Biocon - The ultimate biosimilars play!

The article above is making a mountain of a molehill. Ignore would be my suggestion. There are to many fake news stories - the above article is a good example

FDA observations (minor only in my biased view) are with regards to insulin aspart, and not insulin glargine - FDA approval is already in place for this facility for insulin glargine…

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US FDA PAI Inspection of Malaysian facility completed on September 2021 was for Insulin Aspart - Form 483, 6 observations.

US FDA PAI Inspection of Malaysian facility completed on July 2019 was for Insulin Glargine - Form 483, 12 observations.

US FDA PAI Inspection of Malaysian facility for Insulin Glargine has got Establishment Inspection Report on April 2020 with VAI (Voluntary Action Indicated) with 3 observations issued at the conclusion.

Hope this clears the confusion.
Compliance track record has been poor in the past also.

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Bicara Therapeutics Presents Promising New Preclinical Data for Lead Immunotherapy Program BCA101 at the Society for Immunotherapy of Cancer 2021 Annual Meeting - 12th Nov 2021

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When FDA conducts inspection to approve a facility it is not uncommon for them to issue observations
Most observations tend to be minor only and the management can fix that…

If FDA issues a warning then the issue/s is/are very significant. Biocon has never received any warning ever from FDA ever I don’t think.

The key is the terms used in the report - observations vs warning

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Biocon Biologics Collaborates with RSSDI to Expand Access
to its Insulins for Children with Type 1 Diabetes on World Diabetes Day.

Biocon Biologics and Viatris Announce Launch of Interchangeable SEMGLEE® (insulin glargine-yfgn) Injection and Insulin Glargine (insulin glargine-yfgn) Injection.

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Competition responding to interchangeable insulin biosimilar

Views invited

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I am not able to figure why screeners are showing Biocon with medium financial strength. Financials look ok to me. Any red flags? Views?

Being invested in Biocon for some time now ( postion was cut to small at 200DMA level break though) , here are some learnings

  • Good Management and governance pedigree but far too many moving parts beyond their control , multiple businesses with each way different than other - Old house Generics vs evergreen CRAMS vs High risk reward biologics
  • By design they see far too many obstacles than successes, builds uncertainty which mkt doesn’t like
  • Success and growth isn’t linear and Capex heavy high gestation game that biologics is, add to it marketing success dependency on partners
  • A good candidate for very long term investors but opportunity cost for folks with short to med term horizon( unless one is lucky or time it well with technical + fundamentals)

If Biologics were to spearte out and list it may be attractive, Syngene is a good investment on its own for CRAMS story, Generics is anyway a crowded space.

Sunrise sector ( atleast biologics+CRAMS part) + good management + good governance doesn’t mean a sure shot receipe for success - entry price and timing matters alongside ability to withstand large periods of underperformance.

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Found the best summary for the name in quite some time, thanks Dev. Perfectly put!

Clarifications by management:

  1. Aspart CRL might take a few months (no timelines given - hopeful to get by first half of the year)
  2. No update on Bevacizumab Pre Approval Inspection (does not think it will happen until COVID variant subsides)
  3. Glargine has seen some pick-up in the US in Q3. In the coming, quarters will see a higher pick up of MS

The MS report of Biocon highlights that the market size of Glargine is roughly US$1.2bn. While the sales of Lantus Solostar are at $4.8bn. According to a press release, some time back Viatris and Biocon have won a patent litigation against Sanofi for Solostar. Hence the total market size that Biocon will be targeting can be $6bn, right? Can someone give confirmation on this point?
Glargine + Solostar can be a huge opportunity for Biocon.
The report also highlights a few upsides on the generic side like a limited competition $500mn product and Copaxone opportunity (though Copaxone has been there for a few years with no material progress.)
Below I have attached screenshots of a few pictures from the MS report:


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Biocon Q3 show was strong on all fronts, 2nd consecutive quarter of strong performance by Biologics and signs of generic turnaround, outlook commentary good as well,

Q3 concall a must listen for understanding direction better

Key highlights from concall

  • Q3 21 2200 cr revenue, pbt reported at 269 cr = 350 cr excluding mtm losses for Adagio - annualized 8-9K cr revenue, 1400 to 1500 cr pbt. PAT in range of 1200cr+ range
  • per mgmt estimations Serum deal to contribute $400 M revenue at full utilization with margin profile similar to core EBDITA- ramp up from H2 23, mgmt says aggressive in commercialization- that is as big as current whole Biologics division - need to be conservative in estimation here give past track record
  • Biologics firing on all fronts- mkt share gain, Interchangeable status boosting performance and best is yet to play out, Sandoz pipeline to be announced soon as next phase of growth , Serum deal to contribute in H2 - con call has finer details
  • Grnerics new launches doing well, Vizag facility coming online and contribute from FY 23, still seeing cost pressures but sequential improvements visible
  • Syngene on its own doing well, raised guidance a bit
  • Opportunity size was never issue, biologics /biosimilar as well as CRAMS are a theme for deacde + , long runway but uneven stock performance driven by mkt expectation mismatch
  • Biosimilar price erosion is sane in developed mkt and holding better than expectations in emerging mkt
  • New leadership appointment are in right direction with signs of better control on mkt facing/commercial destiny( e.g. Head of BB commercial- DM, India branded Head etc)

All in all, mgmt sounded at offense than defense in past many Qtrs, technicals supporting turnaround after near 1-2 years of underperformance, valuations look decent considering future triggers, breakout on weekly and daily charts with volume.

Valuations

  • Biologics- Q 3 at 981 cr, EBIDTA at 313 cr, 28% YoY and 30% QoQ on topline, primarily driven by following
  • Glargine supply to Viatris contributed this Qtr, trigger of profit share is yet to play out when Viatris supplies in end markets. Glargine has two launches - Branded as Samaglee and unbranded as Insulin Glargine. Branded profile bound to have higher margins, Interchangeable benefits and preferred status over Lantus to also reflect in numbers.
  • Continued to maintain a steady market share for bTrastuzumab (Ogivri*) in the U.S. and
    bPegfilgrastim (Fulphila**) in the U.S. and key EU countries
  • Ogivri mkt share gains in EU helped them in this Qtr
  • Fuphilla approval in Canada to help in coming Qtrs

While they do not give guidance we know that biosimilar grows healthy as mid teen, new launches and preferred status, Profit share gains and better than expected pricing in emerging mkts - they can continue to deliver similar growth as last two qtrs for 1-2 years. Pending approvals of Aspart and other upcoming ones ( with Sandoz) to keep pipeline healthy.

At Q3 annualized, biologics biz is 4000 cr topline 1250 cr EBDITA, 25% growth, let’s add Serum( H2 23 onwards) $400M and $120 M numbers - 3000cr revenue and 1000cr EBDITA.

How much one pays for an innovative biotech with revenue 7K cr+ 2250 cr+ EBDITA - Serum merger happened at $5B valuations but with future potential this biz could be way higher - samsung biologics at $1B+ sales is valued at $45 B ( of course much higher growth metrics)- on continued performance delivery Biocon biologics on its own have significant room for rerating here on. Even at 25X EBDITA 60k cr type number - ofcourse Pre conditions being ability to commercialization of Vaccine capacity ( serum) and steady growth from BB. Market being forward looking some rerating should play out in next 2-3 qtrs.

  • Syngene is listed at 25K cr, at holding co discounts(40%) one can factor in say 16K cr- it’s in middle of sizable Capex and results to show in FY 24 onwards including Mangalore facility.
  • Generics is a crowded space and will get standard peer based valuations- at annualized 2500 cr revenue at 8 - 10K cr range. New API facility trigger and Tabuk pharama tie up to help in ME.
  • High risk reward of novel molecules not added as buffer

All in all 25K cr( Syngene + Generics), Biologics at last round was $5B - likely to get rerated based on execution to 60Kcr by end on FY23 based on success in core biosimilar + Serum vaccine capacity commercialized at healthy Financials
Posiibility of 80-100K cr mkt cap against 45K cr now. This is back of envelope and could be wrong. Mgmt has missed guidance etc in past and things usually take longer to materialize in this industry compared to others, entry price and MoS is key.

Risks

  • Recent past underperformance of business post corona, though all facts suggest worst is behind
  • Capital intensive business, compliance risks of pharma
  • Investment for those okay with industry nature and sizable period of flat/underperformance , these are not secular compounders( key learning)
  • Pharma Sector not in favor currently ( more of a factor of mkt momentum than biz)

Invested and added recently

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- List of Fundraising
o 06-01-2020: $75 mn for 2.44% equity stake with True North fund (valuation: $3.07 bn)
o 31-07-2020: $30 mn for 0.85% equity stake with Tata Capital Growth Fund (valuation: $3.53 bn); For $30mn (at exchange rate: 75), they were allotted 88’30’456 shares of Biocon Biologics at price of 254.8 (Biocon holds 95.25% stake)
o 07-11-2020: $150 mn (1125 cr.) for 3.8% equity stake with Goldman Sachs India AIF Scheme-1 (valuation: $3.94 bn); Exchange rate: 75; Valuation is 12.36 P/sales
o 07-01-2021: $75 mn (555 cr.) for 1.8% equity stake with ADQ (valuation: $4.17 bn); Biocon now holds 89.89% stake
o 16.09.2021: Gave 15% stake of Biocon Biologics to Serum Institute Life Sciences in return of merger with covishield at valuation of $4.9bn
o 28.02.2022: Bought Viatris’ biosimilar business for $3.335 bn ($2.335bn through cash + $1bn through compulsory convertible preference shares in Biocon leading to >12.9% equity stake; this implies Biocon Biologics’ valuation of $7.75bn); CY22 estimates revenues of Viatris: $875mn, EBITDA: $200mn

Viatris business acquisition is done at CY22 EV/sales of 3.8x, this sharp de-rating of biosimilar business valuation is in-line with increased competition (especially innovators like Amgen). In the last 2-3 years, it seems that Biocon is more interested in M&A rather than building businesses.

Disclosure: Not invested

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Biocon was lacking commercial engine ( market facing engine), they had scince and manufacturing well covered, but lacked control on growth ( or atleast felt so)

If we think from size & scale this makes sense to compete globally as one cohesive unit. This is also useful construct to attract sizable investments.

This space is undoubtedly getting competitive, and to compete effectively, size and scale will matter more and more. Rather than sharing profits- would get to keep it all, though Viatris ratio looks lower.

Though Biocon in near term likely dont have much to offer retail investors, good to see a giant coming out of india base( Biologics, CRAMs, Vaccines- Serum, Viatris part, Generics+API)

Tracking positions

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A good thread on the Biocon acquisition

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Interestingly even Viatris got beaten down more than biocon share for letting go lucrative business. I feel it’s a positive sign for biocon in long term though short term debt will be a pain

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