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Viatris deal - High risk-reward play with leverage…

About the stock: Biocon is a leading biopharma company operating in biologics, contract research (Syngene), small molecules and branded formulations.

* Biosimilar US pipeline: (approvals - Pegfilgrastim, Trastuzumab, Glargine, Adalimumab); filed - Aspart and Bevacizumab

* Revenue breakup FY21: biosimilars (37%), generics (31%), CRAMS (29%)

Event: Biocon Biologics to acquire Viatris’ biosimilars asset

* Biocon Biologics (BBL), a subsidiary of Biocon plans to acquire Viatris’ biosimilars assets for up to US$3.335 billion in stock and cash to create a unique fully integrated global biosimilars enterprise

* BBL will pay a consideration up to US$3.335 billion, including upfront cash up to US$2 billion and compulsorily convertible preference shares(CCPS) in BBL, valued at US$1 billion (equivalent to an equity stake of 12.9% in BBL). Viatris will also receive up to US$335 million as additional cash payments in 2024 and an option to acquire bAflibercept

* Viatris will contribute to Biocon Biologics’ biosimilars portfolio and related commercial and operational capabilities, amounting to CY22E revenues ~ US$875 million and CY22E estimated adjusted EBITDA ~ US$200 million, in exchange for pre-tax consideration of up to US$3.335 billion, which represents a transaction multiple of 16.5x of CY22E EBITDA

* Acquisition of the Viatris biosimilars business will accelerate BBL’s direct commercialisation strategy for its current and future biosimilars portfolio and enable it to move up the value chain

What should investors do? Biocon’s share price has grown by ~1.9x over the past five years (from ~| 178 in March 2017 to ~| 338 levels in March 2022).

* Maintain HOLD due to 1) sheer magnitude of this deal leads to significant balance sheet expansion, 2) Incremental execution risks and 3) Legacy Issues of competition and price erosion besides regulatory clearances

Target Price and Valuation: We value Biocon at | 390 on SOTP basis

Key triggers for future price performance:

* Biosimilars- 1) market share gains in existing biosimilars, 2) approvals and launches of bBevacizumab and bAspart, 3) bGlargine ramp up, 4) Expected Adalimumab launch in FY24

* Developments on the vaccines front post strategic alliance with Serum

* CRAMs- Syngene Mangalore facility customer validations and approvals

* Generics- Ramp-up in US and branded business along with new launches

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