.2 46.7 22.6 25.6 28.1 53.8 23.6 23.2 23.7

Unichem Lab UNILAB 275.8 285 Hold 2505.9 12.3 13.2 17.5 23.7 22.4 20.9 15.7 11.6 13.8 14.5 16.2 18.9 11.7 11.3 13.3 15.6

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



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com 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]

ICICIdirect.com 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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