>BIOCON: Pfizer have terminated the $350mn (Rs17.5bn) agreement for the supply of insulin and its analogues

Biocon and Pfizer have terminated the $350mn (Rs17.5bn) agreement for the supply of insulin and its analogues. Pfizer was to market Biocon’s insulin products in various countries including the US. The termination of agreement is negative for Biocon in the short term as it has to find another partner to market its insulin products in the developed and developing markets or alternatively to create its own marketing set up. The exit of Pfizer is due to the change in business priorities in Pfizer’s biosimilar programs. Biocon has already received $100mn (Rs5.0bn) upfront payment and is likely to receive a major portion of $100mn (Rs5.0bn) lying in escrow account. Moreover, Biocon will also get undisclosed settlement fees on termination of the agreement. We reiterate Buy with a revised target price of Rs350 (based on 16x FY14 EPS).


■ Details of the Pfizer agreement: Biocon entered into an agreement with Pfizer Inc., US for the supply of human recombinant insulin and its three analogues in October’10. The four biosimilars have a combined market size of $14bn (Rs700bn). The deal size was $350mn (Rs17.5bn). Under the agreement, Biocon has already received $100mn (Rs5.0bn) as upfront payment and $100mn (Rs5.0bn) is lying in the Escrow account. Biocon is likely to get the major portion of this amount. In addition, the company was to receive additional development and regulatory milestone payments up to $150mn (Rs7.5bn) but is unlikely to receive this amount. Biocon was also to receive additional payments linked to Pfizer’s sales of four insulin
biosimilars across the global market.


■ Bicon to retain intellectual property: As on 12th March’12, all rights of insulin range of products licensed to Pfizer will revert to Biocon. All insulin products distributed under the brand names Univia and Glarvia will be available to Biocon only. Hence, all intellectual property rights under the deal will revert to Biocon. Hence Biocon is not a loser in terms of milestone payments and intellectual property rights.


■ Company to receive settlement fees: Biocon is likely to receive an undisclosed settlement fees on the termination of the agreement with Pfizer. This will be reflected in Q4FY12 results of Biocon.


■ In search of another partner: Biocon and Pfizer have said that due to the individual priorities for the biosimilar business it is in the best interest to move forward independently. Biocon will have to find another partner to market its insulin range of products in the developed and developing markets. There are three major players in the global insulin market namely: Novo Nordisk, Eli Lilly and Sanofi Aventis. Currently, Biocon has 15 partners in various emerging markets. Alternatively, Biocon will have to establish its own marketing set-up. Both these are time consuming exercises.


■ Divestment of Axicorp stake: After entering into the insulin agreement with Pfizer, Biocon divested its majority stake in Axicorp, Germany. Axicorp was a front of Biocon for marketing its products in Europe. Hence, Biocon will have to establish its own marketing set-up in Europe or find another marketing partner.


■ Out-licensing of NCEs: Biocon has plans to out-license its IN-105 oral insulin molecule to a global pharma company. The molecule has completed phase III trials in India. The company’s other molecule Itolizumab for psoriasis has completed phase III clinical trials in India and has exhibited an excellent safety and tolerability profile. Biocon has plans to out-license this molecule also.


■ Reiterate Buy: We have revised our EPS estimates downwards by 18% for FY13 and 23% for FY14 due to the termination of Pfizer deal. At the CMP of Rs249, the stock trades at 12.5x FY13E EPS of Rs19.8 and 11.4x FY14E EPS of Rs21.9. We are positive on the long-term prospects of the company in view of its strong growth in branded formulations and CRAMS segments and the possibility of outlicensing of two of its NCE molecules. We reiterate Buy with a target price of Rs350 (based on 16x FY14E EPS).


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