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Can Serum deal provide a booster dose to Biocon’s target price?

NEW DELHI: Biocon Biologics’ deal with Serum Institute Life Sciences (SILS) for commercialisation of the latter’s vaccine portfolio could not add much to Biocon’s price targets for now, as analysts await clarity on the pricing front and actual ramp-up, which they said would be among key determinants of the stock performance going ahead.

For now, the scrip is factoring in most of the positives in the price targets and suggests only a single digit upside potential.

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Under the strategic alliance, the Biocon subsidiary has approved the merger of Covidshield Technologies (CTPL), a subsidiary of Serum Institute Life Sciences (SILS), with itself.

Serum will acquire 15 per cent in Biocon’s subsidiary with a post money valuation of $4.9 billion. The acquisition values Biocon Biologics 18 per cent higher than the value Saudi Arabia’s ADQ paid in January for a 1.8 per cent stake in the Biocon subsidiary. It is also 39 per cent higher than the valuation at which Tata Capital Growth Fund investment bought 0.85 per cent stake in Biocon Biologics in Q2FY21.

The Serum alliance would give Biocon Biologics’ access to 100 million doses of vaccines per annum for 15 years with commercialisation rights, including that of Covid-19 vaccines, for global markets.

Optically appealing
Edelweiss said the deal looks “optically appealing” but it is not clear yet what is the target geographies, vaccine types and profit-sharing fine print.

“Strategically, Biocon has achieved a profit share in a business it has had limited experience in. Even so, we see downside to mid-30s margin as the bulk of sales are likely to be in EMs, wherein pricing is about one-fourth of high-income countries. While our vaccine NPV analysis adds Rs 38 per share to the business, we are marking down the target price to Rs 345 from Rs 370 given the challenges in biosimilars,” it said.

Biosimilars account for 37 per cent of Biocon’s revenues, generics 31 per cent and CRAMS (contract research and manufacturing services) 29 per cent.

Natural extension
Motilal Oswal Securities said vaccines would complement Biocon’s current product offerings.

“With its industry-leading capabilities in affordable Biologics, entering the vaccine segment is a natural extension to its current capabilities. It will leverage its existing commercial strength, especially in developing countries, to build business prospects from this alliance,” the brokerage said.

So far, Biocon Biologics has focused on biologics used in the treatment of noncommunicable diseases, except for a few drugs used in the treatment of Covid-19. Biocon Biologics will be generating a committed revenue stream from October. It will also set up an R&D facility to develop vaccines for communicable diseases.

Valuations
Brokerage ICICIdirect finds the stock Rs 410 worthy. “The sheer size of the deal notwithstanding, the direction on the pricing front and actual ramp-up would be the key determinants, as we still await further clarifications in the due course,” it said.

The brokerage believes a ramp-up of insulin glargine after interchangeability approval in the US, approval to bevacizumab and insulin Aspart in the US, the rampup of market shares in existing biosimilarsx Syngene Mangalore customer validations and developments on the vaccines front will drive the stock going ahead.

Motilal Oswal said the business potential from this alliance is subject to the intensity of the pandemic once Serum’s Pune facility turns operational. It will also depend on the successful development of products for other viral infections, it said.

“We expect 39 per cent earnings CAGR over FY21-23 and value Biocon at 34 times 12-month forward earnings to arrive at our target of Rs 410,” it said.

Kotak Institutional Equities has a ‘sell’ rating on the stock with a target of Rs 310. A total of 20 analysts tracking the stock has a median target of Rs 394, suggesting a single digit percentage upside potential for the stock.

On Monday morning, the scrip traded 1.58 per cent lower at Rs 371 in a depressed market.

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