biocon an innovative and integrated bio-pharma company

- An Integrated & Innovative Bio-Pharma Company

Content Index

• Biocon – Investment Snapshot :- Slide #4 • Industry Opportunity – An Overview:- Slide #6 • Biocon – Business Overview :- Slide #10 • Investment Rationale :- Slide #18 • Biocon – Financials:- Slide #23 • Concerns & Reasoning :- Slide #25 • Conclusion :- Slide #26

“ Specialists in discovering Multibagger stocks “

Biocon – Investment Snapshot (as on January 30, 2012)

Recommendation :- BUY Accumulation Range :- 230-265 Target Price range :- 400-460 Investment Period :- 18 to 24 months Current Market Price – Rs. 257.90 Bloomberg / Reuters Code – BIOS IN / BION.NS BSE / NSE Code – 532523 / BIOCON Mkt Cap (INR BN / USD Mn) – 52.97 / 1070 [1 USD – Rs. 49.50] Total Equity Shares [Mn]– 205.3 Face Value – Rs. 5 52 Week High / Low – Rs. 390 / Rs. 240 Promoter’s Holding – 60.9 % Institutional Holding – 13.9 %

Biocon was started in 1978 by Kiran Muzumdar with an initial capital of 10,000 Rs for manufacturing enzymes. It has used this base to evolve as a leading player in the growing Bio-Pharma space. Kiran Muzumdar Shaw and her team have grown Biocon from a local fermentation company to Asia’s largest Bio-technology company which competes against multibillion dollar companies like Eli Lilly and Novo Nordisk. Biocon’s business is broadly classified under four different verticals of 1.) Small Molecules & Enzymes 2.) Branded Formulations 3.) Research Services and 4.) Novel Molecules. Biocon is a fully integrated healthcare company with capabilities across the value chain like drug discovery, development, manufacturing and commercialization. Biocon’s in-house talent, technical capabilities, platform, experience, partnerships and novel drug pipeline places it amongst India’s most innovative companies with a potential to emerge as a global leader in the Bio-Pharma space. “ Specialists in discovering Multibagger stocks “

Key Investment Highlights Stable Industry Trends & Growth Traction – With an ageing world, the market for Biotech drugs is estimated at over 100 Bn $’s and is growing at 16-18 % YoY. Opportunities are arising for companies, as 25 Bn $ worth of biologics are losing patent protection by 2016. Global Insulin markets where Biocon has a significant presence is expected to grow rapidly to about 20 Bn $’s by 2020. All these provide significant opportunities for Biocon to be exploited over this decade. Balanced Revenue Streams – Biocon basically leverages India’s low cost Innovation base to deliver affordable drugs through research and marketing partnerships. Biocon’s revenue streams from different verticals like Research services, branded formulations and drug development balances each other in cash generation and helps it grow consistently with the required space for disruptive innovations. Strong Manufacturing & Research Capabilities– Biocon has a global manufacturing base and is Asia’s largest insulin producer. Spread over 90 acres, Biocon has established the largest biotech park in the Asia- Pacific region housing world class, state of the art infrastructure, facilities and a large contingent of scientists. Biocon has invested over 160 Million $’s for setting up a strong manufacturing capacity in Malaysia which is expected to get operational from 2014. Healthy Balance Sheet – Biocon has around 580 Cr Rs in Cash and no debt on its balance sheet. This provides it with flexibility for investing heavily in the future growth areas without any strain on its financials. Biocon also generates good free cash flow every year from its existing businesses. Attractive Valuations – Biocon aims to grow at 20% CAGR for the next 5 years. For a stable business with such good growth rates, high margins (26-28% EBIDTA) and healthy ROCE (around 19%), it is presently quoting at a valuation of 15x earnings which is a discount to its peers. We feel, Biocon at this price is available at a discount to its intrinsic value and can deliver strong returns over the next few years.


Industry Opportunity & Potential - An Overview


Strong Structural Demand

• Indian pharma companies are on a strong structural growth path, due to the ageing of majority population in developed economies of Japan, Europe and USA. Increasing health complications, amongst people with spending power is driving healthcare spends and growth for Pharma companies. • Emerging markets like China, India, Brazil, Russia, Indonesia etc are collectively called as “Pharmerging Economies”, reflecting the increasing potential in these economies due to the growing affluence and health insurance peneteration. • Indian companies have established a strong foothold in the Global pharma arena due to supportive human resources, cost advantage, stable regulations etc. India has the highest number of FDA approved plants after the US. This has a positive rub-off on the entire ecosystem of pharma majors arising out of India.

Products Usage of Biocon’s drugs

Statins Drugs that reduce cholesterol and are used to prevent and cure heart diseases.

Insulins Hormones that regulate glucose in blood and are used to treat diabetes

Immunosuppressants Prevents tissue and organ rejection in transplants.

Branded Formulations Finished dosages catering to different therapeutic segments like Diabetology, Cardiology, Nephrology, Oncology, Comprehensive care and Immunotherapy.


Growth in Insulins

• The spread of diabetes has reached alarming proportions with developing countries bearing the brunt of this epidemic in the 21st century. By next year, India will be home to over 50 million diabetics, making it the world’s diabetes capital. • By 2030, that number will hit a staggering 87 million, affecting nearly 8% of the country’s adult population. With the number of diabetics increasing, the market, over the next five years, will be driven by the strong uptake of insulin analogs. • Biocon is the only company, among the 61 players in the anti-diabetes space, to have demonstrated success with both, insulins and oral anti-diabetics.


Market Size & Growth

• Regulations in Developed economies are increasingly in favor of low cost generics, thereby allowing Governments to reduce their large health subsidy. This has increased the peneteration of generics, opening a huge market. This is good news for companies like Biocon, which focuses on producing affordable drugs. • Business verticals on which Biocon focuses are substantially large and growing at a healthy pace. This provides a good opportunity for Biocon to grow and evolve as a market leader.


Products Industry Details

Contract Research Services

Pharma R&D outsourcing have been growing strongly and with companies spending over 100 Bn $’s on research, even a small increase in outsourcing % is a huge opportunity.

Statins Company’s has a 20% global market share in this segment and this business is growing at a healthy pace. Company is front ending this business through various initiatives.

Comprehensive care

The market for chemotherapeutic drugs in India is estimated to be worth INR 12 billion. This market is forecast to grow at a CAGR of 16% over the next 5 years to reach INR 26 billion.

Nephrology Chronic kidney disease (CKD) and its progression to end-stage renal disease (ESRD) is rapidly turning into a worldwide public health epidemic. The Indian Nephrology market is estimated to be growing at an approximate 11% YoY.

Diabetology Total sales of oral diabetes and Insulin in India is expected to be 28 Bn Rs in 2010 and is growing at over 14 % YoY.

Biocon – Business Overview


Key Highlights

Each of Biocon’s 4 verticals have huge opportunities for growth. All these

verticals provide multi-billion $ market opportunity for the company.

Huge Opportunity

Biocon’s experience in research services, regulatory knowledge,

multiple partnerships and HR resources provide a strong moat to its business which is reflected

in its high margins.

Strong Moats

Biocon’s unique portfolio of combining research services,

branded formulations and novel drugs is built on a robust business model of leveraging each vertical’s

strengths and adding value to generate consistent cash flow.

Unique Business Model

Biocon is led by one of India’s most respected entrepreneur Mrs. Kiran

Muzumdar Shaw.

Biocon has also groomed a strong management team with an in-built

culture of calculated risk taking.

Good Entrepreneurial Management Team

Biocon has been growing strongly

over the past several years.

Biocon’s ROIC has been around 19% and it has managed working

capital very efficiently.

Strong Financials & Growth

Biocon


Fully Integrated Business Model

• Biocon has an unique integrated business model with a clear strategy for the growth of each division. Integration helps in scaling up businesses across verticals by leveraging assets like Human resources, manufacturing capacity which would be a big risk, if it was used for in-house work alone.

• By working with larger companies in research services, Biocon is able to learn their best practices and attain scale for its R&D division. Through, its branded formulations business it is gaining experience in building sales and distribution network. All these denote the clear vision of the company to move up the value chain and emerge as a major force in the Industry.


Strong Innovation

• Biocon has a strong culture of innovation and risk taking amongst its technical team, which is difficult to replicate by new companies. • Being a small company, Biocon has its limitations in taking bigger risks in spite of its huge ambitions. Hence, Biocon has a good hedging policy and balances risk by following various innovation models, tying up with larger companies on various phases of development etc. • This approach balances its needs for regular growth, scale and cash flow with its large vision to develop blockbuster drugs out of India.


Branded Formulations

• The chronic therapy segment on which Biocon is focused, represents only 25% of the market at this point in time but what is interesting is that it is outpacing the acute segment with a growth pace of 21% against acute segment’s 16% CAGR.

• Biocon’s branded formulations business is fast gaining a strong foothold in the domestic market with the building up of strong sales, marketing and distribution team.

Products Usage of those drugs

Diabetology Biocon ranks #3 in the 4O IU insulin space, with a growth rate of 43% that outpaces the market growth of 17%. Biocon’s launch of “Insupen”, is also driving growth for the company.

Comprehensive care The comprehensive care business unit delivered a strong performance driven by Albubet®, Penmer® and Biopiper®. The current portfolio was strengthened with the launch of Suprava®, Cegava® and Albubet Safe®. Within a year of the division’s launch, three of its brands now feature among the top 10 brands in their respective categories.

Nephrology Nephrology business unit is delivering a strong growth driven by commendable performances in both the renal transplant and dialysis portfolios. Biocon is also launching a global drug for the management of post-transplant recipients in the previous quarter.

Oncotherapeutics Launched in 2006, Biocon Oncotherapeutics is committed to delivering novel yet affordable cancer therapies. The division aims to strengthen its position in the Indian market by focusing on growth areas of pain management and hematological malignancies.

Immunotherapy Launched in Oct 2010, Biocon Immunotherapy is focused on bringing to the market a portfolio of safe, efficacious and affordable immunomodulator drugs for the treatment of immune related disorders in dermatology. With an objective to build a large portfolio of brands and actively support the disease area, the division aims to establish its credentials and reinforce its commitment to the patient and physician communities.


Research Services

• Big pharma companies which spend billions of dollars in R&D, are increasingly witnessing a declining ROI on their spend. There is now realization of the need to outsource R&D to efficient companies which can lead to tremendous cost savings and also better execution. • India with its low cost and skilled technical workforce, is a choice of destination for bigger companies for outsourcing their core Research. Biocon being one of the earliest companies to provide these services, has built a good base for its growth. • Biocon’s integrated research services through Syngene & Clinigene has been gaining significant traction and has earned over 112 Cr revenues this quarter which is 28% higher compared to last year. • Biocon is retaining and growing its customer base and there is a clear traction in their strategy to broaden the range of discovery and development capabilities to provide a more integrated service capability to support its customers changing R&D models and goals. • Usually , outsourced R&D business takes a significant time to build the required competencies and relationships. Biocon’s contract research services have turned around in the previous year, after years of losses at the PAT level and now has healthy EBIDTA margins. All these boost the fortunes for their listing in the medium term.


Biocon’s Strength

• Biocon’s revenues are pretty much well diversified amongst its major verticals, which provides a good buffer for its topline growth. All verticals now contribute well to its bottom line with a major portion coming from Bio-Pharma vertical. • Biocon has a portfolio of over 100 products in over 170 countries. More importantly, it gets over 50% of its revenues from emerging economies against 37% just a few years ago. Biocon has been an early mover in many of these high growth markets. • Biocon has built a large pool of technical talent over the years. Biocon has “India’s largest concentration of life science scientists at a single site “ catering to diverse customers from big pharma to virtual biotech’s and small start ups. Biocon also has the Asia’s largest Biotech park.

Post Graduate

46%

Doctorate 5%

Graduate 36%

Others 13%

Intellectual Profile

Bio-Pharma inclusing Licensing income

62% Branded Formulations

- India 14%

Contract Services

22%

Others 2% Revenues Fy-2011


Company’s Firsts • Set up in 1978, Biocon is India's first biotech company.

• First Indian biotech company to receive US funding for proprietary technologies (1989).

• Sets up India's first clinical research organization, Clinigene (2000).

• First Indian company to be approved by US FDA for the manufacture of lovastatin, a cholesterol-lowering molecule (2001).

• First company worldwide to develop human insulin on a Pichia expression system (2003).

• Biocon enters the stock market with its IPO and becomes only the second Indian company to cross the $1-billion mark on the day of listing (2004).

• Launches India’s first cancer drug, BIOMAb EGFR® (2006).

• First Indian company to manufacture and export enzymes to USA and Europe.

• India’s largest producer and exporter of enzymes.

• Releases country’s first 24-hour diabetes drug, Glargine (2009).

• First biotech company to receive ISO 9001 certification in India.

• Syngene is country’s first custom research company in drug discovery.


Investment Rationale


Big Partnerships/ Alliances

• Biocon’s technical capability can be seen from its partnerships with several big pharma companies. Its alliances at the commercialization and research services, have the potential to generate substantial revenues for the company. • One of the recent deals with Pfizer was a big boost to the company. Pfizer will have exclusive rights (with some exemptions) to commercialize biocon's biosimilar versions of insulin and insulin analog products: rh-insulin, Glargiene, Aspart and Lispro globally. Biocon will be responsible for clinical development, manufacture, supply and regulatory approvals. • Payment from Pfizer is as follows,

Upfront payment from Pfizer - 100 Mn $'s + New manufacturing facility related milestone payments - 100 Mn $'s + Development, launch and regulatory milestones - 150 Mn $'s + Payment linked to supplies and sales.


Healthy Product Pipeline

• Biocon has a good pipeline of novel molecules under various phases of development. There are a number of promising molecules in its portfolio. • Most promising near term molecules, are those treating Oral Insulin and Psoriasis. Both the molecules are targeting multi-billion dollar opportunities. • Biocon is looking to announce its partnership with larger firms to take the development of these drugs to the next level. Any progress on these front, can be a significant boost for the company’s licensing income and also earnings visibility.


Consistent Growth (Ex Axi-corp)

• Biocon has been growing pretty strongly with a revenue CAGR of 19% which is healthy in the tough circumstances of global downturn. Even net PAT has shown consistent growth during this period. • Biocon’s increased profitability in Fy-11 was mainly due to the large licensing income which can’t be expected every year. But with a good pipeline, healthy licensing income can be expected in regular intervals or tranches over the medium term. • Also with the launch of Fidaxomycin by Optimer in different geographies for which Biocon is the sole manufacturer, we expect a good growth in financials over the next few quarters. • We expect a blended growth rate of 20% from its businesses consistently for the next 3-5 years. Margins will start expanding, once Biocon starts moving up the value chain.

Segment Growth Rate

Branded Formulations

40 % YoY

Contract Services

24 % YoY

Bio-Pharma 24 % YoY


Short Term Triggers • Biocon is expected to announce a partnership with a major pharma company for its Oral insulin molecule in the next 6 months. This could be a potential trigger and also there has been significant progress in its Psoriasis drug, which will drive great value for Biocon over the next 12-18 months.

• Potential listing of Clinigene and Syngene. ( Contract Service & Clinical Research ). Both the businesses have broken even, increasing their chances for getting listed. Management even during the latest Conference call with investors have reiterated the goal of listing these companies over the next 18 months. Considering the fact that these are unique companies, Biocon is expecting a premium valuation thus unlocking shareholder value for investors in the parent company.

• Having most of its earnings in dollars, it should get positively impacted by rupee depreciation of over 20%. The weak rupee should increase its competitive advantages and margins. It is particularly useful for the profitability of its commoditizing low value business.

• Divestment of Axicorp. (38 % of revenues last year but margins of less than 4%) It's been a low margin and slow growth business, lowering the overall return ratios. It's divestment provides free cash and management bandwidth. Deal with Pfizer has resulted in no value of having stake in Axicorp, which is very positive for Biocon in the long run.

• Biocon's Malaysian manufacturing facility where it has invested over 160 Million $'s is expected to become operational from 2014 which the markets would start discounting from the next year considering the boost to revenues and profitability from this plant.

• In the next 16-24 months, markets will start anticipating the huge gains from 20 Bn $’s worth of biologics which go off patent over 2014-18 benefitting companies like Biocon hugely.


Financials


Earnings Projection (with Axi-Corp)

Income Statement (INR Crs) FY 10 FY 11 FY 12E FY 13E

Net Sales 2367 2776 2020 2485

EBIDTA 471 592 542 680

Depreciation & Amortization 140 157 181 219

Interest 17 25 13 8

Other Income 37 37 44 40

PBT 351 447 392 493

Tax 49 72 67 89

Net Profit 293 367 326 403

Diluted EPS 14.7 18.4 16.5 20.4

- EPS Growth % - 25.17 % -10.3% 24.20%

Cash Flow from Operations 404 934 363 564

ROCE % 15.6 19.3 15.6 17.5

• Dip in sales for Fy-12 is only due to the divestment of Axi-Corp business.

• Biocon has been generating good cash from its operations with some lumpiness which is mainly due to its licensing income.

• Biocon has been managing its financials well, which can been seen from its conservative balance sheet and tight working capital.

• Biocon has not diluted equity and hence the bottom-line growth will be translated into shareholder gains.

• Biocon’s capital allocation has been pretty good with healthy return ratios.


Concerns & Reasoning 1.) Increased competition in biosimilar market and its commoditization will dent biocon's margins. But we feel, Biocon's low cost advantage of being based out of India (40% Cheaper) will help it out in the long run even if there is temporary pressure on the margins. Company has also taken a lot of steps to front end its business to compete in a commoditizing market. It is also moving up the value chain in a lot of other verticals, to protect and improve the margins. 2.) Research business is lumpy and commercializing deals happens once in a while. R&D expenses is set to increase and the monetizing part comes only after the next 18 months which can be a dampener for the stock EPS growth for FY-13 will be minimal, in spite of healthy revenue growth because of increased R&D spends and these will take some time to show on the P&L statement. These are genuine concerns and the earnings estimate are worked only after considering these things. Market is not at all valuing the R&D prowess of the company and if something positive happens like licensing or discovery happens, it will give huge returns for investors. 3.) Biocon in spite of being in a relatively less riskier sector, had its share price corrected over 40 % in 2008 and PAT saw severe de-growth. If we take and dissect the 2008 numbers, we can find that business was not performing very badly in topline or EBIDTA but profits had crashed. Primary reason for these are high forex losses ( due to high rupee volatility and a big bad acquisition in the form of Axicorp ). Other big reason for the fall was the generally high expectation from the company giving it very high valuations which were not sustainable.


Conclusion


Price chart

• Biocon has correctly sharply over the last few months as a result of overall negative sentiment and some disappointing results. It had a sharp run from the lows of 2009 and peaked out during Nov, 2010 inline with the broader markets which provides us an opportunity to buy at lower levels. • There has been some significant selling pressure from Institutional investors over the past few quarters. We expect the stock to show significant strength once this trend reverses. • We feel the stock is available at good levels for the 1st phase of buying and even if it corrects another 10-15 %, investors are advised to average down considering the strong fundamentals. • Stock should attract institutional investor interest, as it is one of the cheapest pharma stocks available with sufficient liquidity for investment by large investors.

Share Holding %

Dec 2011

June 2011

Mar 2011

Dec 2010

Sep 2010

Promoters 60.9 60.9 60.9 60.9 60.9

FII 3.52 4.84 5.62 5.88 7.12

DII 10.4 10.8 11.2 11.1 11.4


Conclusion

Biocon is definitely a company to watch out for in the Global Pharma space considering its R&D execution capabilities. Looking at the size of opportunity which it is targeting, Biocon has a fair chance of making it big. Going forward, we expect the stock to interest several investors. We expect Biocon’s businesses of Research services, Branded Formulations and Biosimilar’s to grow at a healthy pace of (18-20% CAGR) for the next 5 years. Expectations from these verticals are set to increase as we near 2014, from which there will be huge opportunities from the off-patent drugs. It’s novel molecule business has the potential to offer huge lumpy licensing income and could definitely provide a sharp trigger to its earnings over the next few years. It’s not rocket science to understand that Biocon at a Enterprise valuation of 4500 Cr Rs is a good price to buy, on just looking at the Pfizer deal. (1750 Cr Rs + Revenue Sharing). There can be some good triggers on commercialization of novel molecules, licensing partnership and listing of Syngene. Even without these, for a business which has a 20% growth, 26% EBIDTA margin, 17% PAT margin, good corporate governance and high operating cash flows, it is trading at an attractive valuation of 13x its FY-13 earnings. Biocon is a stable stock from which an investor can expect healthy returns over the longer term. If some of the triggers materialize (which we expect over the next 3years), stock can outperform the market handsomely. Thus, Biocon is a classic case of “Heads- I win. Tails – I don’t lose much”. We feel that the risk-reward ratio is very much in favor of the investor.


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biocon an innovative and integrated bio-pharma company

Business

discovering

kiran muzumdar

pharma space

good pipeline

strong foothold

branded formulations

healthy pace

huge opportunities