IDirect Biocon Q4FY16content.icicidirect.com/mailimages/IDirect_Biocon_Q4FY16.pdfKiran Mazumdar-Shaw. Unlike most pharma companies that are chemical based, Biocon has carved out its

April 28, 2016

ICICI Securities Ltd | Retail Equity Research

Result Update

Syngene, biosimilars drive growth… • Revenues grew 16.9% YoY to | 978.8 crore (I-direct estimate: | 860.5

crore) mainly due to 32.8% growth in the research segment (Syngene) to | 316 crore (I-direct estimate: | 298.9 crore). Due to biosimilar launches in emerging markets, biopharma segment grew 8.6% YoY to | 531 crore (I-direct estimate: | 430.3 crore)

• EBITDA margins declined 31 bps YoY to 21.8% (I-direct estimate: 22.9%) mainly due to higher R&D expenses. EBITDA grew 15.3% YoY to | 213.3 crore, (I-direct estimate: | 197.1 crore)

• Adjusted net profit declined 54% to | 92.5 crore (I-direct estimate: | 102.5 crore) on account of higher taxation

Biopharmaceuticals segment continues to face structural issues Biopharma segment accounts for ~66% of turnover and comprises diverse sub-segments like small molecules (APIs), branded formulations, biosimilars, etc. Some components like small molecules are facing pricing pressure and capacity constraints and, hence, bringing down growth of the entire segment. To address the issue, the company is reshuffling the biopharma portfolio by focusing more on biosimilars, branded formulations. With Syngene monetisation, Biocon is likely to get a substantial war chest to augment R&D in biosimilars post FY17E. The future also depends on progress of six biosimilars programmes and three insulin analog programs under the Mylan partnership deal (four are on track for filings in the US and EU in CY16). We expect biopharma segment to grow at a CAGR of 10.8% to | 2289.3 crore in FY16P-18E. Research services (Syngene) to maintain growth momentum Biocon’s research arm Syngene contributes ~31% to its turnover. Syngene is the contract research organisation (CRO) arm of Biocon with proven capabilities. The company caters to 256 clients including eight out of global top 10 global players. This segment is consistently growing at 20%+ rate and recently has been the major growth driver for the company as the biopharma segment is slowing down. We expect revenues to grow at 24% CAGR to | 1641.9 crore in FY16P-18E. Well placed to exploit opportunities in biotech space The space (biologics + biosimilars) is still evolving as many global regulators including the USFDA are yet to frame final guidelines for Biosimilars (recently USFDA approved second biosimilar but without giving guidelines.) Insulin, Stains, Immunosuppressants and Oncology are some of the preferred spaces for the company. The journey so far is not a smooth one though with pricing pressure and regulatory hurdles have time and again affected the performance in the last few years. With a recalibrated approach, portfolio reshuffling and sustainable tie-ups with global innovators (BMS) as well as generic players (Mylan), the future augurs well for the company. Biosimilars progress key future catalyst; maintain HOLD Syngene continues to maintain growth momentum. However, the positive surprise was biopharma growth on the back of biosimilar launches in emerging markets. This, along with the Japanese Glargine approval and proposed filing in other markets bodes well for the future as the company expects higher contribution from biosimilars, going forward. On the other hand, prolonged restructuring, pricing pressure and capacity constraints continue to impact small molecules growth. Given the different fortunes for different segments we continue to adopt SOTP methodology for valuation. Our SOTP target price is | 545.

Rating matrix Rating : HoldTarget : | 544Target Period : 12 monthsPotential Upside : -5%

What’s Changed?

Target Changed from | 510 to | 545EPS FY16E Changed from | 23.5 to | 22.1EPS FY17E Changed from | 26.3 to | 28.3

EPS FY18E Changed from | 28.1 to | 30.5Rating Unchanged

Quarterly Performance

Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%)Revenue 978.8 837.3 16.9 836.4 17.0EBITDA 213.1 184.9 15.3 189.1 12.7EBITDA (%) 21.8 22.1 -31 bps 22.6 -84 bpsNet Profit 92.5 106.0 -12.7 103.0 -10.2

Key Financials (| Crore) FY15 FY16P FY17E FY18ERevenues 3089.8 3485.4 4031.8 4647.9EBITDA 695.8 820.0 955.6 1103.4Adj. Net Profit 408.4 441.2 565.2 609.5Adj. EPS (|) 20.4 22.1 28.3 30.5

Valuation summary

FY15 FY16E FY17E FY18EPE(x) 28.0 12.7 20.2 18.7Target PE (x) 26.9 24.9 19.5 18.0EV to EBITDA (x) 12.5 10.9 12.7 12.5Price to book (x) 10.4 9.1 10.9 11.1RoNW (%) 8.3 7.6 6.4 5.3RoCE (%) 3.5 2.8 2.6 2.3

Stock data ParticularMarket Capitalisation Debt (FY16P)Cash (FY16P)EV 52 week H/L 581/397Equity capital (|Crore)Face value (|) | 5

| 100 crore

| 11971 crore

Amount| 11425 crore| 2467 crore| 1921 crore

Price performance (%)

1M 3M 6M 1YBiocon 23.3 14.4 28.3 31.5Ipca labs -17.3 -24.0 -37.0 -23.3Torrent Pharma 3.2 3.4 -9.8 23.3Aurobindo Pharma 1.7 -4.5 -9.6 25.9

Biocon (BIOCON) | 575

Research Analyst

Siddhant Khandekar [email protected] Mitesh Shah [email protected]

Nandan Kamat [email protected]

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis Q4FY16 Q4FY16E Q4FY15 Q3FY16 YoY (%) QoQ (%) Comments

Revenue 978.8 860.5 837.3 836.4 16.9 17.0 YoY growth mainly on the back of robust growth in SyngeneRaw Material cost 361.2 321.7 337.5 312.7 7.0 15.5 340 bps YoY improvement in gross margins mainly due to better biopharma product

mix and increased contribution from SyngeneEmployee cost 173.5 161.9 136.6 158.9 27.1 9.2R & D Expenditure 100.0 68.8 56.0 67.9 78.6 47.3 Sharp YoY increase in R&D expenses on the back of enhanced spending on clinical

development for biosimilar moleculesOther Expenditures 131.0 110.9 122.4 107.8 7.0 21.5 Registered | 4 crore of forex loss in Q3FY16Total Expenditure 765.7 663.4 652.5 647.3 17.4 18.3EBITDA 213.1 197.1 184.9 189.1 15.3 12.7EBITDA (%) 21.8 22.9 22.1 22.6 -31 bps -84 bps Improvement in gross margin was largly offseted by sharp increase in R&DInterest 1.4 1.5 0.0 1.5 0.0 -6.7Depreciation 62.8 62.1 58.5 62.1 7.3 1.1Other income 24.7 20.1 16.8 19.7 46.8 25.4EO -268.4 0.0 -95.2 0.0 NA 0.0 Deferred revenues of | 268 crore pertaining to execution of its agreement with Lab

PiSA of Mexico program PBT 442.0 153.6 238.3 145.2 85.5 204.4Tax 58.2 30.7 21.9 24.1 165.8 141.5MI 22.9 20.3 15.3 18.1 50.1 26.5Adj. Net Profit 92.5 102.5 106.0 103.0 -12.7 -10.2 YoY Decline was mainly due to higher taxationKey MetricsBiopharmaceuticals* 531.0 430.3 489.0 421.6 8.6 25.9 YoY Growth was largely due to small molecule product mix, increased sales of

insulin and launch of Trastuzumab in emerging markets. Beat vis-à-vis I-Direct estimates was mainly due to higher than expected Biosimilar sales.

Branded Formulations 101.0 107.8 98.0 104.5 3.1 -3.3 Muted growth was mainly due to product rationalisation to improve profitability and disruption in supply of key in-licensed products

Contract Research 316.0 298.9 238.0 270.1 32.8 17.0 Strong YoY growth was on the back of robust growth registered across all verticals. Beat vis-a-vis our expectations was mainly due to higher than expected growth across verticals

Licensing income 23.0 15.0 5.0 32.0 360.0 -28.1

Source: Company, ICICIdirect.com Research; * excludes Licensing income Change in estimates

(| Crore) Old New % Change Old New % ChangeRevenues 3,769.7 4,031.8 7.0 4,332.0 4,647.9 7.3 Increased mainly due to better than expected sales in Biosimilar and higher-than-

expected increase in client addition in SyngeneEBITDA 893.7 955.6 6.9 1,028.4 1,103.4 7.3EBITDA Margin (%) 23.7 23.7 -1 bps 23.7 23.7 0 bpsNet Profit 520.6 565.2 8.6 555.0 609.5 9.8EPS (|) 26.0 28.3 8.6 27.8 30.5 9.8 Changed mainly in Sync with revenue

FY17E FY18E

Source: Company, ICICIdirect.com Research Assumptions

CurrentGrowth (%) FY15 FY16E FY17E FY18E FY17E FY18E CommentsBiopharmaceuticals* 1,765.0 1,865.4 2,044.1 2,289.3 1,870.3 2,094.7 Changed mainly due to better than expected sales in BiosimilarBranded Formulations 430.0 436.5 478.9 550.7 509.8 586.3 Changed due to product rationalisation to improve profitability and disruption in

supply of key in-licensed productsContract Research 822.0 1,068.5 1,357.0 1,641.9 1,240.7 1,488.8 Enhanced on the back of higher-than-expected FY16 sales and higher-than-expected

increase in client additionLicensing income 43.0 90.0 60.0 60.0 60.0 60.0

Earlier

Source: Company, ICICIdirect.com Research; * excludes Licensing income


Company Analysis

Biocon was established in 1978 by the first generation entrepreneur Dr Kiran Mazumdar-Shaw. Unlike most pharma companies that are chemical based, Biocon has carved out its niche in the more complex biotechnology field. Over the decades, Biocon has successfully evolved into an emerging global biopharma enterprise, serving its partners and customers in over 75 countries. As a fully integrated biopharma company, it delivers innovative biopharmaceutical solutions, ranging from discovery to development and commercialisation. In 2004 it came out with its maiden IPO. Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab and Insulin Glargine) have already reached the critical milestone of global Phase III clinical trials. The company is also planning to start US and EU filings from FY17 with Mylan. Biocon entered partnership with Mylan for six biosimilar programs (Trastuzumab, Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept and Filgrastim) and three insulin analog programs (Glargine, Lispro and Aspart). Exhibit 1: Biosimilars: Insulins Pipeline Molecule Type Status Market Size (US$ billion)Rh Insulin Recombinant Human Insulin EU Phase III complete 3.1Glargine Long Acting Basal Insulin Global Phase III 7.1Aspart Rapid Acting Insulin Analog Preclinical/Scale Up 4.7Lispro Rapid Acting Insulin Analog Preclinical/Scale Up 2.8

Total Market Size 18.0 Source: Company, ICICIdirect.com Research Exhibit 2: Biosimilars: MAbs & Biologics Pipeline Molecule Indication Status Market Size (US$ billion)Adalimumab Chronic Plaque Psoriasis Global Phase III 14.0Trastuzumab mBreast Cancer Global Phase III 6.8Pegfilgrastim Chemo-induced Neutropenia Global Phase III 4.7Bevacizumab mColorectal Cancer EU Phase 1, RoW Phase III 6.9Filgrastim Chemo-induced Neutropenia Preclinical/Scale Up 1.0Etanercept Auto-immune Preclinical/Scale Up 8.7

Total Market Size 42.0 Source: Company, ICICIdirect.com Research Exhibit 3: Revenues to grow at CAGR of 15.5% in FY16P-18E

2770.7

2086.5

2485.32877.3

3089.83485.4

4031.8

4647.9

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18ERevenues

(| c

rore

)

Source: Company, ICICIdirect.com Research Biocon operates through five broad business verticals- 1) Small Molecules, 2) Research Services, 3) Branded Formulations, 4) Biosimilars and 5) Novel Molecules. However for reporting purpose Biocon classifies its operations into two segments i.e. Biopharma and Research services (Syngene). While Biopharma constitutes ~66% of overall sales, services


account for the rest of the pie. Except for research services, all other business verticals have been grouped under the biopharma category. Small Molecules- It comprises a portfolio of active pharmaceutical ingredients (APIs), including generics like statins, immunosuppressants, peptides, ophthalmics and other therapeutic products. It also includes proprietary products like Fidaxomicin (anti-infectives). This vertical is due for major reshuffling due to persistent pricing pressure in some of the products, especially statins. The company is now exploring fewer opportunities but with higher profitability in this segment such as moving into formulations and filing own ANDAs, 505 (b)(2) filings etc. This segment constitutes 40-45% of the overall sales. Biosimilars- This segment has been specifically carved out to tap numerous biosimilar opportunities especially in the next three to five years. The biosimilar space is globally still in a nascent state for want of guidelines by most countries including the US. Globally, six out of the top 15 drug brands are biologics. The now defunct Pfizer deal was also based on biosimilar opportunities. For biosimilars opportunities, Biocon is mainly focusing on following therapies- diabetology, oncology and immunology. Biocon’s biosimilar pipeline currently includes 10 products in different phases of completion. Out of these 10 products, the four diabetic products- rH Insulin, Glargine, Lispro and Aspart were subject matter of two deals first with Pfizer and then with Mylan (excluding rH Insulin). This segment constitutes ~10% of the overall sales. Exhibit 4: Biopharma sales to grow at CAGR of 10.8% in FY16P-18E

1133.61259.3

1503.71732.0 1765.0

1865.42044.1

2289.3

0

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FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E

(| c

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Biopharma*

Source: Company, ICICIdirect.com Research; * excludes branded formulations and licensing income

Novel molecules- This is the innovative products arm of Biocon. The revenues are derived from various out-licensing and development deals. This segment monetises Biocon’s in-house research expertise in the field of oncology, diabetes and autoimmune diseases. Currently there are six novel molecules under various stages of developments- three in Oncology and one each in diabetology, ophthalmology and auto-immunology. It has struck a deal with Bristol Myers Squibb (BMS) for developing IN 105 (oral insulin) further. This segment constitutes 3-5% of the overall sales.


Exhibit 5: Licensing income

152.5

126.5

25.015.4

43.0

90.0

60.0 60.0

0

20

40

60

80

100

120

140

160

180


(| c

rore

)Licensing income

Source: Company, ICICIdirect.com Research

Branded formulations- It comprises Indian domestic formulations. Biocon owns 80+ brands encompassing seven therapeutic segments namely diabetology, oncology, nephrology, cardiology, immunotherapy, comprehensive care and bio-products. However, with ~0.38% market share and 57th rank in the IPM market (AIOCD), the company is still a marginal player in the Indian context. Among therapies, diabetology is the largest therapy which account for 60% of branded formulations. Some of its unique launches are INSUPen (insulin delivery device), Biomab (novel biologic for Oncology) and Alzumab (novel biologic for Psoriasis) and the pipeline includes CANMAb (biosimilar version of oncology product Herceptin). This segment constitutes ~13% of the overall sales. Exhibit 6: Branded formulations sales to grow at a CAGR of 12.3% in FY16P-18E

186.3

256.5

347.9391.4

430.0 436.5478.9

550.7

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200

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400

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600


(| c

rore

)

Branded Formulations


Research Services (Syngene)- Biocon’s research arm Syngene contributes ~31% to its turnover. This is the CRO business of Biocon, which deploys over 2000 scientists. The company provides end-to-end discovery and development services for novel molecular entities (NMEs) across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies under one roof with a distinctive economic advantage. It also provides support for biosimilar and generic molecules development. The company provides variable cost alternative like full-time equivalent (FTE) and fee-for-service (FFS) to the traditionally fixed cost, in-house, resource intensive business model of R&D focused organisations. Currently the company has 256 clients ranging from large multinational corporations to start-ups, including seven of the top 10 global pharmaceutical companies.

Research Services Revenues (FY16P)

Dedicated33%

Others (FTEs+FFS)

67%


The company has developed long-term relationships and has multi-year contracts with its clients, including three long-duration multidisciplinary partnerships with Bristol-Myers Squibb (BMS), Abbott Laboratories (Singapore) and Baxter International. The company also provides clinical research and clinical trial services through its subsidiary Clinigene. In August 2015, Syngene had raised | 550 crore through IPO.

Exhibit 8: Trends in overall R&D cost

118.0

156.9 167.8130.6

168.8

275.3

322.5

371.8

4.3

7.5

6.8

4.5

5.5

7.9 8.08.0

0

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FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(| c

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3.0

4.5

6.0

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(%)

R & D cost R & D cost (% revenues)


Exhibit 7: Contract research to grow at CAGR of 24% in FY16P-18E

317.7411.2

558.0714.7

822.0

1068.5

1357.0

1641.9

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1400

1600

1800


(| c

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Contract Research



Exhibit 9: Trends in EBITDA margins

586.7517.3 543.0

687.1 695.8820.0

955.6

1103.4

24.8

21.8

23.9

22.5

21.2

23.5

23.7 23.7

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18

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26

(%)

EBITDA EBITDA Margins (%)


Exhibit 10: Net profit to de-grow at CAGR of 17.5% in FY16P-18E

367.5 338.4

508.9413.8

497.4

896.1

565.2 609.516.2

20.5

14.4

13.316.1

25.7

14.013.1

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1200


(| c

rore

)

46810121416182022242628

(%)

Net Profit Net Profit Margins (%)


Exhibit 11: Return ratios likely to be under pressure on the back of reduced profitability…

19.3

11.9 11.710.4

9.1

10.913.0

11.1

18.1

14.9

12.613.7

12.510.9

12.7

12.5

6

10

14

18

22


(%)

4

6

8

10

12

14

16

18

20(%

)

RoCE (RHS) RoNW (LHS)



SWOT Analysis Strengths - Early entrant in a more lucrative biotech space with a proven track record. The space has high entry barriers due to complexity of the molecules and tougher trials requirement. Weakness - Its largest segment i.e. small molecules is witnessing constant pricing pressure and capacity constraints. Other emerging segments such as Biosimilars will take some time to scale up. Opportunities - Huge opportunity beckons for biosimilars once the USFDA guidelines for Biosimilars are in place. Globally, six out of the top 15 drug brands are biologics and some will lose patent exclusivity in the next five to seven years. The price erosion in biosimilars is much less than that of chemical compound based drugs. Threats- (i) Backtracking by Mylan may increase the R&D cost sharply, (ii) pricing pressure in branded formulations

Exhibit 12: Trends in quarterly performance (| Crore) Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 YoY (%) QoQ(%)

Revenues 637.1 700.7 740.8 707.3 728.5 725.3 757.6 769.1 837.3 833.0 837.2 836.4 978.8 16.9 17.0

Raw Material Cost 276.1 303.7 295.0 294.8 292.6 291.1 309.8 317.6 337.5 326.5 329.6 312.7 361.2 7.0 15.5

% to revenues 43.3 43.3 39.8 41.7 40.2 40.1 40.9 41.3 40.3 39.2 39.4 37.4 36.9

Gross Profit 361.0 397.0 445.8 412.5 435.9 434.2 447.8 451.5 499.8 506.5 507.5 523.7 617.6 23.6 17.9

Gross Profit Margin (%) 56.7 56.7 60.2 58.3 59.8 59.9 59.1 58.7 59.7 60.8 60.6 62.6 63.1 341 bps 48 bps

Employee cost 109.0 115.3 113.1 115.5 122.4 125.5 135.4 136.0 136.6 154.3 149.7 158.9 173.5 27.1 9.2

% to revenues 17.1 16.5 15.3 16.3 16.8 17.3 17.9 17.7 16.3 18.5 17.9 19.0 17.7 142 bps -127 bps

R & D 45.9 43.0 38.6 20.0 29.0 31.0 35.0 46.9 56.0 50.0 57.4 67.9 100.0

% to revenues 7.2 6.1 5.2 2.8 4.0 4.3 4.6 6.1 6.7 6.0 6.9 8.1 10.2 353 bps 210 bps

Other Expenditure 94.0 86.7 118.3 101.3 109.0 103.8 104.3 108.7 122.4 90.0 102.8 107.8 131.0 7.0 21.5

% to revenues 14.8 12.4 16.0 14.3 15.0 14.3 13.8 14.1 14.6 10.8 12.3 12.9 13.4 -123 bps 50 bps

Total Expenditure 525.0 548.7 565.0 531.5 553.0 551.4 584.5 609.2 652.5 620.8 639.5 647.3 765.7 17.4 18.3

% to revenues 82.4 78.3 76.3 75.1 75.9 76.0 77.1 79.2 77.9 74.5 76.4 77.4 78.2

EBIDTA 112.1 152.0 175.9 175.8 175.6 173.9 173.1 160.0 184.9 212.2 197.6 189.1 213.1 15.3 12.7

EBITDA Margin (%) 17.6 21.7 23.7 24.9 24.1 24.0 22.9 20.8 22.1 25.5 23.6 22.6 21.8 -31 bps -84 bps

Depreciation 45.9 48.3 50.1 51.3 54.0 51.9 54.2 56.3 58.5 57.8 59.6 62.1 62.8 7.3 1.1

Interest 1.0 0.4 0.3 0.3 0.7 0.6 5.0 4.8 0.0 4.4 2.9 1.5 1.4 #DIV/0! -6.7

OI 11.9 22.5 11.7 12.3 17.2 16.6 15.0 9.8 16.8 23.5 24.6 19.7 24.7 46.8 25.4

PBT 77.1 125.9 137.2 136.6 138.1 138.1 128.9 108.6 143.2 173.5 159.7 145.2 173.6 21.3 19.6

Tax 28.1 29.7 31.9 26.2 19.2 30.9 21.8 11.2 21.9 37.0 33.5 24.1 58.2 165.8 141.5

Tax Rate (%) 36.5 23.6 23.3 19.2 13.9 22.4 16.9 10.3 15.3 21.3 21.0 16.6 33.5

PAT 49.0 96.2 105.3 110.4 118.9 107.2 107.1 97.5 121.3 136.5 126.2 121.1 115.4 -4.8 -4.7

PAT Margin (%) 7.7 13.7 14.2 15.6 16.3 14.8 14.1 12.7 14.5 16.4 15.1 14.5 11.8

Exceptional Items (EI) -201.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -95.2 0.0 -202.8 0.0 -268.4

Net Profit before MI 250.9 96.2 105.3 110.4 118.9 107.2 107.1 97.5 216.4 136.5 329.0 121.1 383.8 77.3 216.9

Add/(less) MI 2.3 2.7 3.1 5.4 5.8 4.3 5.0 6.6 15.3 10.3 23.1 18.1 22.9

Net Profit 248.6 93.5 102.2 105.0 113.1 102.9 102.1 90.9 201.2 126.2 305.9 103.0 360.9 79.4 250.4

Net Profit (excl.EI) 46.7 93.5 102.2 105.0 113.1 102.9 102.1 90.9 106.0 126.2 103.1 103.0 92.5 -12.7 -10.2



Conference call highlights • The company received first biosimilar approval in a developed

market with Japanese approval of Insulin Glargine. Its partner Fujifilm Pharma expects to commercialise the product in H1FY17

• Biocon entered in to a cost and profit share partnership with Lab PiSA of Mexico for the development and commercialisation for Recombinant Human Insulin wherein Biocon will be fronting the regulatory and commercial efforts in the US. It does not have any capex obligation with Lab PiSA. The company plans to enter the market post FY20

• The branded formulation business was rationalised during the quarter. The business saw low teen margins for Q4FY16. The company expects this business to grow at or above industry average in FY17

• Malaysian facility is in validation stage and is expected to receive regulatory approvals any in near term. The company plans to commercialise sales of insulin in Malaysia and other emerging markets in FY17.

• The company is in process of setting up oral solid dosage facility for generic formulations and sterile formulations facility for biologics business. These plants are being built in Bangalore SEZ area and are expected to be commissioned in CY17.

• The company has filed for gCopaxone (Glatiramer acetate; Multiple Sclerosis) 20mg and 40mg with the USFDA.

• The company expects higher growth for biosimilars in emerging markets and branded formulations and mid single digit growth for small molecules

• The company currently is conducting Phase III trial for biosimilar Itolizumab in India

• The company has filed ~7 ANDAs with USFDA till date and plans to file five to six ANDAs every year

• All legal and regulatory costs for biosimilars would be shared by Biocon and Mylan.

• In Q4FY16, R&D spend was | 152 crore. Of this, | 100 crore was reported in the P&L and remaining was capitalised. The company plans to spend 18-20% (Gross) of biopharma sales on R&D expenditure for FY17

• FY16 long-term debt was | 2072 crore. The debt is to fund the group's capex requirements in India and Malaysia

• The company is planning standalone capex of | 200-225 crore for FY17, which includes maintenance capex along with additional capex required for commissioning the two new facilities in Bangalore

• The company hedges 100% of its net foreign currency exposure for 12 months in the range of | 66/dollar to | 73/dollar and 50% to 70% for the next 12 months in the range of | 74/dollar and above

• The company gave tax rate guidance of 22-24% for FY17 and FY18

• It registered forex loss of | 17 crore for FY16


Valuation Syngene continues to maintain growth momentum. However, the positive surprise was biopharma growth on the back of biosimilar launches in emerging markets. This, along with the Japanese Glargine approval and proposed filing in other markets bodes well for the future as the company expects higher contribution from biosimilars going forward. On the other hand, prolonged restructuring, pricing pressure and capacity constraints continues to impact small molecules growth. Given the different fortunes for different segments we continue to adopt SOTP methodology for valuation. Our SOTP target price is | 545. Exhibit 13: Valuation Particulers FY18E EPS (| cr) Multiple (x) Per share (| )Biocon (ex Syngene) 17.5 16.0 280.2Syngene

Targeted Market Cap 8900Biocon's Holding 74.6%Holding Company Discount 20.0%Syngene valuation 5308Per share valuation 265

SOTP valuation 545 [

Source: ICICIdirect.com Research

Exhibit 14: One year forward PE

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Price 21.5x 18.2x 12.7x 10.5x 8.3x[


Exhibit 15: One year forward PE of company vs. CNX Pharma Index

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Biocon CNX Pharma


Exhibit 16: Valuation Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)FY15 3090 15.8 20.4 22.0 28.0 8.3 12.5 10.4FY16P 3485 12.8 22.1 8.0 12.7 7.6 10.9 9.1FY17E 4032 15.7 28.3 28.1 20.2 6.4 12.7 10.9FY18E 4648 15.3 30.5 7.8 18.7 5.3 12.5 11.1



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Target Price: | 545

Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event

Mar-09 Syngene, a subsidiary of Biocon, signs agreements with DuPont Crop & Bristol-Myers Squibb to provide research services in both discovery and development process of new chemical & biological entities

May-09 Launches long lasting human insulin Basalog in Indian market. The drug is similar to Sanofi's Lantus

Oct-10 Enters into an agreement with Pfizer for worldwide commercialisation of biosimilar versions of insulin and insulin analogue products: Recombinant human insulin, Glargine, Aspart and Lispro

Jan-11 Novel oral insulin IN-105 fails to meet its primary end point of lowering HbA1c levels compared to available drugs in the market (placebo)

Mar-12 Biocon and Pfizer conclude their alliance to commercialise Biocon's biosimilar versions of insulin and insulin analogue products worldwide

Nov-12 Enters into an option agreement with Bristol-Myers Squibb (BMS) for Biocon's IN-105 (oral insulin product candidate)

Feb-13 Out-licenses three insulin analogue products to Mylan. Mylan will have the rights to develop and market Biocon's Glargine, Lispro and Aspart.

Nov-13 Receives marketing approval from Drugs Controller General of India to launch its biosimilar Trastuzumab (anti-cancer) in Indian market.

Jan-14 Biocon launches its biosimilar CanMab in Indian market

Sep-14 Biocon Research buys back the 7.69% stake held by GE Equity International Mauritius valuing Syngene at | 2800 crore.

Jan-15 Silver Leaf Oak acquires 10% stake in Syngene International, Biocon's Research Services Subsidiary at a valuation of | 3800 crore

Jul-15 Syngene IPO starts from July 27, 2015 at a price range of | 240-250

Oct-15 Acquired API unit of Acacia Life Sciences Private Limited at Vizag Source: Company, ICICIdirect.com Research Top 10 Shareholders Shareholding Pattern Rank Investor Name Latest Filing Date % O/S Position Position Chan1 Shaw (Kiran Mazumdar) 30-Sep-15 41.5 83.0m 3.72 Glentec International 30-Sep-15 19.8 39.5m 0.03 Templeton Asset Management Ltd. 31-Mar-15 4.0 7.9m 0.74 Life Insurance Corporation of India 30-Sep-15 2.5 5.0m -0.95 Biocon India Ltd Employee Welfare Trust 25-Aug-15 1.9 3.8m 0.16 Reliance Capital Asset Management Ltd. 30-Nov-15 1.3 2.5m 0.07 Chandavarkar (Arun Suresh) 30-Sep-15 1.1 2.2m 0.08 Krishnan (Murali K N) 29-Dec-15 1.1 2.1m -0.29 Swiss Finance Corporation (Mauritius) Ltd. 30-Sep-15 1.0 2.1m 2.110 Dimensional Fund Advisors, L.P. 31-Oct-15 1.0 1.9m 0.0

(in %) Mar-15 Jun-15 Sep-15 Dec-15 Mar-16Promoter 61.0 61.0 61.0 60.7 60.7FII 10.7 11.6 11.8 12.8 13.6DII 8.4 8.3 7.4 7.0 7.0Others 19.9 19.1 19.8 19.5 18.6

Source: Reuters, ICICIdirect.com Research Recent Activity

Investor Name Value ($ mn) Shares Investor Name Value ($ mn) SharesShaw (Kiran Mazumdar) 25.26 3.72 Life Insurance Corporation of India -5.86 -0.86Swiss Finance Corporation (Mauritius) Ltd. 13.97 2.06 Canara Robeco Asset Management Company Ltd. -2.73 -0.38Biocon India Ltd Employee Welfare Trust 0.97 0.15 Krishnan (Murali K N) -1.30 -0.17JM Financial Asset Management Pvt. Ltd. 0.50 0.07 Emerging Global Advisors, LLC -0.41 -0.06OppenheimerFunds, Inc. 0.38 0.06 Robeco Hong Kong Limited -0.38 -0.05

BUYS SELLS

Source: Reuters, ICICIdirect.com Research


.

Financial summary

Profit and loss statement | Crore (Year-end March) & (| crore) FY15 FY16P FY17E FY18ETotal Operating Income 3089.8 3485.4 4031.8 4647.9Growth (%) 15.8 12.8 15.7 15.3Raw Material Expenses 1256.1 1330.1 1532.1 1743.0Employee Expenses 533.4 636.3 737.8 872.0R&D Expenditure 168.8 275.3 322.5 371.8Other Expenditures 435.7 423.7 483.8 557.8Total Operating Expenditure 2394.0 2665.4 3076.2 3544.5Operating Profit (EBITDA) 695.8 820.0 955.6 1103.4Growth (%) 26.5 17.8 16.5 15.5Depreciation 221.0 242.3 261.6 350.8Interest 8.9 10.2 10.1 10.1Other Income 53.1 84.5 137.9 159.0PBT before Exceptional Items 519.0 652.0 821.9 901.5Less: Exceptional Items -105.1 -575.4 0.0 0.0Total Tax 95.7 256.9 164.4 180.3PAT before MI 528.4 970.5 657.5 721.2Minority Interest 31.0 74.4 92.3 111.7

Adjusted PAT 408.4 441.2 565.2 609.5Growth (%) 22.0 8.0 28.1 7.8EPS (Adjusted) 20.4 22.1 28.3 30.5


Cash flow statement | Crore (Year-end March) & (| Crore) FY15 FY16E FY17E FY18EProfit/(Loss) after taxation 360.9 896.1 565.2 609.5Add: Depreciation & Amortization 221.0 242.3 261.6 350.8Net Increase in Current Assets -331.3 -291.6 -279.2 -305.9Net Increase in Current Liabilities -22.7 -61.0 85.9 174.1Other Operating Activities -17.2 10.2 10.1 10.1CF from operating activities 210.7 796.1 643.6 838.7(Increase)/Decrease in Investmen 452.8 -198.2 -200.0 -500.0(Purchase)/Sale of Fixed Assets -916.9 -845.9 -200.0 27.4Increase/ (Decrease) in Minority I 0.0 139.0 92.3 111.7Other Investing Activities 200.3 -29.0 0.0 0.0CF from investing activities -263.8 -934.1 -307.7 -360.9Proceeds from issues of Equity Sh 0.0 0.0 0.0 0.0Inc/(dec) in loan funds 331.3 1443.1 -100.0 0.0(Payment) of Dividend and Dividen -144.6 -310.9 -161.9 -174.6Interest Paid -0.5 -10.2 -10.1 -10.1Other Financing Activities 0.0 0.0 0.0 0.0CF from financing activities 186.2 1122.0 -272.0 -184.7Net Cash flow 133.1 983.9 63.9 293.1Opening Cash 804.4 937.5 1921.4 1985.3Closing Cash 937.5 1921.4 1985.3 2278.5Free Cash Flow -706.2 -49.9 443.6 866.1


Balance sheet | Crore (Year-end March) & (| Crore) FY15 FY16E FY17E FY18ELiabilitiesEquity Capital 100.0 100.0 100.0 100.0Reserve and Surplus 3170.6 3955.6 4358.9 4793.8Total Shareholders funds 3270.6 4055.6 4458.9 4893.8Total Debt 1024.2 2467.3 2367.3 2367.3Deferred Tax Liability (Net) 48.1 34.6 34.6 34.6Minority Interest 172.2 311.2 403.5 515.1Other NCL & LT Provisions 566.6 380.2 380.2 380.2Source of Funds 5081.7 7248.9 7644.5 8191.1AssetsGross Block 3042.3 3143.7 3393.7 4551.8Accumulated Depreciation 1412.4 1654.7 1916.3 2267.1Net Block 1629.9 1489.0 1477.4 2284.7Capital WIP 1676.6 2421.1 2371.1 1185.6Total Fixed Assets 3306.5 3910.1 3848.5 3470.2Other Investments 230.3 428.5 628.5 1128.5Inventory 452.7 511.4 571.2 658.5Debtors 770.5 822.9 972.2 1120.8Loans and Advances 450.6 597.6 647.6 697.6Cash 937.5 1921.3 1985.3 2278.5Other Current Assets 90.3 123.8 143.8 163.8Total Current Assets 2701.6 3977.0 4320.2 4919.2Creditors 429.3 547.1 541.7 624.5Provisions 706.2 87.7 117.9 148.0Other Current Liabilities 158.2 597.9 659.1 720.3Total Current Liabilities 1293.7 1232.7 1318.6 1492.8Net Current Assets 1407.9 2744.3 3001.5 3426.4Other Non Current assets 137.0 166.0 166.0 166.0Application of Funds 5081.5 7248.7 7644.4 8191.1


Key ratios (Year-end March) FY15 FY16E FY17E FY18EPer share data (|)Reported EPS 24.9 44.8 28.3 30.5BV per share 163.5 202.8 222.9 244.7Dividend per share 5.9 15.5 8.1 8.7Cash Per Share 46.9 96.1 99.3 113.9Operating Ratios (%)Gross Margin 59.3 61.8 62.0 62.5EBITDA margin 22.5 23.5 23.7 23.7EBIT Margin 15.4 16.6 17.2 16.2PAT Margin 13.2 12.7 14.0 13.1Inventory days 53.5 53.6 51.7 51.7Debtor days 91.0 86.2 88.0 88.0Creditor days 50.7 57.3 49.0 49.0Asset Turnover 0.6 0.5 0.5 0.6EBITDA Conversion Ration 30.3 97.1 67.4 76.0Return Ratios (%)RoE 12.5 10.9 12.7 12.5RoCE 10.4 9.1 10.9 11.1RoIC 19.2 19.9 21.1 15.9Valuation Ratios (x)P/E 28.0 12.7 20.2 18.7EV / EBITDA 8.3 7.6 6.4 5.3EV / Net Sales 1.9 1.8 1.5 1.2Market Cap / Sales 1.8 1.6 1.4 1.2Price to Book Value 3.5 2.8 2.6 2.3Solvency RatiosDebt / EBITDA 1.5 3.0 2.5 2.1Debt / Equity 0.3 0.6 0.5 0.5Current Ratio 1.4 1.7 1.8 1.8



ICICIdirect.com coverage universe (Healthcare) Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

Ajanta Pharma AJAPHA 1542 1,780 Buy 13569.4 36.0 45.0 50.0 42.8 34.3 30.8 24.2 20.2 18.0 50.3 46.3 40.5 37.8 34.3 29.2

Apollo Hospitals APOHOS 1328 1,420 Hold 18468.9 23.7 27.6 34.6 55.9 48.1 38.3 27.6 23.9 18.9 9.9 11.2 13.0 10.4 11.1 12.5

Aurobindo Pharma AURPHA 775.5 990 Buy 45377.0 28.1 33.9 37.7 27.6 22.9 20.6 30.7 25.1 22.0 23.4 24.7 25.0 31.7 28.7 24.7

Alembic Pharma ALEMPHA 595 620 Hold 11590.9 15.1 38.2 19.6 39.4 15.6 30.3 32.2 12.6 23.9 30.7 58.0 24.8 32.1 51.5 22.3

Biocon BIOCON 564.3 560 Hold 11286.0 20.4 22.1 28.5 27.6 25.6 19.8 8.3 6.9 5.6 10.4 11.6 13.6 12.5 11.3 13.2

Cadila Healthcare CADHEA 329 405 Buy 33670.9 11.2 14.7 15.3 29.4 22.4 21.5 19.9 14.8 14.4 20.7 26.2 24.4 27.0 28.0 23.9Cipla CIPLA 540.4 690 Buy 43410.9 14.7 21.5 25.7 36.7 25.2 21.0 19.4 15.6 13.1 13.8 14.8 16.5 10.9 14.1 14.8

Divi's Laboratories DIVLAB 1059 1,320 Buy 28110.5 32.1 40.2 46.7 33.0 26.4 22.7 22.3 18.7 15.9 29.4 31.3 31.1 24.4 25.6 25.1

Dr Reddy's Labs DRREDD 3120 3,880 Buy 53227.0 129.0 146.8 143.3 24.2 21.3 21.8 14.5 11.8 11.6 16.7 18.0 16.6 22.3 20.3 16.5

Glenmark Pharma GLEPHA 832 975 Buy 23467.1 23.1 28.9 39.7 36.0 28.8 21.0 20.7 15.7 12.9 13.3 17.7 21.1 21.7 21.7 23.3

Indoco Remedies INDREM 277.4 390 Buy 2555.8 9.0 9.3 15.6 30.9 29.9 17.8 15.9 14.8 10.7 16.4 15.4 22.2 16.0 14.7 20.8

Ipca Laboratories IPCLAB 495 515 Hold 6248.8 19.9 12.1 24.7 24.9 40.9 20.0 13.5 18.2 12.2 11.5 6.7 11.7 11.4 6.6 12.2

Jubilant Life Sciences VAMORG 401.7 375 Hold 6398.3 -0.6 31.0 43.0 NA 13.0 9.3 15.9 8.1 6.5 5.8 13.4 15.8 NA 17.1 19.5

Lupin LUPIN 1577 2,200 Buy 71088.4 53.6 50.5 71.2 29.4 31.2 22.2 17.8 19.6 13.3 35.1 22.4 28.7 27.1 21.2 24.0

Natco Pharma NATPHA 487.2 630 Buy 8485.8 8.3 7.5 11.6 58.6 65.4 41.8 35.3 29.3 21.6 15.4 13.0 16.5 17.9 10.0 13.8

Sun Pharma SUNPHA 814 845 Hold 195931.8 19.8 23.6 28.4 41.1 34.5 28.7 24.5 21.6 18.0 18.8 20.0 21.1 18.6 18.8 19.1

Syngene International SYNINT 399 445 Buy 7971.0 8.8 11.1 15.6 43.3 34.2 24.3 26.6 20.9 17.0 19.5 13.3 16.7 20.7 21.2 23.5

Torrent Pharma TORPHA 1428 1,650 Buy 24169.7 44.4 115.3 67.1 32.2 12.4 21.3 24.4 8.4 13.3 20.1 43.7 24.4 30.2 50.3 24.0

RoE (%)EPS (|) PE(x) EV/EBITDA (x) RoCE (%)



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Pankaj Pandey Head – Research [email protected]

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[email protected]


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Documents

IDirect Biocon Q4FY16content.icicidirect.com/mailimages/IDirect_Biocon_Q4FY16.pdfKiran Mazumdar-Shaw. Unlike most pharma companies that are chemical based, Biocon has carved out its