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1 | Page Raghvendra Kumar [email protected] OUTPERFORMER Current price Rs 404 Target price Rs 567 Potential upside 40% Time Frame 12-15 months Biocon (BIOCON) Initiating coverage February 19, 2008| Pharmaceutical Analyst ICICIdirect | Equity Research Price Trend 300 350 400 450 500 550 600 650 700 750 800 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan -08 Absolute buy Current Pric e Absolute Sell Biocon has re-oriented itself by moving out of enzymes to focus on biopharma. The stabilisation of statin (cholesterol-busting drugs) prices in the US is expected to improve its earnings visibility. A takeoff in bio- similar revenue, the likely turnaround in BBPL (a 51% JV), and Clinigene (a 100% subsidiary) in FY10E & FY09E, and ramp-up in Syngene operations are set to reverse the fortunes of Biocon. Two big triggers barely 12-24 months away Biocon may generate a windfall gain in next 12-24 months via out- licensing of its innovative oral insulin. Further, in a move to unlock value, Biocon plans to list its contract research arm, Syngene, within the next 12- 15 months. Robust growth in biopharmaceuticals revenue over FY07-10E Despite a flat outlook for statins, we expect a 16.88% CAGR in bio-pharma revenues over FY07-10E to Rs 1173.63 crore on the back of a 26.37% growth in sales of other-than-statin bio-pharma products and 23.31% growth in out-licensing and royalty income. Turnaround in Clinigene and BBPL in FY09E and FY10E We expect the 100% clinical research arm, Clinigene, and 51:49 joint venture with CIMAB SA Cuba, Biocon Biopharmaceutical Private Ltd (BBPL) to turnaround in FY09E and FY10E, respectively. Risks to our call Biocon’s innovative oral insulin is entering phase II clinical trials. As a new drug molecule, it could fail at any stage. The failure will lead no revenue inflow and the entire R&D expenditure on it would go in vain. Also, change in time lines for the launch of products in any market may impact valuations. Valuations We expect a 15.47% CAGR in Biocon’s consolidated top line and 17.79% CAGR in net profit (after-minority-interest) over FY07-10E. We have not factored in the windfall gain from out-licensing of oral insulin. A SOTP (sum-of-the-parts) valuation works out to Rs 567, fetching 40% return over the current market price of Rs 404. At the target price, the stock would discount its FY10E EPS of Rs 32.74 by 17.32x. The stock currently trades at 12.33x FY10E EPS. We rate the stock an OUTPERFORMER. Sales & EPS trend 0 200 400 600 800 1000 1200 1400 1600 FY07 FY08E FY09E FY10E 0 5 10 15 20 25 30 35 Sales (LHS, Rs crore) EPS (Rs) Stock metrics Promoters holding 60.90 Market Cap (Rs crore) 4300 52 Week H/L (Rs) 663 / 364 Sensex 17594 Average volume 62671 Comparative return metrics Stock return 3 M 6M 12M Biocon 4.94 17.37 45.56 Ranbaxy -12.44 6.34 -14.74 Dr Reddy’s Lab 10.91 -0.26 -17.60 Glenmark 25.91 67.17 90.35 Exhibit 1: Key Financials Year to March 31 FY06 FY07 FY08E* FY09E FY10E Net sales 789.14 985.73 1094.51 1245.66 1517.73 Net Profit 174.00 200.36 214.90 249.61 327.43 Shares in issue (crore) 10 10 10 10 10 EPS (Rs) 17.40 20.04 21.49 24.96 32.74 P/E (x) 23.22 20.16 18.80 16.19 12.34 Price/Book (x) 4.55 3.78 2.72 2.38 2.04 EV/EBIDTA 18.11 14.84 13.85 11.53 8.83 RoNW (%) 19.25% 18.12% 16.26% 16.54% 18.52% RoCE (%) 20.04% 16.19% 13.62% 14.11% 17.28% *FY08E earnings comprise profit on sale of enzyme business, which we we have excluded for calculations Source: Company, ICICIdirect Research Sweet spot on the anvil…

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Page 1: Biocon (BIOCON) Rs 567 - ICICI Directcontent.icicidirect.com/mailimages/Biocon -final.pdf · Biocon India incorporated as 70:30 JV between Indian promoters & Irish company Biocon

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Raghvendra Kumar [email protected]

OUTPERFORMER

Current price Rs 404

Target price Rs 567

Potential upside 40%

Time Frame 12-15 months

Biocon (BIOCON)

Initiating coverage

February 19, 2008| Pharmaceutical

Analyst

ICICIdirect | Equity Research

Price Trend

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Biocon has re-oriented itself by moving out of enzymes to focus on biopharma. The stabilisation of statin (cholesterol-busting drugs) prices in the US is expected to improve its earnings visibility. A takeoff in bio-similar revenue, the likely turnaround in BBPL (a 51% JV), and Clinigene (a 100% subsidiary) in FY10E & FY09E, and ramp-up in Syngene operations are set to reverse the fortunes of Biocon.

Two big triggers barely 12-24 months away Biocon may generate a windfall gain in next 12-24 months via out-licensing of its innovative oral insulin. Further, in a move to unlock value, Biocon plans to list its contract research arm, Syngene, within the next 12- 15 months. Robust growth in biopharmaceuticals revenue over FY07-10E

Despite a flat outlook for statins, we expect a 16.88% CAGR in bio-pharma revenues over FY07-10E to Rs 1173.63 crore on the back of a 26.37% growth in sales of other-than-statin bio-pharma products and 23.31% growth in out-licensing and royalty income. Turnaround in Clinigene and BBPL in FY09E and FY10E

We expect the 100% clinical research arm, Clinigene, and 51:49 joint venture with CIMAB SA Cuba, Biocon Biopharmaceutical Private Ltd (BBPL) to turnaround in FY09E and FY10E, respectively.

Risks to our call Biocon’s innovative oral insulin is entering phase II clinical trials. As a new drug molecule, it could fail at any stage. The failure will lead no revenue inflow and the entire R&D expenditure on it would go in vain. Also, change in time lines for the launch of products in any market may impact valuations. Valuations We expect a 15.47% CAGR in Biocon’s consolidated top line and 17.79% CAGR in net profit (after-minority-interest) over FY07-10E. We have not factored in the windfall gain from out-licensing of oral insulin. A SOTP (sum-of-the-parts) valuation works out to Rs 567, fetching 40% return over the current market price of Rs 404. At the target price, the stock would discount its FY10E EPS of Rs 32.74 by 17.32x. The stock currently trades at 12.33x FY10E EPS. We rate the stock an OUTPERFORMER.

Sales & EPS trend

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FY07 FY08E FY09E FY10E05101520253035

Sales (LHS, Rs crore) EPS (Rs)

Stock metrics

Promoters holding 60.90 Market Cap (Rs crore) 4300 52 Week H/L (Rs) 663 / 364 Sensex 17594 Average volume 62671

Comparative return metrics Stock return 3 M 6M 12M Biocon 4.94 17.37 45.56 Ranbaxy -12.44 6.34 -14.74 Dr Reddy’s Lab 10.91 -0.26 -17.60 Glenmark 25.91 67.17 90.35

Exhibit 1: Key Financials

Year to March 31 FY06 FY07 FY08E* FY09E FY10E

Net sales 789.14 985.73 1094.51 1245.66 1517.73 Net Profit 174.00 200.36 214.90 249.61 327.43 Shares in issue (crore) 10 10 10 10 10 EPS (Rs) 17.40 20.04 21.49 24.96 32.74 P/E (x) 23.22 20.16 18.80 16.19 12.34 Price/Book (x) 4.55 3.78 2.72 2.38 2.04 EV/EBIDTA 18.11 14.84 13.85 11.53 8.83 RoNW (%) 19.25% 18.12% 16.26% 16.54% 18.52% RoCE (%) 20.04% 16.19% 13.62% 14.11% 17.28% *FY08E earnings comprise profit on sale of enzyme business, which we we have excluded for calculations Source: Company, ICICIdirect Research

Sweet spot on the anvil…

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INDEX OF CONTENT Particular Page No Company Background 3 The evolution 3 The transformation 3 Current status 3 Manufacturing capability 5 Investment Rationale 7 Big Triggers hardly 12-24 months away 7 Windfall gain from out-licensing of oral insulin 8 Value unlocking through listing of CRO business 8 Growth engine on a roll - Biopharmaceuticals 9 Strong discovery pipeline – a goldmine for future 9 Faster growth in formulation revenue 9 Launch of insulin & GCSF in regulated markets: key growth driver 10 Immunosuppressant: Long-term strategy to enter regulated markets 11 Immunosuppressants & insulin to become largest revenue contributors 12 Monoclonal antibody Biomab EGFR likely to grow at 75% 12 Launching Abraxane in Q1FY09 13 Double digit growth in out-licensing revenue 13 CRO Business: DNA of EPS growth 15 Syngene: the top-line mover of CRO business 15 Clinigene: Likely to turnaround in FY09E 16 BBPL: Dark horse 17 Financial 18 Revenue mix is changing 18 Consolidated revenue to rise at 15.5% 19 Margin likely to improve FY10E onwards 20 Capital cost to keep pressure on net margin till FY10E 21 Substantial cash generation to induce inorganic growth 22 Improving return ratios 23 Return on invested capital shows a rising trend 24 Net profit is likely to see good growth in FY10E 25 Risks & Concerns 26 Valuations 27 Valuation band indicate imminent re-rating 27 SOTP Valuation 27 Manufacturing business (DCF Valuation) 28 CRO business (P/E Valuations) 28 Annexure 1: Statins 32 Annexure 2: Immunosuppressants 35 Annexure 3: BIOMAb EGFR 36 Annexure 4: Acquisition of Germany-based AxiCorp 38

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COMPANY BACKGROUND Biocon was incorporated in 1978 to manufacture select enzymes for the breweries industry. In 1999, the company began its transformation to an innovation-led biopharmaceuticals company. The evolution … In 1978, Biocon was promoted as a 70:30 joint venture (JV) between Indian promoters (70% stake) and an Ireland-based Biocon Biochemicals (30% stake) to manufacture and export few enzymes for breweries. In 1995, Unilever acquired Biocon Biochemical’s stake in the JV and merged with Quest, Unilever’s Food & Breweries subsidiary. Biocon was to supply enzymes to Quest of international standards. This led Biocon to invest heavily in creating world-class fermentation assets, which it exploited later to make a foray in the fermentation-based pharmaceutical products. In 1999, Unilever sold Quest to ICI. As Quest had 23% stake in Biocon, this was also up for transfer. At this point in time, Indian promoters used their first right of refusal and bought Quest’s 23% stake, which led to a 100% holding of the Indian promoters in the company. …the transformation Post acquisition, the company moved from enzymes to fermentation-based pharmaceutical (Bio-pharma) products, which has now become the mainstay of Biocon. Biopharmaceutical business took off with identification and production of APIs (active pharmaceutical ingredients), which required advanced fermentation and had significant market potential in the regulated markets. The company started with statins and evolved as a significant player in statins API globally including regulated markets. Simultaneously, the company also started contract and clinical research services. Looking at the significant pricing pressure on statins during 2004-05, the company diversified to other products including insulin, immunosuppressant and bio-similars and launched Insugen, its brand of recombinant human insulin for diabetes in the Indian market. In a major breakthrough, under partnership with CIMAB, Cuba, the company launched a novel cancer drug, Biomab EGFR in September 2006. In 2006, the company bought the assets of Nobex IP, which boosted its patent assets greatly. Current status Biocon is now focused on its biopharma verticals that include APIs, biologicals and proprietary molecules both commercialized and under development. Currently, the company is a fully vertically-integrated biotech company with innovative research to commercialization. The interesting part is that Biocon has worked for each level of drug life cycle. While Biocon houses the biopharmaceutical manufacturing, its 100% subsidiary, Syngene, provides contract research for the molecules in pre-clinical stage and Clinigene, another 100% subsidiary, provides clinical research for the molecules aspiring to get commercialized. Its 51:49 JV with CIMAB, Cuba provides manufacturing services for the Biomab EGFR to Biocon.

Share holding pattern Shareholder % holding Promoters 60.90 Institutional investors 16.61 Other investors 7.85 General public 14.64 Promoter & Institutional holding trend (%)

60.9 60.9 60.9 60.9

10.8 7.2 6.8 7.3

0

20

40

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Q3FY07 Q4FY07 Q1FY08 Q2FY08

Promoters FII

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Exhibit 2: Biocon’s business model * In FY07, the company has included the licensing income in contract research but we have taken

it into the Biopharma segment as the income relates to Biopharma

Exhibit 3: Biocon’s corporate structure

51% 100% 100%

22% 17% 61%

BIOCON

Syngene

Clinigene

BBPL

Promoters

Institutions

Public & others

Biocon (FY07 sales of Rs 986 crore)

Biopharma Rs 755 crore

Enzyme Rs 95 crore

Contract research (CRO) Rs 136 crore*

Statins Immunosuppressants Insulin Streptokinase EPO GCSF BIOMAb EGFR (Monoclonal antibody) Novel products Licensing income

Sold

Syngene (Contract research)

Clinigene (Clinical research)

BBPL (Manufacturing of

Biomab EGFR)

Likely listing in 12-15 months

Likely turnaround in FY09E

Likely turnaround in FY10E

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Exhibit 4: Biocon’s fully integrated business model Source: Company

In the current revenue model of FY07, biopharmaceuticals (statins, GCSF, immunosuppressant, Out-licensing income, etc. are clubbed in biopharmaceuticals revenue) accounted for 74% of revenue while the contract research 16.54% and enzymes contributed 16.54% and 10% respectively. The clinical research arm generated miniscule revenue while the 51:49 JV, Biocon Biopharmaceutical Pvt Ltd started operations this year only. Manufacturing capabilities In 2006, the company established Biocon Park, India’s largest integrated biotech hub spread over a 90 acre of land, in a SEZ (special economic zone). The company has built additional capacity by commissioning the multi-product microbial fermentation and synthetic conversion facilities at Biocon Park. These facilities were inspected and approved by the US FDA.

Library Screening

Lead molecule optimization

Preclinical studies

Human clinical trials

Process scale-up

Regulatory approvals

Marketing & sales

DISCOVERY RESEARCH • FTE (No IP) • Projects (Royalties &

Milestones) • Partnering (Shared IP)

CLINICAL DEVELOPMENT • Clinical program for

in-house products • Clinical registries • CRO

COMMERCIALIZATION • Process development • Manufacturing • Regulatory filing • Marketing

SYNGENE CLINIGENE BIOCON

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Exhibit 5: Biocon’s major milestones

Source: Company

2006

2003

2002

2001

2000

1998

1997

1996

1994

1993

1990

1989

1978

Biocon India incorporated as 70:30 JV between Indian promoters & Irish company Biocon Biochemicals

Unilever acquires Biocon Biochemicals and merged with Quest International

The company scales up its in-house research program based on a proprietary solid substrate fermentation technology from pilot to plant level

Biocon’s R&D and manufacturing facilities receive ISO 9001 certification

Biocon India sets up Syngene International as a CRO (Contract Research Organisation)

Biocon spearheads initiatives in human healthcare through dedicated manufacturing facility

Commercial success of Biocon proprietary fermentation plant leads to a 3 fold expansion in capacity

Unilever inks a deal with ICI to sell its specialty chemicals business of which Quest is a part. Unilever agrees to sell its stake in Biocon to Indian promoters and Biocon India becomes independent company.

Biocon commissioned its first submerged fermentation plant & Clinigene international was set to pursue clinical trials business

US FDA approves Biocon’s facility to manufacture Lovastatin Biocon’s proprietary bioreactor granted US patent

Clinigene became the first Indian company to get CAP accreditation

Biocon launched monoclonal anti-body, new plant in SEZ commissioned and bought various IPs from Nobex

Biocon aims to develop Human insulin and monoclonal anti-body

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INVESTMENT RATIONALE Biocon is emerging as a biopharmaceutical major in India with a strong focus on innovation in niche areas of oncology, diabetes, cardiovascular. The commercialization of discovery-led Biomab EGFR for head and neck cancer and strong focus on discovery-led biotechnology assets such as non-injectable (oral) insulin differentiate it from its Indian peers. The business model based on discovery focus entails higher risk and long gestation, however the revenue generation and margins are phenomenal. Moreover, Biocon is moving up the value chain to include formulations in its product basket. Increasing proportion of formulations in the product mix and increased revenue flow on account of licensing in coming years makes us optimistic.

Big triggers: Barely 12-24 months away

Biocon could generate windfall gains in next 12-24 months through the out-licensing of its innovative oral insulin. Further, in a bid to unlock value, it plans to list its contract research arm, Syngene, in the next 12- 15 months. These events are expected to trigger a re-rating on the counter.

I) Windfall gains from out-licensing of oral insulin Biocon is working on a non-injectable oral insulin, which has a potential to become a blockbuster drug. According to estimates, the potential market size of oral insulin is US$1-3 billion. The company plans to out-license oral insulin to other companies for further investigation and commercialization in certain geographies in return for a fee and royalty on commercialization after the proof-of-concept phase of clinical trials (phase II clinical trial). The molecule is entering phase II trials now, which may take 15 to 24 months. Biocon may generate windfall revenues through this out-licensing. We have assumed the deal size to be between US$100 to 300 million with upfront payment in the range of 10 % to 25% and have worked out the EPS sensitivity (Exhibit 6). The out-licensing deal may happen any time either during FY09E or FY10E. We have constructed two matrices, one for FY09E EPS sensitivity, and the second for FY10E EPS

Exhibit 6: FY09E EPS sensitivity to out-licensing deal (Rs) Upfront payment 10% 15% 20% 25% Current FY09E EPS (without licensing revenue) 24.96 24.96 24.96 24.96 Out-licensing deal size (US$, Million) 300 34.91 39.88 44.85 49.82 250 33.25 37.39 41.54 45.68 200 31.59 34.91 38.22 41.54 150 29.93 32.42 34.91 37.39 100 28.28 29.93 31.59 33.25

Source: ICICIdirect Research

Oral insulin out-licensing and listing of Syngene are two big triggers for Biocon

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If the out-licensing deal happens in FY10E, the upfront payment would impact the FY10E EPS as follows.

Exhibit 7: FY10E EPS sensitivity to out-licensing deal (Rs) Upfront payment 10% 15% 20% 25% Current FY10E EPS (without licensing revenue) 32.74 32.74 32.74 32.74 Out-licensing deal size (US$, Million) 300 42.69 47.66 52.63 57.61 250 41.03 45.17 49.32 53.46 200 39.37 42.69 46.00 49.32 150 37.72 40.20 42.69 45.17 100 36.06 37.72 39.37 41.03

Source: ICICIdirect Research

II) Value unlocking through listing of CRO business In order to unlock value, Biocon plans to list its contract research business in coming 12 to 15 months. We believe that the contract research business of Biocon would command better valuations after the imminent IPO (initial public offer) of TCG Lifesciences. TCG Lifesciences has filed draft red herring prospectus with SEBI in October 2007 and we expect the IPO to come in next few months. The listing could act as a benchmark valuation for the CRO business of Biocon.

We expect a 29% CAGR in top line of Biocon’s CRO business over FY07-10E to Rs 308 crore, while net profit would witness a 33% CAGR to Rs 106.10 crore. We expect a handsome ramp up in Syngene operations on the back of Bristol Myers Squibb (BMS) deal and turnaround in the operations of Clinigene.

Exhibit 8: Valuation of CRO business via P/E (x) based on FY10E EPS EV to EBIDTA (x) 20 18 15 12 EBIDTA of CRO Business in 2010E 136.28 136.28 136.28 136.28 EV (Rs crore) 2725.52 2452.97 2044.14 1635.31 Debt 0 0 0 0 Cash 0 0 0 0 Market capitalization (Rs crore) 2725.52 2452.97 2044.14 1635.31 Value per share of Biocon (Rs) 272.55 245.30 204.41 163.53

Source: ICICIdirect Research

Exhibit 9: Valuation of CRO business via P/E (x) based on FY10E EPS

Net profit of CRO business in 2010E (Rs crore) 106.10 106.10 106.10 106.10 PE (x) 30 25 20 15 Market cap (Rs crore) 3182.86 2652.39 2121.91 1591.43 Value per share of Biocon (Rs) 318.29 265.24 212.19 159.14

Source: ICICIdirect Research

Listing of TCG Lifesciences could trigger re-rating of Biocon’s CRO business

We have valued the business at 20x FY10E EPS

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GROWTH ENGINE ON A ROLL - BIOPHARMACEUTICALS

Strong discovery pipeline – a goldmine for future Biocon differentiates itself from most of its peers by virtue of its focus on discovery research and commercialization of one of its discovery research product in the market. In the discovery pipeline, the company has few exciting products such as non-injectable (oral) insulin, which targets the potential global market size of US$1-3 billion. Non-injectable (oral) insulin is likely to enter the phase II of clinical trials (proof-of-concept level) in March 2008 after which the company plans to out-license it. Out-licensing may generate windfall revenue to the company. Besides discovery research, the company also works on bio-similars in innovating new processes. In this category also the company has created a rich library of IP (intellectual property) assets, the monetization of which would generate handsome revenues. The company has rich library of novel as well as generics in the pipeline (Exhibit: 10).

Exhibit 10: Robust discovery pipe-line

Novel Drug Pre-clinical Phase I Phase II Phase III Commercialization IN-105 Diabetes Oral BNP Cardiovascular BVX 10 Inflammation BVX 20 Oncology T1h Oncology Inflammation Biomab EGFR Oncology Generics GCSF Oncology Streptokinase Cardiovascular Reteplase Cardiovascular Insulin Glargine Diabetes hGH Endocrinology

Source: Company, ICICIdirect Research

From the above pipeline of novel and generics biopharma molecules, the company plans to out-license IN 105, which falls in the diabetes segment. The molecule is likely to enter the 2nd phase of clinical trials and can be out-licensed to generate windfall revenues.

Faster growth in formulations revenue We expect revenue growth in biopharmaceuticals, the largest revenue grosser, to pick up now. We expect a 16.88% CAGR in biopharmaceutical revenues to Rs 1173.63 crore over FY07-10E on the back of (I) growth in formulation revenue in the subsequent years of launch, (II) entry into regulated markets with immunosuppressants after patent expiry, (III) double digit growth in licensing and royalty income (IV) start of marketing of Abraxane from Q1FY09E and (V) commissioning of large capacity in the H2FY07. While we expect flat sales growth in statins due to pricing pressure, other products in the biopharmaceutical space are likely to grow strongly at 26.37% CAGR over FY07-10E.

Revenue from core business of Biocon, Biopharmaceuticals, has an outlook to grow at a CAGR of more than 16.88% over FY07-10E

Strong discovery pipe-line lends Biocon a strength, which it can utilize to phase out the vagaries in the current business

Out-licensing of IN 105 may generate windfall revenue

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We expect formulations revenue to grow at a faster pace vis-à-vis the API revenue as the formulations would be entering the growth curve after launch. New products such as novel cancer drug Biomab EGFR (launched in September 2006), immunosuppressants (launched in March 2007) and GCSF would be entering the second year of launch and are likely to see good growth. The management has indicated that the formulations contribution to the total biopharmaceuticals revenue is expected to increase to 35% in next 3-4 years from the current 6% on the back of the company’s entry into regulated markets and new launches get matured.

Exhibit 11: Potential market for major products Product Current markets Market potential Form of marketing Immunosuppressant India, GCC and other neighboring countries Rs 200 crore Both API & formulation Insulin India, GCC, Other neighboring countries, North African

countries, Latin America Over Rs 200 crore Both API & formulation Streptokinase India & other neighboring countries Rs 100 crore Formulation GCSF India, GCC & other neighboring countries Rs 100 crore Formulation

Source: Company, ICICIdirect Research

Launch of insulin and GCSF in regulated markets: Key growth driver We believe that recombinant DNA insulin would become the largest value driver for Biocon for the next few years. The strategy of the company is to grow via generics (injectable insulin) in the short to medium-term and launch its patent protected oral insulin in the long run. We expect the injectable insulin revenue growth to pick up now on launch of the insulin in the Chinese market by its licensing partner, Bayer, in FY09E. We expect supplies to the Chinese market would increase the penetration of Biocon to the overall unregulated countries’ market size of around US$2 billion. We expect supplies to regulated markets to start from FY10E (the drug is likely to be launched in the US and Canada in FY10 by its licensing partner). FY10E would be a key insulin revenue-driving year for the company. Moreover, Biocon also signed an agreement with Invitrogen for supplying its high quality insulin for cell culture on a global basis, which is a very attractive business.

Biocon launched GCSF in the domestic market in FY08 and out-licensed it to Abrexis for the US and EU markets. Abrexis is likely to start marketing GCSF in these markets from 2011.

In the short to medium term it plans to enter new geographies with generics insulin and launch patented oral insulin in the long-term.

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Immunosuppressant: Long-term strategy to enter regulated markets In our view, the medium to long-term revenue outlook for Biocon from this segment is much brighter than in the short-term. The company is likely to enter the regulated markets only in the medium to long term after patents for different immunosuppressants expire, starting from the end of the current calendar year. The company has already filed DMFs for immunosuppressants and has approvals in place. Immunosuppressant is a fast growing class of nephrology drugs, where the competition is lower due to complexity in manufacturing. In the domestic market, Biocon is the largest manufacturer of immunosuppressants. The company is targeting a 25% market share in the domestic market from immunosuppressants in next five years. The current size of the domestic markets for Immunosuppressants is estimated at around Rs 125 crore (total market for nephrology products in India is estimated at Rs 300 crore) which is likely to witness a 26% CAGR. To capture the growth in the segment, the company launched a division focusing on nephrology drugs in March 2007 in domestic market. Immunosuppressants are used in nephrology ailments. We expect the company to achieve the target market share as Biocon provides competitive quality immunosuppressant products at 35 – 40% cheaper price than the existing drugs in the market. The global market for nephrology products is estimated at US $3.3 billion. The company is currently marketing its product in India, the GCC (Gulf Cooperation Council) region and neighboring countries. The company has plans to enter the regulated markets but that will happen once the products are off patent. Most of the immunosuppressants are currently on-patent and are slated to go off patent during 2008-10. Exhibit 12: Immunosuppressants market potential & patent expiry

Product Patent expiry Global Market size Biocon's DMF Status Tacrolimus 2008 end US$1.50bn Approved Sirolimus 2010 US$0.28bn Not filed so far Mycophenolate Mofetil 2009 US$1.37bn Approved Mycophenolic Acid US$0.92bn Approved

Source: Company, ICICIdirect Research

Biocon is the largest player in immunosuppressants market and is targeting 25% market share in 5 years, which is growing at a CAGR of 26%

Biocon’s long-term strategy in immunosuppressants is to enter regulated market on patent expiries

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Immunosuppressant and insulin to become largest revenue contributors Currently, immunosuppressants and insulin contribute around 25% of the biopharmaceutical revenue. We expect this segment to grow at a CAGR of around 25% over FY07-10E to Rs 400 crore, accounting for around 34% of biopharmaceuticals revenue. Exhibit 13: Revenues in immunosuppressant and insulin (Rs Crore)

0

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450

FY07 FY08E FY09E FY10E

Source: Company, ICICIdirect Research

Monoclonal antibody Biomab EGFR likely to grow at 69% The monoclonal antibody Biomab EGFR, which is Biocon’s proprietary product, is likely to grow at a CAGR of 69% over FY07-10E on a lower base. The company launched the product in September 2006, and in the first year of launch the product generated Rs 20 crore in revenue. Monoclonal antibody falls under oncology segment. Globally this product has a 30% CAGR. We are expecting higher sales as the product is in initial years of launch in India and would be launched in other geographies in neighbouring countries. Exhibit 14: Biomab EGFR to grow at a 69% CAGR (revenue in Rs crore)

0

10

20

30

40

50

60

FY07 FY08E FY09E FY10E

Source: Company, ICICIdirect Research

Biocon’s monoclonal anti-body, Biomab EGFR is likely to grow at a CAGR of 69%

Immunosuppressants and insulin are likely to account for the highest revenue contributor by FY10E

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Launching Abraxane in Q1FY09 In July 2007, Biocon signed an in-licensing agreement with Abraxis BioScience, US, for the commercialization of Abraxane in India, Pakistan, Bangladesh, Sri Lanka, UAE, Saudi Arabia, Kuwait, and countries in the Gulf. In this in-licensing agreement, Biocon will pay royalties to Abraxis based on the Abraxane sales. Abraxane is a breast cancer drug and Biocon targets a market potential of Rs 25 crore from the geographies where the company has marketing license. Double-digit growth in licensing income Biocon out-licensed GCSF to Abraxis Bioscience for the US and EU markets. As part of this deal, Biocon received upfront payments and will receive milestones based on the progress of product registration in regulated markets. In FY07, the company received Rs 27 crore from out-licensing of insulin rights for six markets including US. This further validates effectiveness of Biocon’s strategy to generate significant licensing income through monetization of IP assets. The management has indicated a similar y-o-y growth in the out-licensing income based on milestone payments. We expect the out-licensing revenue of Biocon to grow at a CAGR of 23% over FY07-10E to Rs 51 crore. Commissioning of new facility Biocon commissioned its new facility in the Biocon Park, which would lead the revenue to grow faster. After commissioning of the facility the capacity of Biocon would improve multifold.

Revenue generation through monetization of IP assets is becoming key strategy of Biocon to finance the rising R&D cost

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Exhibit 15: Assumptions for revenue model Biopharmaceuticals

FY07 FY08E FY09E FY10E

Sales from Biopharma segment (Rs crore) 735.02 813.81 970.12 1157.63 Growth 21.99% 10.72% 19.21% 19.33% Statins (Rs crore) 316.06 316.06 316.06 316.06 % of Biopharma sales 43.00% 38.84% 32.58% 27.30% Growth expected 0.00% 0.00% 0.00% Immunosuppressants & insulin (Rs crore) 205.81 236.68 307.68 399.98 % of Biopharma sales 28.00% 29.08% 31.72% 34.55% Growth expected 15.00% 30.00% 30.00% Other Biopharma (includes Bio-similar) (Rs crore) 176.16 202.58 263.35 342.36 % of Biopharma sales 23.97% 24.89% 27.15% 29.57% Growth expected 15.00% 30.00% 30.00% Biomab EGFR (Rs crore) 10.00 18.00 32.40 48.60 % of Biopharma sales 1.36% 2.21% 3.34% 4.20% Growth expected 80.00% 80.00% 50.00% Out licensing income (Rs crore) 27.00 40.50 50.63 50.63 % of sales 3.67% 4.98% 5.22% 4.37% Growth expected 50.00% 25.00% 0.00%

Source: Company, ICICIdirect Research Enzymes (Divested)

FY07 FY08E* FY09E FY10E

Enzymes (Rs crore) 95 46 0 0 % of sales 9.57% 4.02% 0.00% 0.00% Growth expected 11.76% -51.58% 0.00% 0.00%

Source: Company, ICICIdirect Research *FY08E onwards the company would receive Rs 14.63 crore in FY08E, Rs 25 crore in FY09E and Rs 16 crore in FY10E by leasing out the Enzymes facility to Novozymes Contract & Clinical research

FY07 FY08E FY09E FY10E

Syngene (Rs crore) 134.63 165.33 198.55 267.60 % of sales 13.56% 14.45% 15.15% 16.66% Growth expected 39.42% 22.80% 20.09% 34.78% Clinigene (Rs crore) 9.00 18.00 27.00 40.50 % of sales 0.92% 1.69% 2.19% 2.66% Growth expected 100.00% 50.00% 50.00%

Source: Company, ICICIdirect Research BBPL (51:49 JV for manufacturing Biomab EGFR)*

FY07 FY08E FY09E FY10E BBPL (Rs crore) 1.15 7.98 14.37 41.56 % of sales 0.12% 0.75% 1.16% 2.73% Growth expected 597.36% 80.00% 189.15%

Source: Company, ICICIdirect Research *BBPL’s revenue includes the sales of manufactured Biomab to Biocon, which is adjusted in the consolidated sales of the company

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CRO business: Fulcrum of growth We expect the CRO business to contribute around 20% to consolidated revenue in FY10E, but the bottom-line contribution is likely to be around one-third. The high-margin CRO business is gradually gathering lot of significance in Biocon’s overall business as top line growth has a multiplier effect on the bottom line. In CRO operations, the company provides end-to-end services in drug discovery exercise, from pre-clinical stage to clinical trials. Syngene provides contract research for the molecules in pre-clinical stage and Clinigene provides clinical research services. The combined top line of Syngene and Clinigene is likely to see a 29% CAGR over FY07-10E to Rs 308 crore, while the combined bottom line is set to witness a CAGR of 33% to Rs 106.10 crore through FY10E.

Syngene: To contribute around 1/3rd of bottom-line We believe BMS (Bristol Myers Squibb) deal would be the main growth driver in the medium term. However, the long term growth would depend upon the regular ramp up in number of scientists. Under the BMS deal, the company would be employing 400 scientists. Currently the company has strength of 800 scientists, which the company would be ramping up to 1200 in next two years (addition of 400 scientists under BMS deal). From Q1CY09, the company would employ 250 scientists, while another 150 would be added in Q1CY10. We expect Syngene’s operating revenue to grow at a CAGR of 29% over FY06-10E to Rs 267.60 crore, while bottom line is likely to increase at a CAGR of over 42% to Rs 96.85 crore over this period.

Exhibit 16: Robust revenue growth estimates (Rs crore)

0

50

100

150

200

250

300

FY06 FY07 FY08E FY09E FY10E

Revenue PAT

Source: Company, ICICIdirect Research

We see a robust ramp up in the CRO business revenue.

Syngene is the principle CRO delivery channel and crucial for Biocon’s CRO revenue growth

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Clinigene: Likely turnaround in FY09E We expect Biocon’s clinical research business to turnaround in FY09. This business has higher proportion of fixed cost, which allows it to turn around the operations with increase in volume of business. We expect a good ramp up in Clinigene operations and the top-line to move up at a steady growth rate. Top line of Clinigene is likely to grow at a CAGR of 65% over FY07-10E to Rs 40.50 crore in FY10E. We expect the bottom line to follow the top line movement at turn black in FY09E. We expect the bottom-line of Rs 3.33 crore in FY09E. In FY10E, we expect the bottom-line to be Rs 8.95 crore.

Exhibit 17: Turning around in FY09E (Rs crore)

0

5

10

15

20

25

30

35

40

45

Mar '06 Mar '07 Mar '08E Mar '09E Mar '10E

-8

-6

-4

-2

0

2

4

6

8

10

Sales (LHS) Net Profit (RHS)

Source: Company, ICICIdirect Research

Clinigene is likely to turnaround in FY09E

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BBPL: Dark horse Biocon Biopharmaceuticals Private Limited (BBPL) is 51:49 JV between Biocon and CIMAB of Cuba, in which Biocon holds 51% stake. BBPL has a right to manufacture Biomab EGFR for other geographies also. The company is currently supplying to only Biocon for India and neighbouring countries. The company is likely to start supplies to European Union from FY10E (CY09), and US and Japan from FY11E. Revenue from EU is likely to be Rs 20 crore while that from the US and Japan is likely to be Rs 70 crore. Being a proprietary product the variable production cost of Biomab EGFR is very low while most of the costs are fixed in nature. With increase in sales we expect the margins to improve substantially. We expect the JV to make losses till FY09 and turnaround in FY10E with a profit of Rs 9.15 crore on sales of Rs 41.56 crore in FY10E.

Exhibit 18: BBPL to turn to black (Rs Crore)

0

5

10

15

20

25

30

35

40

45

FY07 FY08E FY09E FY10E

-20

-15

-10

-5

0

5

10

15

Revenue (LHS) Net Profit (RHS)

Source: Company, ICICIdirect Research

BBPL is likely to emerge as a significant earning driver in FY10E

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FINANCIALS Biocon has just completed a huge capex where it increased its capacity multifold. We believe the company would reap the benefit from these expansions in the years to come. We expect top-line of the company to rise at a 15.47% CAGR over FY07-10E largely on the back of improvement in formulation revenue and monetization of IP assets. However, the concerns such as higher depreciation cost due to initial years of commercialization of large expansion, higher R&D cost on oral insulin in phase II of clinical trials, increased selling expenditure on formulations and rising tax expenditure after FY09E due one of its plant exiting EOU (export-oriented unit) status, are there, we expect the operating and net margins to improve over FY07-10E. Margins are likely to improve on account of rise in such revenues (out-licensing revenue, leasing revenue), which does not require large recurring expenditure. We expect the bottom-line of Biocon to grow at a robust CAGR of 17.79% over FY07-10E. Revenue mix is enriched Biocon sold its enzymes business in the H1FY08. Despite that we expect sales growth momentum to continue as the company is likely to start earning revenue from new geographies, other revenue stream such as lease income on account of leasing out of the facility related enzymes business to Novozymes A/S, the company which bought the enzymes business of Biocon. Post the sell-off, Biocon is likely to start revenues from new streams such as its licensing partner in China is likely to launch Insugen in Chinese market in FY09E, Biocon is likely to launch the in-licensed cancer drug Abraxane in Indian markets in FY09E. BBPL is likely to start adding meaningful revenue to the consolidated P&L from FY10E. Moreover, Syngene would start generating revenue from the BMS deal from FY09E. In addition, the company is set to generate more revenues through monetization of IP assets to fund its increased R&D expenses on its discovery pipe line advancing to higher stages of investigation.

Exhibit 19: Revenue mix in FY07 (Total Revenue: Rs 985.73 crore)

Biopharma, 73%

Out-licensing revenue, 3%

Enzyme, 10%

Contract research, 14%

Clinigene, 1%

Source: Company, ICICIdirect Research

Rise in formulation and R&D income is likely to change the product mix of the company

In FY07, Enzymes contributed 10% while contract research and out-licensing revenue stood at 14% & 3% respectively

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Exhibit 20: Revenue mix in FY10E (Total Revenue: Rs 1517.73 crore)

Clinigene, 3%

Contract research, 18%

Biopharma, 73%

Out-licensing revenue, 3%

BBPL, 3%

Source: Company, ICICIdirect Research

Rising revenue from CRO business, out-licensing business (monetization of IP assets) and BBPL suggests that the high-margin business revenue contribution is increasing.

Consolidated revenue to rise at 15.5% We believe that the consolidated revenue of the company would rise despite the non-existence of enzymes’ revenue. The overall revenue growth is likely to be on account of higher revenue growth in CRO business (Syngene and Clinigene), revenue contribution from BBPL, revenue from new streams and an increase in the formulations revenue in biopharmaceuticals space.

Exhibit 21: Robust revenue growth (Rs crore)

0

200

400

600

800

1000

1200

1400

1600

Mar ' 04 Mar ' 05 Mar '06 Mar '07 Mar '08E Mar '09E Mar '10E

Source: Company, ICICIdirect Research

Despite zero enzymes revenue, we expect the consolidated revenue to grow at 15.47% with changing product mix

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Margins likely to improve FY09E onwards We expect the margin pressure to ease FY09E onwards as the R&D and selling expenditures as a percent of revenue will decline on account on growth in revenue. Moreover, the power & fuel expense (as % of top-line) is also likely to decline. Moreover, we expect a good ramp up in better margin CRO business, BBPL and formulations.

Exhibit 22: Margins are likely to increase FY09E onwards

26%

26%

27%

27%

28%

28%

29%

29%

30%

30%

31%

Mar '07 Mar '08E Mar '09E Mar '10E

Source: Company, ICICIdirect Research

Exhibit 23: Higher contribution from better margin businesses

0%2%4%6%8%

10%12%14%16%18%

FY07 FY08E FY09E FY10E

Contract research Clinigene BBPL

Source: Company, ICICIdirect Research

We believe operating margin would remain under pressure in FY08E & FY09E due to increase in R&D and selling expenditure. As the company is working on Biomab EGFR to investigate whether the drug works for other cancers and the oral insulin (IN 105) of the company is entering the phase II clinical trials in India and ongoing Phase I trials in Sweden, we expect that the R&D expenditure would continue to rise over FY08E-10E. We expect the R&D expenditure to be in the range of 5-6% of revenue as compared to historical

Operating margin to improve by 300bps from FY08E levels

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levels of around 3% of revenue. Moreover, rising formulation revenue is likely to continue to push the selling expenses. The rise in R&D and selling expenditure is likely to keep pressure on the operating margin.

Exhibit 24: R&D expenditure to remain high (Rs crore)

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30

40

50

60

70

80

90

Mar '07 Mar '08E Mar '09E Mar '10E

0%

1%

2%

3%

4%

5%

6%

7%

R&D Expenditure R&D cost as % of sales

Source: Company, ICICIdirect Research

Exhibit 25: Selling expenses rising with increasing formulation sales (Rs crore)

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10

15

20

25

30

35

40

45

Mar '07 Mar '08E Mar '09E Mar '10E

0%

1%

1%

2%

2%

3%

3%

4%

Selling expenses Selling expenses as % of sales

Source: Company, ICICIdirect Research

Capital cost likely to keep pressure on net margin The higher capital cost is likely keep pressure on net margin. The company commercialized a new plant built on an investment of around Rs 500 crore, the depreciation cost is likely to remain high. Moreover, the tax expenses are likely to zoom in the FY10E as one of the plants is getting out of the EOU status and the tax rate is likely to increase FY10E onwards. Rising other income is likely to subdue the pressure.

We expect the R&D cost of the company to increase with the molecules advancing the stages of investigation

Increase in proportion of formulation in the product mix to push up selling expenses

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Exhibit 26: Below the line expenses likely to put pressure on NPM (%)

18%

20%

22%

24%

26%

28%

30%

32%

Mar '06 Mar '07 Mar '08E Mar '09E Mar '10E

OPM (%) NPM (%)

Source: Company, ICICIdirect Research

Healthy cash generation provides fillip for inorganic growth Healthy cash generation from operations provides fillip to follow an inorganic growth avenue. We expect traction in operations and higher depreciation is would generate substantial cash from operations. Moreover, the recent sell-off of enzymes business to Novozymes for US$115 million adds substantially to the cash. We expect cash and cash equivalents to be ~Rs 770 crore. Huge cash balance in the books gives the company the flexibility to adopt inorganic route of growth aggressively.

Exhibit 27: Substantial cash generation from operations, sell-off of enzymes business

184252

526

322

409

112 103

480

276

356

99153

361

458

770

0

100

200

300

400

500

600

700

800

900

2006 2007 2008E 2009E 2010E

Cash profit Cash Flow after changes in Working Capital Cash & cash equivalent

Source: Company & ICICIdirect Research

Note: We have not taken into account the recent AxiCorp acquisition in calculating cash balance

All the businesses are likely to through cash from FY07 onwards

Sale of enzymes business improves cash position substantially

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Return ratios to recover FY09E onwards We expect return on net worth (RoNW) excluding inflow from sale of enzyme business, to improve from 18.12% in FY07 to 18.40% in FY10E. However, in FY08E & FY09E, RoNW may see a decline by 80bps and 72 bps year-on-year, respectively, due to lower bottom-line growth on account of lower asset utilization and debt repayment. We expect asset utilization to improve in FY10E but on lower leverage.

Exhibit 28: Dupont ratio analysis for RoNW Mar '07 Mar '08E Mar '09E Mar '10E PAT/PBT 92.00% 94.63% 91.19% 90.00% PBT/PBIT 95.58% 96.41% 97.17% 97.83% PBIT/Sales 22.34% 21.24% 21.69% 24.12% Sales/Assets 72.20% 75.40% 74.80% 77.68% Assets/Net worth 1.28 1.15 1.13 1.12 Return on net worth (RoNW) 18.12% 16.84% 16.29% 18.40%

Source: Company & ICICIdirect Research

Our Dupont ratio analysis indicates that the overall tax rate would go up in FY09E and FY10E as one of Biocon’s plants would lose its EOU (Export Oriented Unit) status leading to an increase in overall tax rate. During FY08E to FY10E, we expect the interest cost as a percent of PBIT to decline on account of better utilization of borrowed fund and increase in revenue from BBPL. Improvement in RoNW is also due to improvement in margins from 21% in FY08E to 24% in FY10E as Clinigene and BBPL are expected to contribute to nearly 1/3rd of the overall profit of the company. Almost 50% expected y-o-y rise in profits on the back of turnaround in Clinigene and good bottom-line contribution by BBPL in FY10E is likely to lead the RoNW to improve to 18.40% in FY10E.

Exhibit 29: Return ratios on strong footing after midterm hiccups

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

Mar '06 Mar '07 Mar '08E Mar '09E Mar '10E

RONW ROCE

Source: Company, ICICIdirect Research

Return ratios are increasing

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Return on invested capital (ROIC) shows a rising trend With rising profits and balance sheet expansion (largely led by cash), we expect the return on invested capital to expand substantially. We expect the ROIC to expand from 22% in FY07 to 28% in FY10E.

Exhibit 30: Rising trend in the ROIC shows better utilization of investment made in the business

15%

17%

19%

21%

23%

25%

27%

29%

1 2 3 4 5 6

Source: Company, ICICIdirect Research

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Net profit is likely to see good growth in FY10E We expect the net profit growth of the company to increase by over 63% during next two years. However, the net profit is likely to remain subdued in FY08E & FY09E as most of the investments in the subsidiaries and joint ventures would start adding meaningfully to the bottom-line only from FY10E. The JV BBPL will yield good revenue and profit growth in FY10E, when it is likely to start supplies to European Union. We expect all the segment of Biocon’s business to turn profitable with good contribution to the bottom-line

Exhibit 31: Rising trend in the ROIC shows better utilization of investment made in the business

-50

0

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100

150

200

250

300

350

Mar '06 Mar '07 Mar '08E Mar '09E Mar '10E

Consolidated net profit after minority interest Clinigene net profit

Syngene net profit BBPL net profit (Biocon's share)

Source: Company, ICICIdirect Research

Improvement in fundamentals We expect the balance sheet size of the company to continue to improve without debt on the back of good cash generation from the business and better working capital management. Between FY07-10E, the balance sheet size is likely to improve by 64% with improvement in gross block by 51%.

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Risks & Concerns We believe the discovery focus in itself is a very risky business proposition due to large gestation period, large investment and lower chances of success. However, we have not accounted for the income that may be generated through out-licensing of IN 105 (innovative non-injectable insulin), the bullishness stems from this also. Delay in out-licensing, lower deal size or different payment schedule under the deal have bearing on the valuation. Moreover, if the molecule fails in the proof of concept level (phase II of clinical trials), there would not be any out-licensing income and will have a great bearing on the valuations. In addition if in the deal the up-front payment is lower and milestone payments are higher, this will impact the immediate cash flow. Moreover, the risk may emanate from day-to-day business operations.

While formulating the revenue model, we have assumed various time lines for the launch of different product in different geographies based on the schedule defined by the company. Any change in the schedule or the failure on the part of the company to launch the product in that geography may impact our earning estimates and valuations.

We have assumed that operations of Clinigene would turnaround in FY09E. The delay in turnaround may have bearing on the financials and valuations. For Syngene, we have assumed the similar rate of revenue per scientist in the years to follow, if the rates decline or change or there is a delay in execution of BMS deal our estimates would change accordingly. In estimating revenue and profits for BBPL we have assumed revenues at high EBIDTA (due to lower raw material and production cost) to flow in from European market from FY10E any change in cost structure or delay in revenue flow from that market would impinge our estimates.

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Valuations Biocon is becoming a pure pharma play after the sell-off of the enzymes business to Novozymes during H1FY08. In the pharma sector, the company differentiates itself from most of its peers by virtue of its focus on discovery research and commercialization of one of its discovery research product in the market. In the discovery pipeline, the company has few exciting products such as non-injectable (oral) insulin, which targets the potential global market size of US$1-3 billion. Non-injectable (oral) insulin is likely to enter the phase II of clinical trials (proof-of-concept level) in March 2008 after which the company plans to out-license it. Out-licensing may generate windfall revenue to the company. Besides discovery research, the company also works on biosimilars in innovating new processes. In this category also the company has created a good library of IP (intellectual property) assets, the monetization of which has been generating good revenue with handsome revenue fetching out-look. Moreover, the company is no longer a ‘statin-only’ play rather the product portfolio is diversifying, decreasing the product specific risk. The revenue contribution from statin is decreasing and high margin contract research revenue is increasing in the overall revenue of the company. We believe the business-improvement efforts of the management should become visible in quarters to come. Currently, margins are under pressure. But starting FY10E onwards, we think margins would improve. We expect top line and bottom line to grow at a CAGR of 15% & 18% over FY07-10E respectively while return on net worth to improve in the range of 18%. The stock currently trades at a FY10E PE of 12.34x and FY10E EV/EBIDTA of 8.80x. We rate the stock an Outperformer with price target of Rs 567 in 12 to 15 months. Valuation band indicate imminent re-rating We expect P/E re-rating with the improvement in return ratios and growth numbers.

Exhibit 32: P/E band

15x

20x

25x

30x

200

300

400

500

600

700

800

900

Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07

Source: ICICIdirect Research

SOTP valuation We have followed a SOTP (the sum-of-the-parts) methodology for valuation purposes. We have valued the CRO and manufacturing businesses separately. For the manufacturing business, we used a DCF methodology. For CRO, we have followed the comparable company (P/E) approach.

The band shows that the stock has not been re-rated despite steady improvement in fundamentals

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Manufacturing business (DCF valuation) We have followed the DCF valuation methodology for valuing the manufacturing business. We have assumed a risk free rate of return of 8.50% while a risk premium of 6.5% and beta of 0.50. We have assumed a terminal growth rate of 3% for this business whereas the terminal growth rate may be higher with large sums would come in future if the discovery R&D is able to launch a product in the markets.

Exhibit 33: DCF valuation FY08E FY09E FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E EBIDTA 229.10 252.14 315.10 307.04 393.36 500.04 629.41 766.52 938.64 1107.93 1291.61 EBIDTA of BBPL 0.47 -0.70 10.10 40.17 45.49 52.57 58.54 65.46 72.29 77.90 80.45 Total EBIDTA from manufacturing operations 229.57 251.43 325.19 347.21 438.85 552.60 687.95 831.98 1010.93 1185.84 1372.05 Tax 7.87 9.02 28.24 18.78 23.74 29.90 37.22 45.01 54.69 64.15 74.23 NOPLAT 221.70 242.41 296.95 328.43 415.11 522.71 650.73 786.97 956.24 1121.68 1297.83 Net cash flow 279.78 74.50 208.03 300.57 160.67 202.06 264.75 227.05 246.16 332.03 521.98 Terminal growth rate 3% Terminal cash flow 6178.38 Net cash flow 279.78 74.50 208.03 300.57 160.67 202.06 264.75 227.05 246.16 332.03 6700.36 WACC 11.45% 11.45% 11.45% 11.45% 11.45% 11.45% 11.45% 11.45% 11.45% 11.45% 11.45% Discounted cash flow 279.78 66.84 167.48 217.13 104.14 117.52 138.16 106.32 103.43 125.17 2266.50 NPV 3692.48 Debt 146.80 Equity shareholders value 3545.68 Equity share value 354.57

Source: ICICIdirect Research

CRO business (P/E valuations) The high margin CRO business is gradually gathering lot of significance in Biocon’s overall business as a driver of bottom-line mover. We expect the CRO business to add around 20% to the consolidated revenue in FY10E but the bottom-line contribution is likely to be around one-third in FY10E. In CRO operations, the company provides end-to-end services in drug discovery exercise, from pre-clinical stage to clinical trials. Syngene provides contract research for the molecules in pre-clinical stage and Clinigene provides clinical research services. The combined top line of Syngene and Clinigene is likely to grow at a CAGR of 29% over FY07-10E to Rs 308 crore while the combined bottom line is set to grow at a CAGR of 33% over this period to Rs 106.10 crore in FY10E.

We have valued the CRO business on comparable business method and have compared the business with WuXi PharmaTech, a NASDAQ listed Chinese CRO company. WuXi PharmaTech (Cayman) Inc. (WuXi) is a China-based pharmaceutical and biotechnology research and development outsourcing company. The Company provides a portfolio of chemistry, biology and manufacturing services in the drug discovery and development process to pharmaceutical and biotechnology companies. Its core operations are grouped into two segments: laboratory services and manufacturing. The company’s laboratory services segment consists of discovery chemistry, service biology, analytical, pharmaceutical development and process development services. The manufacturing segment focuses on manufacturing of advanced intermediates and active pharmaceutical ingredients (APIs).

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Exhibit 34: WuXi PharmaTech consensus financials in a nutshell Dec-07 Dec-08E Dec-09E Revenue (US$ million) 135.55 240.76 354.76 EBITDA (US$ million) 39.48 64.64 92.45 EBIDTA margin 29% 27% 26% EBIT (US$ million) 30.57 47.89 67.32 Net Profit (US$ million) 30.97 47.7 63.5 EPS (US$) 0.39 0.7 1.02 Current price (US$) 22.44 22.44 22.44 P/E 57.54 32.06 22.00 ROA (%) 15.4 12 11.7 ROE (%) 19.73 19.37 22.87

Source: Reuters knowledge, ICICIdirect Research

WuXi is trading at 22x the CY09E EPS of US$1.02. We have valued the CRO business of Biocon at 20x the FY10E EPS (on the basis of Biocon’s equity) looking at the size of WuXi PharmaTech. However the EBIDTA margin of Biocon’s CRO is substantially higher than that of WuXi. CRO of Biocon earns EBIDTA in the range of 44-45%, while the EBIDTA margin of WuXi is below 30%.

Exhibit 35: Biocon’s CRO business FY06 FY07 FY08E FY09E FY10E Sales 102.26 143.90 181.20 237.60 308.03 EBIDTA 31.13 64.36 81.53 100.75 136.28 EBIDTA margin 30.44% 44.73% 45.00% 42.40% 44.24% PAT 17.37 45.18 60.17 74.97 106.10 Equity shares of Biocon 10.00 10.00 10.00 10.00 10.00 EPS 1.74 4.52 6.02 7.50 10.61 Valuation (x) 20 Value of CRO business per share of Biocon 212.19

Source: Company, ICICIdirect Research

The fair value of Biocon will be the addition of the value of manufacturing business as well as the value of the CRO business.

Exhibit 36: Fair value of Biocon Per share value of manufacturing business 354.57 Per share value of CRO business 212.19 Per share value of Biocon 566.76

Source: ICICIdirect Research

Getting the value of manufacturing business at Rs 354.57 and Rs 212.19 for the CRO business, we estimate the fair value of Biocon at Rs 567. We rate Biocon as an OUTPERFORMER with a price target of Rs 567, 17.33x FY10E EPS of Rs 32.74, in 12 to 15 months.

Our SOTP value entails 40% return on the current price in an investment horizon of 12-15 months

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Profit & loss Account (Rs crore)

Balance Sheet (Rs crore)

FY '06 FY '07 FY '08E FY '09E FY '10E Equity Share Capital 50.00 50.00 50.00 50.00 50.00 Reserves & Surplus 838.10 1018.61 1437.51 1647.12 1929.55

Secured Loans 67.75 138.73 28.04 32.04 38.10 Unsecured Loans 37.29 113.04 118.76 118.76 118.76

Deferred Tax Liability 29.73 44.83 44.83 44.83 44.83 Total 1022.87 1365.21 1679.14 1892.75 2181.24 Fixed Assets Gross Block 407.05 1015.06 1280.06 1490.06 1540.06 Accumulated Depreciation 106.04 171.31 268.93 381.78 508.19 Net Block 301.01 843.75 1011.13 1108.28 1031.87 Capital Work-in-progress 526.02 70.83 27.00 0.00 0.00 Investments 100.23 79.01 307.86 407.86 607.86 Cash -1.22 74.48 41.69 38.86 151.05 Trade Receivables 223.66 306.52 344.48 389.97 466.31 Loans & Advances 23.94 53.03 59.10 67.27 81.96 Inventory- Other 110.49 161.33 164.50 181.23 221.71

Less : Current Liabilities & Provisions 261.26 274.94 276.63 300.72 379.53 Total 1022.87 1365.21 1679.14 1892.75 2181.24

FY '06 FY '07 FY '08E FY '09E FY '10E Net Sales 789.14 985.73 1094.51 1245.66 1517.73 Other Income 5 3.82 25.00 19.96 45.14 Raw Material 420.95 472.66 466.48 511.84 626.61 Raw material cost as % of sales 53.34% 47.95% 42.62% 41.09% 41.29% Employee Expenses 62.00 90.99 115.15 136.76 170.95 Employee cost as % of sales 7.86% 9.23% 10.52% 10.98% 11.26% Power & fuel cost 33.69 61.96 78.26 80.97 85.75 Power cost as % of sales 4.27% 6.29% 7.15% 6.50% 5.65% R&D Expenditure 21.10 38.70 62.28 73.12 83.73 R&D cost as % of sales 2.67% 3.93% 5.69% 5.87% 5.52% Selling expenses 16.88 23.34 32.84 37.37 42.50 Selling expenses as % of sales 2.14% 2.37% 3.00% 3.00% 2.80% Other Expenses 26.39 35.75 40.26 45.57 49.96 Other expenses as % of sales 3.34% 3.63% 3.68% 3.66% 3.29% Operating Profit 228.94 284.21 299.25 360.04 458.23 Interest 2.34 9.76 8.62 7.82 8.17 Gross Profit 231.60 278.27 315.63 372.18 495.20 Depreciation 29.00 67.00 95.50 112.85 126.41 PBT 202.60 211.27 220.13 259.33 368.79 Extraordinary item 239.00 Tax 30.57 16.91 12.45 14.31 36.88 Net Profit 172.03 194.36 446.68 245.02 331.91 Minority Interest -1.97 -6.00 -7.21 -4.59 4.48 Net profit after minority interest 174.00 200.36 453.90 249.61 327.43 Equity Capital 50.00 50.00 50.00 50.00 50.00 OPM (%) 29.01% 28.83% 27.34% 28.90% 30.19% GPM (%) 29.16% 28.12% 28.19% 29.41% 31.69% NPM (%) 21.91% 20.25% 19.20% 19.72% 20.95% EPS (in Rs.) 17.40 20.04 21.49 24.96 32.74

Rise in R&D and selling expenses likely to cap runaway margin growth

Negligible debt level opens options of inorganic growth

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Cash flow statement (Rs crore) FY '06 FY '07 FY '08E FY '09E FY '10E

Op bal Cash & Cash equivalents 2.54 -1.22 74.48 41.69 38.86 Profit after Tax 174.00 200.36 453.90 249.61 327.43 Add: Miscellaneous exp W/off 0.00 0.00 0.00 0.00 0.00 Less: Dividend Paid -25.00 -30.00 -35.00 -40.00 -45.00 Add: Depreciation 29.00 67.00 95.50 112.85 126.41 Add: Provision for deferred tax 6.29 15.10 0.00 0.00 0.00 Cash Profit 184.29 252.46 514.40 322.46 408.84 Net Increase in Current Liabilities 12.40 13.68 1.69 24.09 78.81 Net Increase in Current Assets 84.61 162.79 47.21 70.38 131.51 Cash Flow after changes in Working Capital 112.08 103.35 468.88 276.17 356.14 Purchase of Fixed Assets 277.85 205.75 167.85 183.00 50.00 (Increase) / Decrease in Investment -134.73 -21.22 228.85 100.00 200.00 Increase / (Decrease) in Loan Funds 28.7 146.73 -104.97 4.00 6.06 Increase / (Decrease) in Equity Capital -1.42 10.15 0.00 0.00 0.00 Net Cash Inflow / Outflow -3.76 75.70 -32.79 -2.83 112.19 Closing Cash/ Cash Equivalent -1.22 74.48 41.69 38.86 151.05

Ratio Analysis

FY '06 FY '07 FY '08E FY '09E FY '10E EPS 17.40 20.04 21.49 24.96 32.74 Cash EPS 20.30 26.74 54.94 36.25 45.38 Book Value 88.81 106.86 148.75 169.71 197.95 Operating Profit Per Share 45.79 56.84 59.85 72.01 91.65 Operating Margin (%) 29.01% 28.83% 27.34% 28.90% 30.19% Gross Profit Margin (%) 29.16% 28.12% 28.19% 29.41% 31.69% Net Profit Margin (%) 21.91% 20.25% 19.20% 19.72% 20.95%

RONW 19.25% 18.12% 16.26% 16.54% 18.52% ROCE 20.04% 16.19% 13.62% 14.11% 17.28% ROIC 25.82% 21.80% 18.64% 20.73% 27.85% Debt Equity 0.12 0.24 0.10 0.09 0.08 Fixed Assets Turnover Ratio 2.62 1.17 1.08 1.12 1.47 Enterprise Value 4146.26 4217.29 4145.11 4151.94 4045.81 EV/EBIDTA 18.11 14.84 13.85 11.53 8.83

Market Cap 4040.00 4040.00 4040.00 4040.00 4040.00 Market Cap to sales 5.12 4.10 3.69 3.24 2.66 Dupont ratio analysis PAT/PBT 84.91% 92.00% 94.35% 94.48% 90.00% PBT/PBIT 98.86% 95.58% 96.23% 97.07% 97.83% PBIT/Sales 25.81% 22.34% 20.43% 21.11% 24.12% Sales/Assets 77.15% 72.20% 76.00% 75.32% 78.14% Assets/Net worth 1.15 1.28 1.15 1.13 1.12

Return ratios to increase on the back of improvement in margins

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ANNEXURE 1: STATINS Biocon made a foray into pharmaceutical business with statins. Gradually, the company diversified its revenue stream and currently generates around 30% of revenue from three statins – lovastatin, simvastatin and pravastatin. The company is into API of these statins and does not compete into the formulation markets.

During last few years, the realizations on statins have significantly declined but the uses have increased. We believe increase in sales is on account of increased instances of high cholesterol, heart disease and diabetes diagnosis. Moreover, reports and articles suggest that evidences supporting the effectiveness and relative safety of statins have emerged.

Statin drugs work by blocking a key enzyme in the production of cholesterol. Cholesterol is a natural product of the liver and in the right amounts does not pose a problem to the body. The body, however, sometimes produces too much cholesterol, which creates problem. Statin drugs block the enzyme linked to the liver’s cholesterol production.

Reports suggest that some evidence are also emerging that statin drugs may help prevent some types disease, including certain forms of cancer (such as colorectal or skin), by working against cellular functions that may be involved in tumor growth, initiation and metastatis. But some others suggest no effect on cancer prevention. Researches also suggest that statins may also impact the onset of Alzheimer’s disease, however, clinical trails are going on to prove.

There are six statins that are in the markets lovastatin, pravastatin, simvastatin, fluvastatin, rusovastatin and atorvastatin. Out of these, lova, simva and pravastatin require fermentation technology and Biocon operates in these statins in API (active pharmaceuticals ingredient). Biocon is not present in the formulation segment.

Exhibit 37: Key statins manufactured by Biocon Lovastatin Produced through fermentation

Pravastatin Produced through double fermentation using compactin as a raw material (Biocon has USFDA approval for compactin)

Simvastatin Produced through chemical synthesis using lovastatin as key raw material (for 1 kg of simvastatin 2 kg of lovastatin is used)

Source: industry data

Market for statins has been very hot in the recent past. Pfizers’ patented Atorvastatin brand generated US$14bn of sales to the company in 2006. Similarly, the Simva and pravastatin generated handsome revenue to their innovators during their patent period. However, after witnessing a lot of turbulence in the recent past the markets statin market is now stabilizing. Patent expiry on Simva and prava led the markets to decline sharply.

The three statins namely, lova, simva and pravastatin are now available as generics. Lovastatin has been a generic since 2001. Pravastatin became available in generic form in May 2006 and Simvastatin in July 2006, when the drugs Pravachol and Zocor, respectively, went off-patent. The two new generics dramatically altered the statin market place. We seen that the sales from Zocor, the brand of patented Simvastatin, to Merck, the innovator has

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significantly declined over CY04 to CY06. During CY04 the company generated US$5.2 billion which declined to US$2.8 billion.

Exhibit 38: Decline in sales (in million $) of Zocor (Simvastatin)

0

1

2

3

4

5

6

CY04 CY05 CY06

Source: Merck. Similarly, the sales of Pravachol, the brand of patented Pravastatin of Bristol Myers Squibb, declined substantially over last 8 quarters. In Q1CY06, the Pravachol generated US$536 million which declined to US$ 90 million. One of the main reason for the decline was that these products went off patent in first half of CY06.

Exhibit 39: Decline in sales (in million $) of pravachol (pravastatin)

0

100

200

300

400

500

600

Q1CY06 Q2CY06 Q3CY06 Q4CY06 Q1CY07 Q2CY07 Q3CY07 Q4CY07

Source: BMS

With the two products (pravachol & Zocor) going off patent, Pfizer also reported declining sales trend of its atorvastatin (Lipitor) sales (as per the earning calls of Pfizer for the two quarters). The company reported 3% decline in global sales of Lipitor in December 07 quarter to US$3.43 billon while in September quarter the Lipitor sales was down by 5% to US$3.17 billion. This

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is so because of the substitution of Lipitor with the simvastatin. Going forward, the pricing environment is likely to be stable on account of increase in use of statins.

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ANNEXURE 2: IMMUNOSUPPRESSANTS Immunosuppressants are a class of drugs that suppress the immune response through various mechanisms. In organ transplantation, immunosuppressants are used to prevent the body from either recognition or attacking the foreign organ via various immune responses.

Biocon generates around 15% revenue from immunosuppressants and insulin. The company started a dedicated division for the renal diseases in March 2007. In our view, the medium to long-term revenue outlook for Biocon from this segment is much brighter than in the short-term. The company is likely to enter the regulated markets only in the medium to long term after patents for different immunosuppressants expire, starting from the end of the current calendar year. The company has already filed DMFs for immunosuppressants and has approvals in place. Immunosuppressant is a fast growing class of nephrology drugs, where the competition is lower due to complexity in manufacturing. In the domestic market, Biocon is the largest manufacturer of immunosuppressants. The company is targeting a 25% market share in the domestic market from immunosuppressants in next five years. The current size of the domestic markets for Immunosuppressants is estimated at around Rs 125 crore (total market for nephrology products in India is estimated at Rs 300 crore) which is likely to witness a 26% CAGR. To capture the growth in the segment, the company launched a division focusing on nephrology drugs in March 2007 in domestic market. Immunosuppressants are used in nephrology ailments. We expect the company to achieve the target market share as Biocon provides competitive quality immunosuppressant products at 35 – 40% cheaper price than the existing drugs in the market. The global market for nephrology products is estimated at US $3.3 billion. The company is currently marketing its product in India, the GCC (Gulf Cooperation Council) region and neighboring countries. The company has plans to enter the regulated markets but that will happen once the products are off patent. Most of the immunosuppressants are currently on-patent and are slated to go off patent during 2008-10.

The types of immunosuppressant drugs that are used in organ transplant are, calcineurin inhibitors, corticosteroids, cytotoxic immunosuppressants, immunosuppressant antibodies, sirolimus derivatives and other immunosuppressants.

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BIOMAB EGFR Biocon launched successfully its novel monoclonal antibody BIOMAb-EGFR in September 2006. Biomab EGFR, which is meant for head & neck cancer, is the proprietary drug of Biocon. Biomab EGFR is a monoclonal antibody and 1st humanized anti-EGFR monoclonal antibody commercialized anywhere in the world. The product has approval for use in head & neck cancer but is being evaluated in global clinical trials for colorectal, lung, brain (glioma) and pancreatic cancers.

The monoclonal antibody market is one of the fastest growing segments in the global pharmaceutical industry. The segment is relatively new in the life cycle with only 19 marketed products in 2004 but has substantial growth potential. The company presentation on monoclonal antibody suggests that the market for the segment grew by 48.1% over 2003-04 to $10.3 billion from $6.9 billion in 2003. The market is likely to extend the growth over the next 5-6 years, with the value almost tripling by 2010. As per estimates, the total market potential of the monoclonal antibody would be $30.3 billion in 2010 with a growth CAGR of 19.8% over 2004-10.

Biotech-enabled cancer therapies Development of monoclonal antibodies has enabled development of new line treatment for cancer. Out of the 400 new cancer drugs developed in 2003, almost 200 were biotechnology-derived and about 40 of them were monoclonal antibodies. The monoclonal antibodies market is expected to almost triple in value over the next six years from $10.3 billion in 2004 to $30.3 billion. Oncology products will continue to dominate the market. The development focus of the industry is moving away from murine and chimeric antibodies to humanized antibodies. As per estimates, out of 20 launches between 2007 and 2010 12 would be fully humanized antibodies. Global revenues from biotech-enabled cancer therapies are expected to rise at an AAGR (average annual growth rate) of 14.5% from $15 billion in 2003 to more than $29 billion in 2008.

Exhibit 40: Projected Global Revenues from Biotech-Enabled Cancer Therapies ($ Millions) Application 2001 2002 2003 2004 2008E CAGR (2003-08)

Hematological 2140.5 3139.1 3892.1 4319.1 9000.2 18.3

Solid Tumors 2763.18 3247.9 3648.85 4686 10084.4 22.5

Conditions related to Chemotherapy 4,912.00 6,261.00 7,440.80 8,053.00 10,358.00 6.80

Total 9815.68 12648 14981.75 17058.1 29442.6 14.5 Source: Company, ICICIdirect Research

Biomab shown good results during the clinical trials Biomab EGFR has shown significant positive response in the head & neck and cancer. The presentation of the company suggests that the median survival in term of number of months improve substantially, when Biomab is administered with radiation therapy and chemotherapy. Also the side effect has been significantly low during the clinical studies vis-à-vis other Mabs.

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Exhibit 41: Median survival in months with Biomab EGFR improves substantially

0

5

10

15

20

25

30

35

40

45

RT Cis+RT Biomab EGFR+RT

Medain Survival (months)

Source: Company, ICICIdirect Research Exhibit 42: Side-effects of Biomab EGFR have been significantly low

Severe Adverse Events Other MAb BIOMAb EGFR Skin Rash 88% 0% Oral Mucositis Gd ¾ 56% 0% Hypomagnesemia 50% NR Gd 3-4 Infusion reaction 3% 0%

Source: Company, ICICIdirect Research

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ANNEXURE 4: Acquisition of AxiCorp We believe acquisition of 70% stake in AxiCorp would provide Biocon a direct presence in the European markets. Biocon took a majority stake in Germany-based AxiCorp Pharmaceuticals in February 2008 at a cost of Euro 30 million (approximately Rs 174 crore), 0.4x the CY07 turnover of Euro 75 million (we have not factored the financials in our model). We expect a good synergy to develop between Biocon and AxiCorp as AxiCorp specializes in manufacturing and marketing of unique range of off-patented medicines while Biocon has expertise in manufacturing. We believe the acquisition to be earning accretive for Biocon in the long-run as we see this acquisition as a forward integration for direct marketing in the European markets. In the lack of any direct presence, the company has recently out-licensed GCSF for the European markets. Going forward, we believe the product pipeline of the company in the European markets to expand. AxiCorp ahs around 180 products in the European markets and Biocon has few biosimilars in its portfolio such as recombinant human insulin.

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Exhibit 43: DMF filings of Biocon S.No Biocon's filing date API Manufacturing site DMF filings by other Indian companies

1 5-Jun-00 Lovastatin Bangalore Kreb Bioscience, Lupin, Concord Biotech, Cadila Healthcare 2 12-Jul-02 Pravastatin Sodium Bangalore Ranbaxy, Concord

3 12-Jul-02 Compactin Bangalore Ranbaxy, Concord, Aurobindo, Lupin, Cadila, Jubilant Organosys & Kreb

4 12-Aug-02 Simvastatin USP Bangalore Kreb Bioscience 5 20-Jan-03 Mychophinolate Mofetil Bangalore Concord 6 20-Jan-03 Mychophinolic acid Bangalore

7 11-Jun-03 Pioglitazone Hydrochloride Bangalore

Cipla, Dr Reddy's Lab, Ranbaxy, Wockhardt, Morepen, Ind Swift Lab, Lupin

8 27-Jan-04 Human Insulin Bulk (RDNA origin) Bangalore Only player from India

9 3-Jun-04 Pravastatin Sodium Bangalore Ranbaxy, Concord 10 21-Jun-05 Tacrolimus Bangalore Concord 11 23-Jun-05 Simvastatin Bangalore Concord, Aurobindo, Lupin, Cadila, Jubilant Organosys & Kreb

12 7-Jul-05 Fluvastatin Sodium Amorphous Bangalore

13 13-Sep-05 Fluvastatin Sodium Bangalore Cadila Healthcare

14 1-May-06 Rosiglitazone Maleate Drug substance Bangalore Cipla & Dr Reddy's Lab

15 16-Jan-07 Atorvastatin magnesium Bangalore Ranbaxy Source: Orange book, Company, ICICIdirect Research

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RATING RATIONALE

ICICIDirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its stocks according to their notional target price vs current market price and then categorises them as Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Outperformer: 20% or more Performer: Between 10% and 20% Hold: +10% return Underperformer: -10% or more

Harendra Kumar Head - Research & Advisory [email protected] ICICIdirect Research Desk, ICICI Securities Limited, Mafatlal House, Ground Floor. 163, H T Parekh Marg, Churchgate, Mumbai – 400 020 [email protected]

Disclaimer The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Ltd (I-Sec). The authors/persons instrumental in generating the report do hold investment in the companies mentioned in this report. I-Sec may be holding a small number of shares/position in the above-referred companies as on date of release of this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This report may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. I-Sec may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject I-Sec and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.