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Viatris deal: Necessary but at a huge cost

Biocon Biologics Limited, a subsidiary of Biocon, plans to acquire Viatris’s biosimilars assets for USD3.335bn. The deal – valued at ~16.7x CY22 EBITDA – includes cash of up to USD2.335bn and Compulsorily Convertible Preference Shares (CCPS) in BBL, valued at USD1bn.

With this acquisition, Biocon gains the entire suite of economic interests and sales force, but without any major pipeline assets(except bEylea, where Biocon has a call option). It is yet to be seen if Biocon will surpass Mylan’s efforts and at ~16.7x CY22 EBITDA, room for disappointment is limited. Our earnings and biosimilar DCF value does not change materially considering higher amortisation, interest, and equity dilution. Retain ‘REDUCE’ with a TP of INR315.

What is in store for Biocon?

The deal is valued at ~16.7x CY22 EBITDA, which will entail a cash outflow of USD2.335bn (funded by USD1.2bn debt, USD800mn equity infusion and balance by internal accruals) and USD1bn CCPS equivalent to 12.9% stake. This will result in a dilution of Biocon’s stake in BBL to ~65% (from 76.5%). With this deal, Biocon will acquire Viatris’ rights in all biosimilars assets, including its in-licensed portfolio, an option to acquire Viatris’ rights in bAflibercept, its global commercial infrastructure and transition services for a two-year period

A strategic fit but comes at a cost; execution risks remain

While Biocon's R&D efforts have borne fruit in the past, but Mylan’s execution has been sub-par; thus, making this vertical integration necessary from a strategic point of view. However, this hardly allays our concern on biosimilars’ competitive dynamics, where gaining market share will remain an uphill task (Refer Exhibit 2, 3 and 4). While the acquisition will add heft to revenue and EBITDA, our earnings and biosimilars’ DCF value does not change materially, considering higher amortisation, interest and equity dilution. We see limited scope for a revenue surprise with no new major pipeline assets, except the ones already factored-in in the near-term launches – bevacizumab, bAspart and adalimumab. This limitsthe earnings upgrade potential.

Outlook and valuation: Downside risk persists; retain ‘REDUCE’

The acquisition does not guarantee an improved performance by Biocon, given: i) pegfilgrastim and trastuzumab market shares seem to have plateaued; ii) aggressive pricing even by innovators in biosimilars; and iii) impending competition. Moreover, limited commercialisation capabilities in developed markets makes it all the more challenging where execution remains to be seen

We revise down our FY23/24E EPS by 9%/15% to factor in the heavy price erosion, additional front-end costs, amortisation and interest costs. Our 35% FY21–24E PAT CAGR captures upside from insulins, but not potential downside from the headwinds in rest of the biosimilars business. We continue to maintain ‘REDUCE/SU’ with SoTP based TP of INR315.

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