Biocon, Viatris acquisition – boon or bane? ICICI Securities

Biocon Limited’s (Biocon) biosimilar arm Biocon Biologics Ltd (BBL) acquired Viatris’ biosimilar assets to create a fully integrated global biosimilar enterprise. BBL will get global biosimilars business and rights in all biosimilars assets, including its in-licensed portfolio. In exchange, Viatris will receive US$3.3bn in a cash + equity deal. Post the deal, BBL’s net debt level will jump to US$1.5bn and net debt/EBITDA would be ~4x. The transaction is expected to close in H2FY23. Implied deal valuations (excluding intercompany transactions of ~35-40%) would stand at 4.7x-5.1x CY23E sales. While BBL gets access to an established front end in the developed market, it heavily weighs on the near-term financials. Additionally, successful execution is quintessential for the transaction to be accretive. We retain HOLD on Biocon with a revised target price of Rs353/share.

What Viatris gets? Viatris will receive US$3.3bn, including US$2.3bn of cash (US$2mn on closing of transaction and US$335mn in CY24) and US$1bn of BBL compulsory convertible preference shares (~12.9% equity stake in BBL post conversion), and one seat in the BBL board.

What BBL gets? 1) Viatris’ global commercial infrastructure, 2) Viatris’ global biosimilars business with an estimated revenue of US$875mn (includes ~35-40% of intercompany revenues of BBL) and EBITDA of US$200mn for CY22 (revenue estimated to exceed US$1.1bn and EBITDA of US$250mn in CY23), 3) Viatris’ rights in all biosimilars assets, including its in-licensed portfolio and an option to acquire Viatris’ rights in biosimlar aflibercept and 4) transition services for a two-year period to ensure a seamless transition with partners and continued services to patients and customers at cost plus US$44mn p.a.. Viatris will pay US$50mn to BBL to fund certain capital expenditures. The cash payment of US$2bn will be funded by an equity infusion of US$800mn in BBL and the remainder by debt, additional equity infusion or a combination.

What is means for Biocon? Biocon had diluted its holding in BBL to ~76% before this transaction. Post this transaction, the holding can drop to as low as ~53%. Additionally, debt on the books jumps significantly, pushing net debt/EBITA to ~2.6x in FY24E from 0.8x in FY21. Biocon intends to list BBL via an IPO in the next 18-24 months to unlock the value it holds.

Valuation and risks: Our revenue and EBITDA estimates for FY24E have materially changed in order to adjust for this acquisition. Also, we roll over our target valuations to FY24 to fully reflect this acquisition. Maintain HOLD with a revised SoTP-based target price of Rs353/share (earlier: Rs374/share). Key downside risks: Adverse regulations, higher competition in products Key upside risks: higher-than-expected growth in biosimilars.

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MB Bureau