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Kiran Mazumdar Shaw’s multi-billion dollar baby

Biocon Biologics’ valuation has raised eyebrows. But the parent has strong growth on its side and a track record of solid execution

Did you know in ancient Greece they detected ‘diabetes mellitus’ by tasting urine? Yes, tasting, not testing. Life was queasy then, at least for those working in diagnostic labs. Millenniums later, scientists discovered the condition developed from lack of insulin, and they began extracting the hormone from living organisms. First dogs, then cows and pigs, and in recent times, research labs moved towards synthetic human insulin with E. coli bacteria. That’s a biologic, a drug made from a living organism.

There aren’t many biologics in the market. But they are necessary, for complex diseases such as cancer, diabetes and arthritis, so the business of biologics and their biosimilars has become a lucrative one over the past few decades. According to research firm MarketsandMarkets, it is expected to be worth $35.7 billion by 2025 from $11.8 billion in 2020.

Since the process to develop a biologic is rigorous, biosimilars or copycats of innovator drugs have to undergo extensive clinical trials before they can be placed before the regulators as an efficient drug. Generics, on the other hand do not need clinical trials; all they have to do is prove bioequivalence to the original drug. The development of a biosimilar alone takes five to six years, so it’s not easy for a new player to challenge an incumbent. One of these incumbents is Biocon. 

It was the first company to manufacture and export enzymes to the US and Europe in the late ’70s. It today manufactures and launches biosimilars to treat cancer and diabetes. Biocon founder and chairman knew that foraying into biosimilars would come with huge challenges. For one, there is a lot of regulatory uncertainty. Yet, she believed that the evolution of the company would only come from making these bold bets. “Biocon was among the early movers from India to pursue a high-risk strategy of developing biosimilars for the global markets. Today, we have over 15 years of experience in developing biologics including biosimilars,” says Kiran Mazumdar Shaw. She believes that now more than ever, it is important for the country to further improve the Indian pharma industry and adds, “We are developing strengths in biopharmaceuticals because companies such as Biocon are getting strong in this segment. That’s where we need to focus.”

Seasoned player
These bold bets have been rewarded by positive market response and investor faith. In early January this year, True North picked up 2.44% stake in Biocon Biologics, a separate entity of the company, for around $75 million. The private equity fund, which was earlier called India Value Fund, had invested in Biocon before — once in 2003 just before its IPO and then in 2017, in its contract research arm Syngene. Both investments gave handsome return to the fund, and therefore making this Biologics bet wasn’t a hard decision. What surprised many was the price at which it bought the stake.

The investment values Biocon Biologics at about $3 billion. While Biologics contributes to just one-third of Biocon’s revenue (See: Balanced mix), it makes up for 60% of the company’s overall valuation. The biologics business has been valued at around 10x its nine-month annualised revenue, which is much higher than the 5.2x revenue multiple investors are currently attributing to the entire company. Biocon Biologics expects to end FY20 with sales of around $300 million, and its FY22 target is to hit $1 billion.

So, why is True North super bullish about Biocon Biologics’ prospects? Satish Chander, partner at the fund, reasons: “Biocon Biologics is one of the few integrated and focused biosimilar players that have launched about four to five biosimilar products across US, Europe and emerging markets.” He believes this diversified pipeline will help Biocon in becoming a leading player. “Biosimilars will find quicker adoption in the US than earlier as regulatory pathways are becoming clearer, and biosimilars play a significant role in reducing overall healthcare cost,” he adds. Unlike chemical molecules, they are effective in targeted treatment and have lesser side-effects. Biocon Biologics’ revenue has grown 50% to $223 million in the first three quarters of FY20 alone.

If we also consider how rarely biosimilars are launched compared to generics, companies such as Biocon, which have molecules in different stages of development, have an upper hand. While most Indian players were fighting for the generics pie in the US over the past decade, the Bengaluru-headquartered company was focusing on its core business of developing innovative and complex drugs. Most had shied away from foraying into biosimilars given the high cost of development, the long gestation period and the still evolving regulatory pathway. Only after signs of price erosion in US generics, did some major players decide to focus on complex drugs. 

But eating into Biocon’s pie is not going to be a piece of cake. For instance, while it takes about $3 million-5 million to develop a generic drug, it costs anywhere between $100 million-150 million to develop a biosimilar. Once it is approved, the companies have to invest to build manufacturing scale. Biocon has already invested around $740 million in biosimilars so far and is looking to invest another $715 million in capex and R&D over the next three years (See: Research this). For this, the funding from True North will come in handy. The company has put its investments to good use, and so far developed a wide portfolio of generic insulin, biosimilar monoclonal antibodies and recombinant proteins. “Along with our strategic partners, Biocon has invested over a billion dollars in science, scale and expertise to develop our wide portfolio of biosimilar assets. We have succeeded in impacting millions of patient lives across the globe through commercialization of three of our biosimilars in US, Europe, Australia and a few others in most of countries including India,” adds Shaw. With 28 molecules, including 11 with Mylan and a few with other players such as Sandoz, Biocon has the largest product pipeline among Indian peers. 

That’s one of the advantages Biocon has — its partnerships. It shook hands with Mylan in 2009 for a broad portfolio of biosimilar and insulin products. While the Indian pharma major develops and manufactures the drug, Mylan takes care of regulatory approvals and commercialisation of products in highly regulated markets such as US, Europe, Canada, Japan, Australia and New Zealand. Biocon has co-exclusive commercialisation rights with Mylan for the rest of the world and both partners are winning through this joint venture. While Biocon lacked experience in commercialisation and connections in the provider community in developed markets, Mylan lacked the expertise of developing biosimilars in a low-cost environment. According to Harith Ahamed, analyst, Spark Capital, the market for biosimilars is much more complex than generic drugs and it takes a lot more than just first-mover advantage to make a difference. “In the case of biosimilars, the decision on what drug to use is made by the hospitals or the GPOs (Group purchasing organisation). Mylan, thanks to its generics business, has strong relationship with the providers as well and that goes a long way in helping the adoption of the drug,” he says. Hence, it is crucial to have deep relationships with healthcare providers. 

In 2018, Biocon entered into another partnership with Sandoz, the generic arm of Novartis to develop the next wave of biosimilars. Under the agreement, the companies will share responsibility for end-to-end development, manufacturing, and regulatory approvals for the products in question, and will share costs and profit. While Sandoz will lead commercialisation of approved biosimilars in North America and the European Union, Biocon will commercialise the drugs in the rest of the world. 

Christiane Hamacher, CEO, Biocon Biologics says much of the growth will come from the US, since approvals there are just trickling in. “A double-digit market share in the US is definitely achievable. There is a lot more discipline when it comes to pricing, leading to far less price erosion,” she says. While the price erosion in the generics space can be as high as 80-90%, the price erosion in biosimilars is far lesser at 50-55% due to limited competition.  

Biocon Biologics is also focusing on increasing market share by participating in the 340B Drug Pricing Programme that covers one-third of the market in the US — a federal government programme that requires companies to provide drugs to healthcare organisations at discounted prices. “Our strategy right from the beginning was that our cost structure overall will allow us to play the price-volume game as well as value maximisation. So, we will be able to serve markets at different price points and overall run a very profitable business,” says Hamacher. In fact, at the UNAIDS Health Innovation Exchange at New York last September, Shaw promised to bring down the cost of human insulin from $5 to 10 cents for low and middle-income countries, which have 80% of the diabetic population. Shaw asserts that they will continue their efforts to expand patient access to high quality biosimilars by making them affordable and available. “We are the only company from India to have commercialised two biosimilars pegfilgrastim and trastuzumab in the US and are all placed to launch insulin glargine in the US later this year. As an early mover in this arena along with our marquee partners, we are well positioned to capitalise on the market as it evolves over the next decade,” she says.

According to an IIFL Securities report, even though the pricing is lower than the reimbursement rates of private insurers, participating in the 340B programme will help increase the market for both pegfilgrastim (chemotherapy drug) and trastuzumab (anti-cancer drug). IIFL expects Biocon Biologics’ Ebit margin to improve from 29% at the end of nine months in FY20 to 33% in FY21, as profit share ramps up in both products and the adoption of biosimilars increases in the US.  

The biologics arm already has approval to sell insulin Gargine in Europe and Japan and is looking to launch the drug in the US by the second half of 2020. Next in the launch pipeline is bevacizumab (anti-cancer and eye disease) and the insulin Aspart, which are likely to be launched in FY22.  

Competitive edge 
It seems like the biologics arm is out to conquer lucrative geographies, but there are challenges. While Biocon and Mylan were the first to launch pegfilgrastim in the US in July 2018, they had to deal with capacity constraints. Meanwhile, Korean players had already started making inroads with funding and regulatory support from their government. Coherus had launched its biosimilar version of pegfilgrastim in January 2019 and gained a higher market share by outsourcing manufacturing. Biocon responded by commissioning additional capacity, which went on stream in December 2019. 

The company is also facing competition from other generic players who are stepping up their game in the complex drugs space, even though they have come late to the party. Given the steep decline in generic prices, players such as Mylan, Teva and Sandoz are building their own pipeline of biosimilars. In fact, Sandoz just got approval for its version of pegfilgrastim, which it plans to launch this year to compete against innovator Amgen’s Neulasta. IMS Health estimates the overall market size for Neulasta biosimilars at $3.6 billion in the US with the biosimilars being sold at 50-55% discount to Amgen’s price. Analysts at Merrill Lynch estimate that Biocon’s share would be in the range of 15-18%. Apart from generic players, Biocon also has to contend with competition from Korean biosimilar players such as Samsung Biologics, Coherus and Celltrion Healthcare.

But Chander claims none of the competitors have the product pipeline that Biocon does and their investment will work as the floor for Biocon’s subsequent fundraising and IPO listing. Shaw had mentioned during the last concall, “This amount is adequate to see us through up to the IPO quite comfortably.” Meanwhile, the company has also been in talks with other private equity investors for subsequent capex plans. “For the molecules we are launching, we are investing in capacity across the globe,” adds Hamacher. 

While there is definitely far more clarity on the regulatory pathway now as compared to five years ago, the bet is on the future potential of the product pipeline and the company’s ability to meet the launch timelines. The company is also scaling up two of its launches in the US. “Biocon’s execution skills will be crucial for its success in the US, where the market is still evolving,” says Chander. 

Apart from biosimilars, Biocon gets about 30% of its revenue from small molecules and 28% from contract research services (Syngene) while branded formulations (India and UAE) account for the balance. Syngene is also Asia’s largest contract research organisation helping global pharma majors such as Bristol Myers Squibb, Amgen, and Abbott Nutrition with drug discovery, development and commercialisation processes. Analysts expect the research arm to rake in 15% revenue growth over the next two years.

About a couple of years ago, in FY18, the small molecules business was Biocon’s largest revenue contributor while biologics accounted for only 17%. Thanks to product launches, biosimilars have taken the lead. But the small molecules business will continue to generate much needed capital to fund further investments. Similarly, branded formulations, which comprise about 9% of revenue will be an important sales channel for Biocon’s biosimilar and insulin products apart from the core portfolio of branded formulations.

Analysts expect the company’s earnings to grow by around 20% (See: Winning streak), led by 36% growth in the biologics business and 17% growth in the small molecules business over FY19-22, coupled with expected margin improvement. Shaw is confident of the biologics arm unlocking major value for the parent and adds, “Biocon Biologics is uniquely positioned as a fully integrated ‘pure play’ biosimilars organisation in the world that aims to deliver affordable access to innovative and inclusive healthcare solutions thus transforming millions of patients’ lives. We are confident that by FY22, we will succeed in impacting 5 million patients and crossing a revenue milepost of $1 billion.” Even as analysts believe that the billion dollar revenue target for the biologics business is a stretch, the company is hopeful that its initial product launches should help them achieve the target.

Biocon hasn’t always been an investor favourite. In fact, when Indian pharma companies were riding on their generic success, Biocon did not perform as well as its contemporaries. Even during the product development phase as there was a lot of uncertainty about regulatory approvals, investors were a little wary. But all that is changing now as Biocon is set to reap the benefit of building a robust pipeline of drugs that are slated for launch in both developed and emerging markets.

Biocon trades at 25x its estimated FY21 earnings even after the stock has gained over 35% in the past six months. Analysts believe any correction from the current level of Rs.350 could provide a good entry point for investors. As long as Biocon continues to make bold bets, it will remain a winner.