Biocon Limited Stock Analysis: The Next (Bio)Pharma Giant?

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With groundbreaking discoveries, back to back USFDA approvals, exhaustive pipeline of complex biosimilar & biologic molecules, partnerships with marquee pharmaceutical companies and extremely transparent management – having the vision to make healthcare accessible to all, we believe Biocon is set to become the next (Bio)pharmaceutical giant in India catering to the whole world.


Biocon
Limited is Asia’s largest biopharmaceutical company based in Bangalore, India, led by Kiran Mazumdar-Shaw, the founder. Biocon is world’s leading player with an exhaustive pipeline of Biologics and Biosimilars.

Biologics are agents derived from living organisms rather than chemicals that date back to the beginning of the 20th century. But recombinant DNA technology developed in the 1970s and 1980s launched a new era: synthesized biologics
instead of animal-derived agents. The price tags on some of the biologics were in the tens of thousands of dollars, which, at the time, seemed expensive, and lead to Biosimilars.

Unlike small-molecule generics, biosimilars are not exact copies of their reference products (biologic). A small-molecule drug may comprise a couple dozen atoms; a biologic, hundreds or thousands. The chemical processes used to make small-molecule drugs ensure an exact copy (although the inactive ingredients to make the pill that contains the drug may differ). The fact that biologics are derived from living organisms also adds some slight — but not necessarily meaningful — variability.

Biocon is the first Indian company to have a biosimilar approved and launched in US. So far, Biocon has 2 biosimilars launched in US, 1 approved by USFDA (to be launched in FY21), while 2 under review.

In EU, Biocon has 3 biosimilar launched, 2 approved, while 2 under-review. Biocon has launched and approved biosimilars throughout the world and has a combined pipeline of 28 molecules.

Biocon has a diversified business model with 4 different verticals, with dedicated management to each vertical, helping Biocon excel in all verticals. While Biosimilar division (caters to the development & sales of biosimilars and novel biologics) is the future growth engine of the company, the Generics (aka small molecules, caters to the API manufacturing industry) division and Research Services divisions (caters to CRAMS and offer research services) is what keep cash coming in the company.

In FY20 Biosimilar, Generics and Research Services division, each account for 30-31% of the consolidated revenue of the company, while the remaining 8% revenue comes from the Branded Formulations division of the company. Biocon, over the years, has transformed itself from an enzyme making company to both forward and backward integrated, full-fledged pharmaceutical company.

Biocon has deep strategic alliances with pharma giants across the globe. Biocon’s partnership with Mylan is long-standing from 2009 and expanded its scope of partnership in 2013 for biosimilars launch of 11 products.

As Biocon’s success became well evident to the world, in 2018, Sandoz, the Novartis Biologics division announced its partnership with Biocon for 2026 Biosimilars Second wave wherein Biocon is a partner in Profit sharing as well.

In July 2018, the FDA published its Biosimilars Action Plan, acknowledging the lack of competition in the biologics space recognizing the numerous barriers to the development and utilization of biosimilars. Yet, acceptance of biosimilar by the healthcare community is a key risk ahead.

“74% of physicians who responded reported ‘physician confidence’ as one of the biggest barriers to widespread adoption of biosimilars.”

Earlier during the year, Biocon received the Drugs Controller General of India’s approval to conduct a clinical trial in moderate to severe patients with COVID-19 complications and got approval to use Biocon’s novel biologic ‘Itolizumab’ to be used in moderate to severe COVID cases.

Biocon’s partner Equillium plans Itolizumab’s global clinical trial for treatment of COVID-19. Biocon’s research services subsidiary Syngene is collaborating on research projects related to vaccine development, which could represent a longer-term solution for fighting the coronavirus pandemic.

While multiple Indian companies have forayed into manufacturing and marketing generics in developed markets, only one Indian player seems to be trying to make a dent in the biosimilar space.

Investment Rationale

Need for Biosimilars

Pharmaceutical Companies invest tremendously large sums in R&D over multiple years to create a combination of molecules (called original drug). It might take 5 years for companies to develop a new drug and they might still need another 10 years to clinically test the product and gain approval from the regulatory agencies.

This is an extremely capital intensive process and the only way to remunerate the investment of the pharma company is to protect the investment through patent protection, which generally lasts for 20 years, and no other company can sell the same compound during that time.

This way the companies are incentivized to invest more in research thereby ensuring a steady supply of new innovator drugs.

Once the patent is about to expire, many companies race to make a copy of the same combination of molecules, without the need to invest in R&D of its success.

These copies of drugs are called generics and companies can replicate the manufacturing process with relative ease. For a company to market a generic, the US FDA must agree (to be sold in US) that the generic is interchangeable with the original drug and that it contains the same active pharmaceutical ingredient (more commonly referred as API).

Ever since modern medicine started to emerge post the Industrial Revolution, simple molecules have been used to treat most diseases by killing the bad cells or foreign virus in human body.

While these formulations were highly effective against some illnesses, it was proving particularly ineffective against more complex diseases like cancer or diabetes.

Our immune system has evolved over millions of years to specifically defend against intruders by finding and destroying anything that is not supposed to be inside our bodies. But cancer or diabetes is not like most diseases.

It is not caused by an invasion of a foreign pathogen. Instead, it is a by-product of rogue cells within our body that do not necessarily act the way they should.

Similarly, diabetes is caused when insulin produced naturally by the pancreas is absent or insufficiently produced.

To this end, using simple molecules to defend against a barrage of mutating versions of our own cells is an exercise in futility.

In the process of killing the bad cells, these drugs will simultaneously annihilate the healthy cells too. So, the cut-slash-kill method is not particularly effective. What we instead need is a ‘biologic’ or a complex protein isolated from natural sources that can mimic our immune cells.

We have had vaccines for a good half century now and considering most vaccines are complex living agents that resemble a disease-causing microorganism, they fit under the ambit of biologics well.

However, it’s only in the last 25 years that new developments in genetic engineering/recombination techniques and targeted therapies have begun to open up new opportunities and this, in turn, has breathed new life into the field of biologics and with it, its copycats — biosimilars.

A biosimilar is not equivalent to the original biologic, instead is highly similar in the way that it interacts with the human body. The design and creation of a biologic drug is complicated enough that a biosimilar is not going to be precisely the same as a biologic.

Biologics, though highly complex and innovative, are often associated with high costs and limited patient access. Fortunately, more affordable options for many patients who rely on biologic treatments are beginning to be accepted by the market: Biosimilars.

What makes Biosimilars cost effective is the cost saved in the very many clinical and human trials that a biologic need to go through. Biosimilars are important because they have an opportunity to provide competition in the market and expand patient access to critical medicines, much like the advent of generic medications more than 35 years ago.

With an ageing population and growing demand for treating chronic conditions, biologic use is on the rise. And in an environment where health decisions are increasingly made based on value and cost, biosimilars will play a vital role in improving patient access to needed medicine. The launch of new biosimilars over the next decade could save consumers as much as $250 billion and boost access to biologic treatments for an additional 1.2 million patients by 2025.

Huge Addressable Market

According to a recent report by Morgan Stanley, as many as nine drugs in the biologic’s category have either gone off-patent or will do so by 2025. Their total revenue was $62 billion (around Rs 4.3 lakh crore) in 2018. This creates a major opportunity for their respective biosimilars. The research firm estimates that the revenue of these biosimilars will grow by 24% annually for seven years to $13.3 billion in 2025 (around Rs 93,000 crore) in the US and Europe alone. That offers a big opportunity for companies focusing on this segment. It is estimated that the global biosimilars market has touched $15 billion by 2020. In December 2018, NHS England, which oversees Britain’s health services, saved 300 million pounds by switching to a biosimilar of Adalimumab after its patent expired.

According to a report by Associated Chambers of Commerce of India (Assocham), the global market for biosimilars will be $240 billion and the Indian market will be over $35 billion by 2030. Indian pharma companies including Biocon, Glenmark Pharmaceuticals, and Zydus Wellness are actively focusing on the biosimilars market. Biocon, for instance, earned Rs 2,000 crore or nearly 30% of its revenue from biosimilars in FY20. A lot will however depend upon factors such as access to critical technology, regulatory guidelines, and the price difference between biosimilars and the underlying biologics.

Biocon – India’s Largest Biopharmaceutical Company

Biocon Limited is India’s largest biopharmaceutical company based in Bangalore, India, led by Kiran Mazumdar-Shaw, the founder. Over the years, Biocon has continuously focused on delivering affordable innovation. The organization is committed to reducing therapy costs of chronic diseases like diabetes, cancer, and autoimmune diseases by leveraging India’s cost advantage to deliver affordable healthcare solutions to patient’s partners and healthcare systems across the globe.

Company has many feats under them:

  • 1st biosimilar Trastuzumab to be approved anywhere in the world developed and launched in India by Biocon Biologics (in 2014).
  • 1st company from India to launch a biosimilar in Japan: Insulin Glargine (2016).
  • 1st company globally to get US FDA approval for biosimilar Trastuzumab; 1st company from India to have a biosimilar approved in the U.S. (2017). Launched in U.S. in December 2019.
  • 1st company from India to have a biosimilar commercialized in U.S.; 1st biosimilar Pegfilgrastim approved by FDA (2018).
  • 1st Company from India to launch biosimilar Trastuzumab in Europe.
  • Ogivri, co-developed by Biocon Biologics and Mylan, is the first trastuzumab biosimilar approved and launched in Australia as well as Canada.
  • Semglee, co-developed by Biocon Biologics and Mylan, is the first Glargine biosimilar approved and launched in Australia. In June 2020, the U.S. FDA approved New Drug Application (NDA) for Semglee.
  • 1st Indian player to launch biosimilar Trastuzumab, Ogivri, in the U.S. through our partner Mylan.
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Strong Future Pipeline

Biocon’s target to have at least eight biosimilars available in developed markets through the partner- Mylan, by the end of FY22 viz. Trastuzumab, Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept, Insulin Glargine, Insulin Aspart and rh-Insulin, addressing an estimated market opportunity of up to USD $33 billion. Their pipeline is expected to deliver three additional molecules between FY23 and FY25 which are undisclosed now.

Please Note: Insulin Glargine is approved in US in June 2020 but not commercialized

Lastly on the Biosimilars front, Company has launched its product in several Developed and Pharma-emerging markets in collaboration with local players. Hence company aspires to become a global leader in the biosimilars segment. Biocon remain committed to impact 5 million patient lives and attain a revenue milestone of USD 1 billion in Biosimilars Division which translates into 70% CAGR for next two years.

Well Diversified Business Verticals

Biocon has 4 business divisions namely Generics, Biosimilar, Novel Biologic and Research Services.

1. Generics Business

Biocon’s Small Molecules (Generics Business) manufactures APIs and crossed an annual revenue milestone of Rs. 2,000 crore in FY20 generating a revenue growth of 18% YoY. This was the second consecutive year of high-teens growth reported by the business despite the challenging environment of the global pharmaceutical industry. As the biggest contributor to Biocon’s consolidated revenue, the Small Molecules/Generics business has been a cornerstone of the Company’s success story over the last two decades.

Business reported robust growth in the U.S., driven by consistent client acquisitions and a higher market share for the three formulations commercialized under Biocon’s own label. This was supplemented by the API business which benefitted from improved price realizations and an optimized product mix. Immunosuppressant sales increased in key geographies, whilst the demand for statins and specialty APIs remained stable.

Compliance

Biocon’s formulations manufacturing facility for oral solid dosages in Bengaluru completed a Pre-Approval Inspection (PAI) by the U.S. FDA with zero observations. Company’s Small Molecules APIs manufacturing facility at Biocon Park, Bengaluru received an EIR (Establishment Inspection Report) from the U.S. FDA for the pre-approval and GMP inspection held in January 2020 with a VAI (Voluntary Action Indicated) status for the five observations. Additionally, company received an EIR from the US FDA for the Small Molecules API Manufacturing Facility and GMP inspection conducted in February 2020 with a VAI classification for the observations, which indicates closure of the inspections.

Facility/Usage Status
Oral Solid Dosage, Bengaluru Pre-Approval Inspection (PAI) by the U.S. FDA with zero observations
Small Molecules APIs, Biocon Park, Bengaluru EIR (Establishment Inspection Report) from the U.S. FDA and VAI (Voluntary Action Indicated) by GMP
Small Molecules APIs, 20th KM, Biocon Campus, Bengaluru Received an EIR from the U.S. FDA and VAI from GMP

Strategy

Over the past two decades, Biocon has attained a commanding share of the global APIs market with its distinctive portfolio of fermentation-derived statins and immunosuppressants with a strong Generic Formulations business in the U.S. with three commercialized products capturing mid- to high-teens market share in a very competitive market.

The company’s strategy is to build a portfolio of fermentation-based and other differentiated but complex Active Pharmaceutical Ingredients (APIs), with vertical integration to supply Generic Formulations to the U.S. market.

Despite being a late entrant, the company believes that the Generic Formulations business offers attractive growth opportunities with the market estimated to reach USD $96 billion by 2023. Between 2020 and 2023, patents will expire on drugs that have combined sales of approximately USD $127 billion. Growth in markets other than the US and EU will be driven by increased generics penetration, ageing populations, and expanded patient access.

To secure anticipated growth in fermentation-derived APIs, company commenced construction work on a greenfield, fermentation-based manufacturing facility in Visakhapatnam, Andhra Pradesh in FY20 with an estimated of capex of Rs. 600 crore, which will enable company to deliver vertically integrated strategy of developing and commercializing our own Generic Formulations and service the needs of our global API customers. Company expect this facility to be operational over the next three years followed by commercialization based on regulatory approvals in major markets.

2. Biosimilar Business

Biocon Biologics, headed by Dr Christiane Hamacher (CEO and Managing Director), is a global company focused exclusively on biosimilars with full vertical integration, have one of the broadest and deepest biosimilars platforms in the industry and many firsts, including the first U.S. FDA approval for a biosimilar Trastuzumab (partnered with Mylan). The latest U.S. FDA approval of our Insulin Glargine (partnered with Mylan, third biosimilar to be approved) paves the way for its launch in the U.S. later this year.

The Biologics business ended FY20 on a strong note, reporting a 29% growth in revenue at Rs. 1,951 crore. Biocon Biologics became the first company from India to have two biosimilars commercialized in the U.S. through its partner Mylan, with Ogivri™ (biosimilar Trastuzumab) being commercialized in the market in end 2019 and Fulphila® (biosimilar Pegfilgrastim) in 2018. The company has also commercialised many biosimilars in Europe and Most of World (MoW) Markets becoming the only company in the world with such a strong pipeline of biosimilars.

Towards the end of FY20, company commissioned new state-of-the-art biologics drug substance facility, for monoclonal antibodies, and expect this facility to begin commercial operations in early FY22, subject to regulatory approvals in various markets.

Company also expanded its manufacturing capacity for Pegfilgrastim drug substance. This new manufacturing facility in Bengaluru received U.S. FDA approval in November 2019, also European Medicines Agency (EMA) approval and has started commercial operations since.

Company’s 4 years old Insulin facility in Malaysia, hosted multiple regulatory inspections successfully during FY20 and received EU GMP certification and closed US FDA inspection as well. Company also expanded R&D footprint in the fourth quarter of FY20 by acquiring Pfizer Healthcare India Ltd.’s R&D capital assets to set up a 60,000 sq. ft. world-class integrated R&D facility at TICEL Bio Park in Chennai.

As moving ahead, Biocon is confident of capitalizing on the new global opportunities. Biocon Biologics has set a target of impacting 5 million patient lives and attaining a revenue milestone of USD 1 billion in FY22.

Branded Formulations Business

Biocon’s Branded Formulations business is making an impact in India through its wide portfolio of branded small molecule generics, biosimilars and novel biologics in the chronic disease segments of diabetes, cancer, end-stage renal illnesses, immune disorders, and other life-threatening conditions.

Segmental revenue stood at Rs. 536 crore, which contributed 8% to FY20 consolidated revenue, declined 18% primarily due to significant downward pricing pressures in leading assets and increased competition for some of key brands in India.

Biocon’s top brands continue to shine among flagship brands, Insugen® continued to hold its position among the Top 3 human insulin brands in India while Basalog® was the No. 2 brand of Insulin Glargine in the country. CANMAb™ retained its position as the No.1 brand of biosimilar Trastuzumab in India, giving a firm foothold in Oncotherapeutics.

Branded Formulations business, starting FY21 will be merged and reported under Biosimilars Segment.

3. Novel Biologics Business

Biocon’s quest to develop affordable therapies and impact global healthcare led them to invest in developing novel biologics and novel targets in the area of large molecules, at a time when the pharma industry in India was focused on the safer business of manufacturing generic medicines. Biocon’s considered scientific risk paid off and today they have a pipeline of novel assets comprising early and advanced stage programs spanning multiple modalities including recombinant proteins, novel fusion antibodies and monoclonal antibodies (mAbs) aimed at diabetes, cancer and autoimmune / inflammatory diseases. These segments are expected to capture the majority share of global healthcare spending over the next few years.

Major Molecules in Pipelines:

Insulin Tregopil Insulin Tregopil is a first-in-class oral prandial insulin molecule for post-prandial glycaemic control. Company recently completed a phase-II study on type-2 diabetes in India and is now in the process of submitting a marketing authorization application to Drugs Controller General of India (DGCI).

FmAb2 – Biocon’s immuno-oncology program focusing on development of novel bi-functional fusion antibodies is housed in its wholly owned subsidiary Bicara Therapeutics, based out of Boston in the U.S. Bicara received a “study may proceed” advice from the US FDA to initiate a phase I safety trial, following a successful Investigational New Drug (IND) application in late FY20.

Itolizumab – ALZUMAb™ (Itolizumab/CD6) novel biologic, launched in India for the treatment of chronic plaque psoriasis in 2013, is being repurposed for the prevention and treatment of COVID-19 complications.

Biocon’s partnership with Equillium: Having biologically and clinically validated CD-6 as a target for autoimmune diseases, Biocon had out licensed Itolizumab to U.S. based biotechnology company Equillium in 2017. Equillium has three clinical studies underway across the globe for Itolizumab in acute graft-versus-host disease (aGVHD), severe Asthma and Lupus Nephritis.

4. Research Services Business (Syngene International)

Syngene International, Headed by CEO Jonathan Hunt, is Asia’s largest contract research & manufacturing organization, which supports R&D programs from lead generation to clinical supplies for companies all around the world. During FY20, Syngene’s revenue grew 10% to Rs. 2,012 crore. It contributes 30% to Biocon’s consolidated revenues.

Syngene continued to invest in the latest technology and infrastructure to meet the demands of a growing business. In Hyderabad, Syngene commissioned the first phase of the new R&D Centre, comprising 50,000 sq. ft. of state-of-the-art laboratory space housing a team of up to 150 multidisciplinary discovery research scientists. The Company’s first operational research Centre outside Bengaluru has the potential to become the second Centre of excellence for Syngene’s Discovery Services. When fully commissioned, it will cover a total of 94,000 sq. ft. and house around 270 scientists.

In Mangaluru, the construction of Active Pharmaceutical Ingredient (API) manufacturing facility in Mangaluru is complete and is going through the process of qualification and validation. It is currently in preparation to commence full-scale commercial operations towards the end of FY21.

During the year, Syngene cleared two US FDA inspections successfully; Received approval from Russia’s Ministry of Health for meeting current Good Manufacturing Practice (cGMP) standards; Received Good Laboratory Practice (GLP) certification for viral testing facility from the National GLP Compliance Monitoring Authority — making it India’s first and only GLP-certified viral clearance study service provider.

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Strong Financials

Biocon’s revenue has grown significantly from Rs. 3,460 Crore in FY16 to Rs. 6,529 Crore in FY20 at a CAGR of 17.2% on the back of Increasing uptake of Biosimilars, Research Services and increasing sales of Generic Formulation in US. What lies ahead for the company is the bigger pie of revenue share, company expects its Biologics division’s revenue to increase from Rs. 1,951 crore to reach Rs. 7,000-7,500 crore (~ USD $1 Billion) by FY22 on the back of US FDA commercialization of Insulin Glargine (approved in US), Pegfilgrastim, Trastuzumab and other biosimilars already present in US, EU and MOW markets.

Biocon is in the expansion phase to cater to the increasing needs across the globe. Biocon has invested over Rs. 2,200 crore in capex in last 5 years alone, while adding Rs. 39,000 crore in the market capitalization.

Net R&D has just doubled in last 3 years from Rs. 216 Crore in FY18 to Rs. 439 Crore in FY20. Gross R&D spend has remained in the range of 8-12% of the total expenses since last 5 years which validates the fact that company aspires to become an innovation driven company.

EBITDA has grown from Rs. 1,029 Crore in FY16 to Rs. 1,803 Crore in FY20 at a CAGR of 12% with an average EBITDA margin around 28%. Company’s PAT has grown from Rs. 550 crore to Rs. 748 crore in the similar time frame with an average PAT margin of 13.4%.

While company has not paid dividends very generously, but the management has been able to increase shareholder’s wealth enormously over the last 5 years. Company retained earnings of over Rs. 2,900 crore in last 5 years, while increasing the market capitalization of the company by over Rs. 39,000 crore.

Biocon has increased shareholder’s wealth by over Rs. 13 for every rupee retained by the company in last 5 years

Company’s commitment in terms of financial numbers is very promising, company aspired to become a US $1 Billion revenue company by FY19, was able to successfully achieve the target. Now company aspires it biosimilar division alone to generate the revenue of US $1 Billion by FY22 on the back of back-to-back US FDA approvals of their biosimilars.

Company, despite investing more than Rs. 5,200 crore in last years, has comfortable debt position at 0.3x of total equity. Company’s sound cash balance of Rs. 1,000 crore add to the strength of its balance sheet.

Biocon has generated strong ROEs at an average rate of 12.8% and ROCE at an average rate of 14.4% over the last 5 years.

Dedicated Management for Each Vertical

Though complex yet transparent company structure is followed by Biocon, where each business vertical is headed by different individual, with its own dedicated management, to gain the expertise and benefits of specialization through different bracket companies under same umbrella ‘Biocon Limited, India’. This helps investors in identifying each vertical of business in detail.

The biggest benefit of having business spread across different verticals is mitigation of risk. When due to unavoidable external forces, one side of business is down, the company has different business to come to rescue and sail the company forward in toughest of the situations.

The company is vertically integrated which gives cost benefit and economies of scale to the company. Company is into research services, CRAMS, branded formulations, and API, also engaged in Novel Innovator drugs, hence, giving it a potential to take the most advantage of the opportunity set forth by Indian pharmaceutical space in years to come. Company is set itself to transform from a pure enzyme company to a full-fledged pharmaceutical giant.

Aggressive Capex Plans

Biocon is a front runner in biopharmaceutical industry. The company adapts to the dynamic environment rapidly and its capex plans remain aligned with its far-sighted objectives, vision, and mission.

Capital expenditure during FY20 stood at Rs. 974 crore. In Generics division, capex spends were largely related to the construction of the new greenfield facility in Visakhapatnam for immunosuppressant products. In Biosimilars, major spends were on account of the greenfield antibody facility in Bengaluru, incremental drug substance and drug product capacities within existing plants and R&D facility in Chennai.

Management expects capex spend to be USD 200 million ~Rs. 1500 crore each in FY21 & FY22, split equally between Small Molecules and the Biosimilars businesses. The capex will be funded through a combination of contribution from internal accruals, debt raise as well as additional private equity investment in Biocon Biologics.

Timeline of Capital expenditure

The greenfield antibody facility in Bengaluru entails an investment of ~USD 200 million with cash outflow over four years starting FY18.

In FY19 Biocon also initiated upgradation of insulins drug substance facility in Bengaluru. In FY19, Biocon incurred ~USD 100 million largely attributable towards these projects along with recurring maintenance capex across all our verticals.

In FY20, Biocon planned to add incremental drug substance and drug product capacities across biosimilars (antibodies, insulins, and proteins) as well as Small Molecules businesses. The company is also evaluating construction of the second phase of our Malaysia Insulin facility which will require investment of ~USD 200 million.

Company has also initiated a greenfield project at Visakhapatnam, Andhra Pradesh with an investment of Rs 600 Crore to secure our anticipated growth in fermentation-derived APIs, including company’s strong portfolio of immunosuppressants. This expansion will enable Biocon deliver on their vertically integrated strategy of developing and commercializing our own ANDAs and service the needs of our global API customers. The company expects this facility to be operational over the next 3 years followed by commercialization based on regulatory approvals in major markets.

Company did brownfield expansion in Chennai acquiring space for its R&D activities from Pfizer, it has undertaken greenfield expansion in Mangalore for building up Small molecule facility as well.

Thus, it is well evident from the capex plans across all the business divisions that the company is well prepared to address the global pharmaceutical need and grab the underlying opportunity with both hands.

Management Transparency and Accountability are key to Biocon’s success

To value a business dictated by R&D involves a lot of uncertainty. Management accountability and transparency becomes the very key to understand the growth prospects. Biocon’s Management scores full marks for transparency and accountability. Company’s management is always committed to high standards of Corporate Governance and has in place appropriate structures and reporting systems.

Biocon’s strong brand equity, commitment to address unmet patient needs, the steadfast pursuit of affordable innovation and a keen sense of responsibility towards the society and the environment are reflected in the awards and accolades conferred upon the Company.

A recent example of transparency and adherence towards highest corporate governance standards has been the termination of its 13-year-old JV with UAE based Neopharma. The company said that the joint venture partner came under investigation for governance issues which is likely to have a reputational impact on the JV. Subsequently, Biocon has decided to wind up the JV entity.

Strategic alliances: A big positive

Biocon have had numerous Strategic alliances with companies across the globe. Biocon’s partnership with Mylan is long standing from 2009 and expanded its scope of partnership in 2013 for biosimilars launch of 11 products. As Biocon’s success become well evident to the world, in 2018, Sandoz, the Novartis Biologics division announced its partnership with Biocon for 2026 Biosimilars Second wave wherein Biocon is a partner in Profit sharing as well. Biocon have had partnerships with Abraxis, Vaccinex, Optimer, IATRICa and Amylin in the past.

Biocon currently holds 13.5% equity stake in Equillium (Nasdaq: EQ) and working alongside to start global trial of Itolizumab to treat moderate to serious patients of Corona Virus after the company received approval from the Indian regulator for its use.

Biocon in 2010 in partnership with Axicorp established its presence in Germany. Biocon launched its first biosimilar in Developed market japan in 2016 partnering with FUJIFILM Kyowa Kirin Biologics, Biocon has a partner in Mexico Pisa Labs to commercialise in US and many others.

Biocon has developed a strategy wherein it commercialises its product by partnering with a local company to take advantage of Local company’s marketing hold in their country and medical institution lobbying.

On other hand, Biocon’s research services Syngene has long standing partnerships with Bristol Myers Squibb, Amgen, Abbott Nutrition, Baxter, Glaxo Smith Kline, Herbal life nutrition and many more pharma giants, that shows Biocon’s representation at a global level.

Mission 10 cents

Diabetes: A Global Pandemic

Unlocking universal access to affordable insulin

In the run-up to the 100th anniversary of the discovery of insulin as a treatment for diabetes, Biocon has embarked on a mission to unlock universal access to high-quality insulin guided by the conviction that such an essential therapy needs to be accessible to patients globally.

More than a 100 million people require insulin therapy for the management of their diabetes –– the ‘silent pandemic’ that currently affects 475 million people worldwide.

At a time when the world is seeking viable, long-term solutions to improve insulin access and affordability, Biocon’s ‘Mission 10 cents’ is offering recombinant human Insulin (rh-Insulin) at less than 10 U.S. cents / day for direct procurement by governments in LMICs, where millions of people cannot access insulin as it is unaffordable.

This initiative coincides with WHO’s first-ever insulin pre-qualification program. Biocon Biologics is talking to several governments for ways to disintermediate the supply of insulin.

Biocon Biologics reaffirmed its commitment to enable universal access to high quality insulin by offering recombinant human Insulin (rh-Insulin) at less than 10 US cents/day ~ less than Rs. 10/day for direct procurement by governments in low and middle-income countries (LMICs). The announcement was made at a UNAIDS Health Innovation Exchange event held on the sidelines of the 74th session of the UN General Assembly in New York. UNAIDS welcomed the announcement by Biocon.

The recent approval of our Insulin Glargine by U.S. FDA will help the company to serve insulin patients in U.S.

How this mission can contribute in growth numbers and P&L

It is a side event at the UN General Assembly. It has offered to the world to LMICs for access to affordable insulin. And this is an offer that is directed towards governmental purchases, which also circumvents all the middlemen and all supply chains in between. So that is one thing. And the other thing, it is an offer made from an organization that is based on a very profitable and a very good cost structure, vertically integrated from end-to-end production. Biocon has its production in Malaysia and in India which makes them also to be a good cost player on this side. And as they are making this offer to governments, this is also about volume and economies of scale which in the end makes it profitable.

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RISKS

R&D does not always capitalize

The research and development (R&D) process is a critical stage in drug development in the pharmaceutical (Pharma) industry. The process starts after an initial candidate drug is identified and encompasses the rigorous research tests that determine its therapeutic suitability.

Now when it comes to biologics, it is entirely a different ball game. As a result, the cost of developing a biosimilar for global markets has been estimated at US$75-$250 million. This is in stark contrast to the estimated US$2-3 million required to develop the much simpler, traditional non-biologic generics (Source: Bourgoin and Nuskey, ‘An Outlook on US Biosimilar Competition’, April 2013)

On the other hand, Biosimilars molecules are far more complex from generics. Thus, replicating the biosimilar drug with the innovator drug is very difficult and has a lot of cost involved. So, it may happen that spending billions on a molecule’s R&D which may not clear trials at later stages or not able to prove Bioequivalence. Hence, it can dent the company drastically.

For instance, Biocon has been trying to complete the trials of its biologic drug Tregopil which is indigenously made novel molecule since last 10 years but missing certain criteria. Sometimes, a company fails to meet primary end point or secondary end point or is not able to prove safety and efficacy of biosimilars with the innovator drug. Hence, R&D holds an integral part in cost structure and should be taken care of.

USFDA is a big trigger!

By most estimates, the US is about a decade behind the EU in terms of adopting biosimilars, with 90% of all global biosimilar sales occurring in EU countries, even though 60% of all biologic drug sales occur in the US.

In the US, biosimilars face a complex web of barriers: red tape, dubious litigation, anti- competitive contracting, fearmongering, and patient and practitioner misunderstanding – while in the rest of the world they are surging forward with great success, specially Europe.

One of those barriers is legal challenges, according to Lovisa Gustafsson, an assistant vice president at the Commonwealth Fund, a healthcare foundation. “The drug companies apply for new patents over and over again,” she said. “It leads to very long periods of exclusivity that are essentially monopolies during which the biosimilars can’t come to market.”

Manufacturers also disseminate misleading information about biosimilars that sometimes constitutes fearmongering. Last year Pfizer petitioned the FDA to step in when a rival’s website stated that ‘the FDA requires a biosimilar to be highly similar but not identical to the [reference product]’, without qualifying that they must also have no ‘clinically meaningful’ differences from the branded drug. Pfizer also cited a Janssen brochure that allegedly implied the biosimilar Inflectra is not interchangeable with Remicade and may pose a safety risk. Additionally, a YouTube video sponsored by Amgen questioned the safety of biosimilars.

In the US, manufacturers need to consider patent litigation challenges and their potential effects. What is often referred to as “the patent dance” can delay biosimilar companies in moving forward with critical steps to support future product uptake, such as negotiating with major payers to get ahead of exclusionary formulary decisions. Litigation barriers can also allow other biosimilar manufacturers, that would have otherwise been third or fourth to market, to get ahead of the presumptive biosimilar market leader and launch their products first, which again impacts a company’s strategy.

In July 2018, the FDA published its Biosimilars Action Plan, acknowledging the lack of competition in the biologics space recognizing the numerous barriers to the development and utilization of biosimilars, the FDA outlined 4 key goals in tackling this issue, including streamlining the approval process, improving regulatory clarity, increasing educational efforts to improve understanding among stakeholders, and collaborating with the Federal Trade Commission to address anticompetitive behaviors.

The FDA has approved 28 biosimilars so far. The first, approved in 2015, was Sandoz’s Zarxio (filgrastim-sndz), a biosimilar of Amgen’s cancer drug Neupogen (filgrastim). Zarxio came on the market just six months after approval, but most other biosimilars have not had such a quick journey. Seventeen of the 28 approved biosimilars were on the market at the beginning of July, so the gap is narrowing but still there.

Acceptance of Biosimilars

“74% of physicians who responded reported ‘physician confidence’ as one of the biggest barriers to widespread adoption of biosimilars”

The law of Interchangeability does not always apply to biosimilars; thus, it slows down the physician acceptance.

Many of the blockbuster biologics expected to lose market exclusivity by 2020 are treatments for severe diseases such as rheumatoid arthritis and cancer, conditions that physicians will not want to risk treating with less effective drugs. In general, for patients whose diseases are already well controlled with reference biologics, physicians might continue prescribing these treatments. And with mandatory substitution unlikely to become widespread in the near term, physicians will not be compelled to switch these patients to cheaper options, yet cost is a major consideration for several people, which makes us.

Originator Company’s Strategies to Slow Market Growth of Biosimilars

Although to date the FDA has approved 25 biosimilars, only a handful have made it to market.

Biologics originators have been deploying a host of defensive strategies in their fight against biosimilars. One is to get the patent on a biologic drug extended (in one instance, by as many as 15 years); another is to insist that the drug’s manufacturing requirements and clinical data qualify as trade secrets, which—if the FDA agrees—protects any biologic approved before the passage of the BPCIA from competition of biosimilars. Even the launch of the recently approved Zarxio biosimilar has been delayed in the US by ongoing patent litigation with the originator.

Some originators have reduced or cut off the supply of their biologics for use in clinical trials by companies developing competing biosimilars. Others have launched trials of a next-generation biologic drug at the same time that the maker of a biosimilar has begun recruiting patients for clinical trials of its product (this can create serious problems in areas such as oncology, where the competition for clinical-trial subjects is already high). Originators have also proactively cut the price of a reference biologic before the launch of a competing biosimilar. And others have launched an improved version of the original biologic ahead of a biosimilar rollout and actively migrated patients to the improved version.

COVID-19 Impact

A potential opportunity for the Indian pharmaceutical industry

Biocon reinforced its reputation of resilience and reliability by continuing to supply life-saving therapies worldwide despite lockdowns and other production and supply chain disruptions due to COVID-19.

Meeting business commitments amid unprecedented challenges did not deter the company from contributing to global efforts to tackle COVID-19 through innovative science. Biocon is repurposing its psoriasis biologic drug ALZUMAb™ (Itolizumab), an anti-CD-6 IgG1 monoclonal antibody, to treat COVID-19.

Earlier during the year, Biocon received the Drugs Controller General of India’s approval to conduct a clinical trial in moderate to severe patients with COVID-19 complications. This trial at multiple hospitals in Mumbai and Delhi and the company is seeing an encouraging response from patients being treated with Itolizumab.

Biocon’s partner Equillium plans Itolizumab’s global clinical trial for COVID-19. Biocon has out-licensed Itolizumab to US-based biotech firm Equillium in 2017 for development in the US and Canada. Equillium has been awarded ‘fast track’ and ‘orphan drug’ designations for the molecule in both prevention and treatment of graft-versus-host disease by the USFDA.

Biocon’s research services subsidiary Syngene is collaborating on research projects related to vaccine development, which could represent a longer-term solution for fighting the coronavirus pandemic.

The COVID-19 pandemic has illustrated the need to have robust supply chains in this connected world of global commerce. Any impact on inbound logistics, especially for raw materials and outbound logistics for customer supplies can have a direct impact on the operations of the Company. This can be aggravated further by reduced availability of raw materials, whether sourced locally, nationally or imported from overseas. While the Company maintains a few months of critical raw material inventory, and supply chains have fast normalized in the first quarter of FY21, any new and longer duration disruption on the supply chain can affect manufacturing operations and adversely impact our financial performance.

The novel coronavirus outbreak has demonstrated that if humanity is to survive as a species, it is imperative that there is equitable access to all essential health products and technologies without distinction of race, religion, political belief and economic or social condition. Universal access to quality healthcare for all is non-negotiable.

Story So Far

Financial Summary

Note: Small Molecules is renamed as Generic; Biologics segment is divided into two segments: Biosimilars and Novel Biologics and Branded Formulations is merged in the new Biosimilars Segment.

Story in Charts

Price Target & Valuation Assumptions

The value of the stock is the future cash flow to shareholders discounted at the expected rate of return. Future cash flow is a function of return on capital and growth. Biocon’s business model is as such it might invest a lot in R&D’s showing lower return on capital in the short duration but can earn substantiated returns once the R&D is capitalised in the form of commercialized drugs.

Valuation Methodology

  • Discounted Cash Flow

We value the stock at Rs 496, based on a 2 stage DCF model. We use a cost of equity of 9.9%, assuming a beta of 0.73, a risk-free rate of 5.85% and a market risk premium of 6.00%. We continue to assume a terminal growth rate of 6%.

  • Sum of the Parts

Based on the Sum of the Parts (SOTP), value for Biocon comes out to be Rs. 467, using a 20% holding company discount.

Disclaimer:

This document has been prepared by Apex Capital. This report and information herein are solely for informational purposes and may not be used or considered as an offer document or solicitation of an offer to buy or sell or subscribe for securities or other financial instruments.

Copyright in this document vests exclusively with Apex Capital.

Cover Image: Biocon Limited

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Sheersh Jain
Sheersh Jain is the Founder at Apex Capital. He is a CFA (Fellowship awaited), a part-qualified Actuary, Capital Market Enthusiast, and believes in bringing a positive change in the community.
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