BIOS recently announced that its subsidiary, Biocon Biologics (BBL), has entered into a definitive agreement with Viatris to acquire its Biosimilar business for $3.3 bn. While BIOS has established its presence across the value chain of Biosimilars in emerging markets, it was lacking regulatory/supply chain/commercial capabilities in developed markets. Acquisition of Viatris’ Biologics business fills this gap and gives it the option to acquire b-Aflibercept (a potential Biosimilar asset).
The valuation, based on estimates shared by the management, stands at 3.8x/3x CY22/CY23 sales and 16.5x/ 13.2x CY22/CY23 Ebitda. While the deal forward integrates BBL in the Biologics value chain, the valuation paid for acquiring Viatris’ commercial infrastructure in developed markets is expensive. We raise our FY23E/FY24e EPS estimate by 3.4%/15% to factor in Viatris’ business. We value BIOS on a SoTP basis (valuing BBL at 25x EV/Ebitda for its 65% stake post-completion of the deal, valuing its 70.4% stake in Syngene at current market capitalisation, valuing the Small Molecules business at 10x EV/Ebitda, and deducting a net debt of $1.5 bn to arrive at our TP of Rs 385/share. We remain Neutral given the limited upside from current levels.
Deal details
BBL (a subsidiary of BIOS) will acquire Viatris’ Biosimilar business to create a vertically integrated company in the Biologics segment. With this acquisition, BBL will acquire the commercial infrastructure in developed/emerging markets, rights for all Biosimilar assets (including the in-licensed portfolio), and the option to acquire rights of b-Aflibercept. The management pegs the estimated revenue/Ebitda of Viatris’ Biosimilar business at $875/200 m and $1.1/250 m in CY22 and CY23, respectively.
Out of the $3.3-bn payment, the cash consideration is expected to be $2 bn. There will be compulsory issuance of convertible preference shares worth $1 bn (effectively 12.9% stake in Biocon Biologics) and an additional payment of $335 m is expected in CY24. The transaction is expected to close in H2CY22, subject to regulatory approvals.
Valuation and view
We expect 36%/56% sales/PAT CAGR over FY22-24E, led by better traction in commercialised Biosimilars, launches, addition of Viatris business, and low base of FY22 (excluding the Viatris business). We are factoring in $1.2 bn in sales for BBL in FY24E. We value BIOS on a SoTP basis: a) valuing BBL at 25x EV/Ebitda for its 65% stake post-completion of the deal, b) valuing its 70.4% stake in Syngene at current m-cap, and c) valuing the Small Molecules business at 10x EV/Ebitda. Accordingly, we arrive at our TP of`385/share. While the overall outlook on BIOS’ Biosimilars/Small Molecules remains encouraging, based on its product pipeline and existing commercial traction, we maintain our Neutral rating as current valuations adequately factor in potential upside in earnings.
