Biocon Biologics and Serum Institute Life Sciences strategic alliance

• Biocon Biologics (BBL), a subsidiary of Biocon, has approved the merger of Covidshield Technologies (CTPL), subsidiary of Serum Institute Life Sciences (SILS) with BBL
• BBL also entered into a strategic alliance with SILS with an offer of 15% stake in BBL with post money valuation of BBL ~ US$4.9 The alliance gives BBL access to 100 million doses of vaccines/annum for 15 years with commercialisation rights (including Covid-19 vaccines) for global markets
• The strategic alliance will also develop antibodies along with a service level agreement (SLAs) for manufacturing and distribution of the vaccines and antibodies. Additionally, Biocon Biologics will establish, at its cost, a vaccine R&D division for developing both vaccines and biologics for communicable diseases. It will also make its cell culture, sterile fill and finish capacities available for vaccine production under the strategic alliance.

What should investors do?

Biocon’s share price has grown by ~2.3x over the past five years (from ~| 152 in August 2016 to ~| 358 levels in August 2021).

• The sheer size of the deal notwithstanding, the direction on the pricing front and actual ramp-up would be the key determinants, as we still await further clarifications in the due course. We maintain HOLD

Key triggers for future price performance:
Ramp-up of insulin glargine after interchangeability approval in the US

• • • Approval of bevacizumab and insulin Aspart in the US
    • Ramp up of market shares in existing biosimilars, geographical expansion
    • Syngene Mangalore customer validations and approvals
    • Developments on the Vaccines front

Key Financial Summary

Key Financials (|	crore)	FY19	FY20	FY21	5	year CAGR (FY16-21)	FY22E	FY23E	2 year CAGR (FY21-23E)
Revenues (| crore)	5514.4		6367.2	7105.8	16.0		8262.0	10572.0	22.0
EBITDA (| crore)	1361.2		1603.1	1640.0	20.9		2014.3	3033.8	36.0
EBITDA margins (%)	24.7		25.2	23.1			24.4	28.7
Net Profit (| crore)	744.8		698.2	730.3	6.1		734.7	1505.4	43.6
EPS (|)	6.2		5.8	6.1			6.1	12.5
P/E (x)	49.3		59.7	60.3			60.7	29.6
RoCE (%)	10.9		10.2	7.6			8.7	12.5
RoE (x)	12.2		10.4	9.6			8.9	15.6

Conference Call Highlights

• Access to 100 million doses of vaccines per annum for 15 years from SILS’s upcoming vaccine facility in Pune
• Alliance will develop antibodies targeting infectious diseases like Dengue, HIV etc
• The management guided for post profit sharing EBITDA margins in mid thirties
• Average Covid vaccine price ~ US$4
• Price range of other vaccines ~ US$3 – US$10
• Biocon is looking to foray into developing markets initially before entering developed markets

Valuation

Exhibit 1: Valuation
Particulers	FY23E EPS (| cr)	Multiple (x)	Per share (| )
Biocon (ex Syngene)	9.0	26.0	235.1
NPV (Vaccines)			31.5
Syngene
	Targeted Market Cap		31200
	Biocon’s Holding		71.1%
	Holding Company Discount		20.0%
	Syngene valuation		17737
	Per share valuation		148
SOTP valuation			410

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts’ valuation for a stock.

• Buy: 15%
• Hold: -5% to 15%;
• Reduce: -15% to -5%;
• Sell: -15%

MB Bureau