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

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.

BSE / NSE Code – 532523 / BIOCON
Mkt Cap (INR BN / USD Mn) – 52.97 / 1070
[1 USD – Rs. 49.50]

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.

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 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.


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
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.

• 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.


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
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.

• 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.


Biocon – Business Overview


Key Highlights
Huge Opportunity

Strong Financials &
Growth

Each of Biocon’s 4 verticals have huge
opportunities for growth. All these
verticals provide multi-billion $ market
opportunity for the company.

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.

Good Entrepreneurial
Management Team
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.

Biocon

Strong Moats
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.

Unique Business Model
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.


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
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.

• 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.


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
Revenues Fy-2011
Contract
Services
22%

Branded
Formulations
- India
14%

BioPharma
inclusing
Licensing
income
62%

Others
2%

Others
13%

Intellectual Profile

Post
Graduate
46%
Graduate
36%
Doctorate
5%

• 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.


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 $1billion 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)
Segment

Growth Rate

Branded
Formulations

40 % YoY

Contract
Services

24 % YoY

Bio-Pharma

24 % YoY

• 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.


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

-

25.17 % -10.3%

24.20%

Cash Flow from Operations

404

934

363

564

ROCE %

15.6

19.3

15.6

17.5

- EPS Growth %

• Dip in sales for Fy-12 is only

due to the divestment of AxiCorp 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 bottomline 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
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

• 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.


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 riskreward ratio is very much in favor of the investor.


THANK YOU


Biocon an innovative and integrated bio-pharma company

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