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Viatris deal closure: Emergence of an Integrated biosimilar play

The completion of USD 3.34bn Viatris acquisition paves the way for an integrated global biosimilar play. We closely watch the execution and forward integration synergies in developed markets for existing products, elimination of transfer pricing and revenue visibility from new launches (bHulio and bKixelle) which will drive operating leverage. This will be partly offset by higher opex, amortisation and finance costs. BIOS has a few ways to deleverage the balance sheet- (1) Equity dilution in Biocon Biologics (‘BBL’) by PE stake sale (eventually 62-63% vs. ~68% post closure); (2) Further dilution in Syngene; and (3) IPO 2-3 years down the line. As highlighted in our IC report (click here), Viatris acquisition has many firsts with high risk-reward proposition. Viatris revenue guidance for CY23 is USD 1.1bn (USD 700mn net) with USD 250mn EBITDA. BIOS will now recognise combined revenues and associated profits from the acquired products, already factored in our estimates (below management guidance). We reiterate strong BUY with unchanged PT of INR 395 as we believe that BIOS is well-poised to turn the tide in its favour given the multiple levers, enviable biosimilars pipeline, strengthening of leadership team, favourable valuation and marquee investor backing which could potentially drive earnings upgrade. Key risks to our thesis include launch delays, debt sustainability and competitive intensity.

* Biocon Biologics rationale: The primary rationale for BBL is to acquire front-end commercial infrastructure in developed markets thereby bridging a gap in its supply chain. The operational capabilities include commercialisation, supply chain and regulatory capabilities in developed markets. This in turn will enable full realisation of revenues of existing partnership products namely Ogivri, Fulphila, Semglee and bKixelle. More importantly, BBL can realise the full potential of upcoming exciting launches in developed markets (BBL already has its own front-end infrastructure in MOW markets). BBL also acquires Viatris’ rights in in-licensed products bEtanercept and bAdalimumab. bAflibercept option exercised presents an opportunity of c. USD 6bn+ and it is the firstto-file on the same.

* Financial aspects uncovered: The deal involves USD 2 bn upfront cash consideration (USD 50 mn for capex funding), USD 1 bn of compulsory convertible preference shares of BBL (i.e. minimum 12.9% of BBL implying a valuation of USD 7.75 bn). BBL will also pay a deferred consideration of USD 160 mn and USD 175 mn for bAflibercept in FY25. Viatris will also provide commercial and transitional services at cost plus USD 44 mn p.a. for 2 years and will also appoint a nominee director on the board. BBL paid USD 2bn, funded through USD 1.2bn sustainability linked loan and USD 800mn fresh fundraise in BBL (USD 150mn from Serum and USD 650mn from BIOS). BIOS USD 650mn is funded by USD 230mn internal accruals (partly raised from Syngene stake sale) and balance from mezzanine funding; The cost of debt would be 4-4.5%. The deferred consideration of USD 335mn in FY25 will be paid through internal accruals.

* Our View: Many firsts, high risk-reward: The many firsts include an acquisition of this size, managing front-end capabilities in biologics in developed markets and taking on massive debt on its balance sheet. These many firsts also come with underlying risks such as debt sustainability, execution risks in a competitive biosimilars market, and margin integration. On the flip side, the rewards are highly promising as BBL will now realise 100% revenue and profits from existing products (mainly interchangeable Semglee) and upcoming key launches. BBL will now have better pricing power as it eliminates the transfer pricing juggernaut between BBL-Mylan. This could translate to incremental market share gains for existing products and the company can leverage this for new launches as well. The deal exerts pressure on BIOS’ financials, pushing the Net Debt/EBITDA to 2.7x in FY25; we believe that this will gradually come down to 2.3x by FY25 and could come down even further post liquidity event. EBITDA margin could improve based on launch timelines of key products and market share ramp-up of Hulio. bAflibercept (Eylea), being an exciting USD 6bn+ opportunity with first-to-file status, stares at competition from Roche’s recently launched Vabysmo (expected to a blockbuster drug) which has better time interval and lower side effects than Eylea. We believe that Eylea remains a meaningful opportunity given its size and filing status. We derive an NPV of INR 24 for it. On the USD 800mn fundraise, BIOS will infuse USD 650mn (partly from Syngene stake sale of 8-9%; USD 420mn mezzanine and rest from internal accrual) while USD 150mn will be infused by Serum Institute. This will maintain BIOS’ stake in BBL at 68% which should eventually come down to 62-63% as BBL onboards strategic investors. BIOS guides for USD 1.1bn revenue and USD 250mn EBITDA in CY23 for Viatris’ biosimilars business. Out of the aforesaid revenue, inter-company revenues could be USD 400mn, which implies net revenue guidance of USD 700 mn. The margins are in line with that of BBL (post intercompany elimination). As a whole, BBL’s revenue guidance for FY24 is USD 1.8bn. We have built in conservative estimates (c. USD 1.3bn). Net of transition costs, the EBITDA margin for the Viatris business in FY23 could be in single digits reaching 30% in FY25 per our estimates. 3Q onwards, we will also see contribution from vaccine supplies (Serum partnership) thereby driving earnings traction in the company.

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