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Integration to bring scale and clarity

Full BBL consolidation simplifies structure despite dilution

• Biocon (BIOS) is fully integrating Biocon Biologics (BBL) by acquiring the remaining stake of 23.3%. In addition to the share swap, BIOS is raising additional capital through a QIP of up to INR45b, subject to shareholder approval, for the cash component payable to Viatris.
• The deal will eliminate the minority interest as BBL will become a wholly owned subsidiary of BIOS. However, the addition of equity shares would result in EPS dilution.
• Accordingly, we trim our earnings estimates by 9%/8% for FY27/FY28. We value BIOS on SOTP basis (22x 12M fwd EV/EBITDA for biologics business, 53% stake in Syngene, and 10x EV/EBITDA for generics business) to arrive at a TP of INR460.
• While the equity dilution and QIP process may create a near-term drag on stock price, business prospects remain encouraging on the back of a) product launches (namely insulin aspart) in biologics segment and subsequent market share gain, b) scale-up of generics business, and c) growth/operating leverage in Syngene business. Maintain BUY.

Transaction details

• Currently, BIOS holds a 76.7% stake in BBL. Other BBL shareholders include Viatris, Serum Institute, True North, and Tata Capital, among others, cumulatively holding a 23.3% stake.
• BIOS will acquire the 23.3% stake through an issuance of 171.3m shares of BIOS at INR405.8 per share and cash consideration of USD400m.
• The cash consideration will be paid through bridge/interim funding and QIP (up to INR45b; USD500m) by BIOS. After the merger of BIOS and BBL, Mr. Shreehas Tambe will assume charge as MD and CEO of the combined entity and Mr. Kedar Upadhye will become CFO. Mr. Siddharth Mittal will transition to a broader leadership role within the Group.
• The transaction values BBL at USD5.5b and simplifies its equity structure.

Conference Call takeaways

• Management indicated a considerable reduction in holdco discount on BIOS due to the buyback of stakes from BBL shareholders.
• The lock-in period for BBL shareholders would be six months if they intend to liquidate BIOS shares, as per regulatory norms.
• Differential swap ratio for Viatris is due to the separate structure for Viatris stake buyback (part shares and part cash consideration).
• The entire compulsory convertible preference shares (CCPS) structure collapses with Viatris transaction.
• BBL’s cash flow, IP and global footprint will stay within the company. BBL would become a wholly owned subsidiary of BIOS.
• Dividend restrictions as a part of debt covenant remain on BBL.
• Biologics business is expected to generate free cash flow in the medium term, subject to product approval/launches.

Valuation and view

• BIOS acquired biosimilar business of Viatris to emerge as a leading global integrated company in the biologics segment. The commercial footprint of Viatris complemented BIOS’s product development/manufacturing capabilities.
• Additional investment in BBL will also boost the biologics business. However, this structure partly led to a holding company discount to the valuation of biologics business in BIOS.
• The buyback of the minority stake would eliminate this discount. The addition of shares due to QIP would dilute EPS to some extent, as per our calculation. We reduce our EPS estimates by 9%/8% for FY27/FY28 to factor in this transaction.
• BIOS remains in good stead for a broad-based scale-up across biologics, generics and CDMO, driving strong earnings revival over FY26-28.
• We value BIOS on SOTP basis (22x 12M fwd EV/EBITDA for biologics business/ 53% stake in Syngene and 10x EV/EBITDA for the Generics business) to arrive at a TP of INR460. Maintain BUY.

Biocon consolidates biosimilar powerhouse, signaling next phase of global scale-up

• The proposed merger of BIOS and BBL marks a strategic step toward the full integration of the biosimilars franchise.
• After the acquisition, BBL will operate as a wholly owned subsidiary of BIOS, following the consolidation at the agreed valuation of USD5.5b.
• Currently, BIOS holds a 76.7% stake in BBL.
• BIOS has proposed to acquire shares of minority shareholders with a 23.3% stake in BBL held by Viatris, Serum Institute, True North, and Tata Capital for a consideration of USD1.2b.
• The transaction is expected to be completed in 4QFY26, subject to regulatory and shareholder approvals.

Integration executed via equity swap + cash settlement

• The acquisition will be funded through a combination of fresh issue and cash.
• The fresh issue of 171.3m is priced at INR405.8 per share for an aggregate amount of USD773m and the cash consideration is USD400m.
• The shares held by Serum Institute, Tata Capital, and True North with a total stake of 16.8% will be acquired via a share swap ratio of 0.7: 1, i.e., 70.28 BIOS shares for every 100 BBL shares, valued at USD358m in total.
• In contrast, the shares held by Viatris with a stake of 6.5% will acquired for USD815m funded via a fresh issue of USD415m and cash of USD400m.
• The equity deal will be settled at a swap ratio of 0.6:1, i.e., 61.7 BIOS shares for every 100 BBL shares, whereas the cash component will be settled via proceeds raised through QIP.
• In addition to the QIP of INR45b (USD500m), BIOS will issue commercial papers worth INR18b in a private placement to meet the interim cash payment to Viatris until the fundraise is completed.

Post-integration structure: EPS takes a tactical hit as BIOS absorbs BBL

• After consolidation, promoter ownership moderates to 44.4% from 54.5%, while non-promoter holding contracts to 37.2% from 45.6%, reflecting dilution due to share issuance to BBL minority shareholders and equity infused via the planned fundraise.

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