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Adds Vaccines as a new growth dimension

Commercial benefit to kick in from 2HFY23E onwards

* Biocon Biologics (BBL) has entered a strategic alliance with Serum Institute Life Sciences (SILS) for commercialization of SILS’ vaccine portfolio. The alliance would develop antibodies targeting several other infectious diseases as well.

* As per the agreement, BBL will receive 100m doses of vaccines from SILS annually. Assuming USD2-5 per dose, the revenue potential is to the tune of USD200-500m post commercialization.

* We tweak our FY23E EPS to reflect the Vaccine business starting in 2HFY23E. Business potential from this alliance is subject to pandemic intensity once the SILS Pune facility turns operational, and/or successful development of products for other viral infections. We expect 39% earnings CAGR over FY21- 23E and value BIOS at 34x 12-months forward earnings to arrive at our TP of INR410. We maintain our Neutral rating

Alliance background

* Through the strategic alliance, BBL will receive 100m doses annually, including the COVID-19 vaccine primarily from SILS’ upcoming facility in Pune. The alliance will focus on development of Vaccines/Biologics for other communicable diseases such as Dengue, HIV, etc.

* On the basis of this agreement, BBL will generate a committed revenue stream/related margin from Oct’22. It will also set up an R&D facility to develop Vaccines/Biologics for communicable diseases. It will also use its cell culture/sterile fill-finish capacities for Vaccine production under this alliance.

* SILS will receive ~15% stake in BBL, at a post-money valuation of USD4.9b. Mr. Adar Poonawalla will join the board of BBL.

Cumulative funds raised to the tune of USD330m till date

* BBL has raised ~USD180m till date from True North, Tata Capital, and ADQ, and issued optionally convertible debentures (USD150m) to Goldman Sachs.

Vaccines compliments/enhances its current product offerings

* Till now, BBL has focused on Biologics used in the treatment of noncommunicable diseases, except for a few drugs used in the treatment of COVID-19. With its industry-leading capabilities in affordable Biologics, entering the Vaccine segment is a natural extension to its current capabilities. BBL will leverage its existing commercial strength, especially in developing countries, to build business prospects from this alliance.

Valuation and view

* We expect 39% earnings CAGR over FY21-23E, led by 17%/18% sales CAGR in Biologics/Research Services and a 320bp margin expansion. We value BIOS at 34x 12-months forward earnings to arrive at our TP of INR410.

* While there has been considerable effort towards building a product pipeline and subsequent traction in the Biosimilar segment, current valuations adequately factor in a potential upside in earnings. We maintain our Neutral rating.

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