Result Update

January 27, 2017

Rating matrix
Rating : Buy
Biocon (BIOCON) | 990
Target
Target Period
:
:
| 1120
12-15 months
Biologics, licensing income propel numbers…
Potential Upside : 13% • Revenues grew 29% YoY to | 1044 crore (I-direct estimate: | 996
crore) mainly due to a sharp jump in licensing income and robust
What’s Changed? growth in biologics. Licensing income increased to | 79 crore from
Target Changed from | 1030 to | 1120 | 32 crore in Q3FY16. Biologics revenues grew 60% to | 120 crore
EPS FY17E Changed from | 31 to | 32.6 • EBITDA margins improved 354 bps YoY to 26.4% (I-direct estimate:
EPS FY18E Changed from | 34 to | 34.4
24.2%) mainly due to lower raw material & other expenses. Higher
EPS FY19E Changed from | 45.2 to | 44.2
licensing income was also contributed to EBITDA
Rating Changed from Hold to Buy
• PAT increased 68% to | 171 crore (I-direct estimate: | 136 crore) on
account of a strong operational performance & higher other income
Quarterly Performance
Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Small molecules segment likely to get boost from ANDA launches
Revenue 1,044.4 807.1 29.4 954.1 9.5 The small molecules segment accounts for ~42% of turnover and
EBITDA 276.1 184.8 49.4 240.0 15.0 comprises APIs like statins, immunosuppressants, specialty APIs and also
EBITDA (%) 26.4 22.9 354 bps 25.2 128 bps includes generic formulations business. This vertical is seeing pricing
Net Profit 170.6 101.5 68.1 142.1 20.1 pressure in some products. The company is exploring fewer
opportunities but with higher profitability in this segment like moving into
Key Financials formulations and filing own ANDAs, 505 (b)(2) filings, etc. It has already
(| Crore) FY16 FY17E FY18E FY19E filed seven or eight ANDAs cumulatively. These include complex generics
Revenues 3485.4 4041.2 4684.8 5657.8 and injectables. We expect small molecules segment to grow at 11%
EBITDA 820.0 1052.3 1199.3 1477.7 CAGR to | 1897 crore in FY16-19E.
Adj. Net Profit 462.9 652.9 688.4 884.8
Adj. EPS (|) 23.1 32.6 34.4 44.2
Well poised to capitalise on global biosimilars opportunity
The biologics segment includes novel biologics and biosimilars, including
Rh-insulin, insulin analogs, monoclonal antibodies and recombinant
Valuation summary
proteins. This segment accounts for ~12% of turnover. Biocon is mainly
FY16 FY17E FY18E FY19E
PE(x) 21.6 30.3 28.8 22.4
focusing on following therapies - diabetology, oncology and immunology.
EV to EBITDA (x) 11.4 14.4 13.7 15.4 The company has invested heavily in this space in the last two or three
Price to book (x) 9.1 13.0 13.7 16.5 years, especially the Malaysian facility. So far, the progress has been
RoNW (%) 24.8 19.2 16.6 13.2 encouraging with launches in emerging markets, Glargine launch in Japan
RoCE (%) 4.9 4.4 3.9 3.5 and filing arrangements in EU and US. We expect biologics to grow at a
CAGR of ~43% to | 1008 crore in FY16-19E.
Stock data Research Services (Syngene) to maintain growth momentum
Particular Amount Biocon’s research arm Syngene contributes ~32% to its turnover.
Market Capitalisation | 19800 crore Syngene is the contract research organisation (CRO) arm of Biocon with
Debt (FY16) | 2457 crore
proven capabilities. The company caters to 256 clients including eight out
Cash (FY16) | 1921 crore
of global top 10 global players. This segment is consistently growing at
EV | 20336 crore
52 week H/L 1052/431
20%+ rate and recently has been the major growth driver for the
Equity capital (|Crore) | 100 crore company as biopharma segment is slowing down. We expect revenues to
Face value (|) |5 grow at a CAGR of ~21% to | 1883 crore in FY16-19E.
Branded formulations growth space
Price performance (%) The branded formulations business includes finished dosages business in
1M 3M 6M 1Y India and overseas including UAE. It constitutes 15% of turnover. It
Biocon -6.7 4.0 40.5 100.5 comprises Indian domestic formulations. Biocon owns 80+ brands
Glenmark -4.8 5.8 2.8 -7.1 encompassing therapies like diabetology, oncology, nephrology,
Torrent Pharma -19.9 -11.8 -5.7 -17.4 cardiology, immunotherapy, comprehensive care and bio-products.
Aurobindo Pharma -9.9 3.0 -5.5 -7.8
Biosimilars progress getting momentum; upgrade to BUY
Encouraging developments on the biosimilars front in the last nine
Research Analyst months have demonstrated the capability in the biosimilars space. What
Siddhant Khandekar has cemented Biocon’s position as perhaps the best placed candidate
siddhant.khandekar@icicisecurities.com among Indian companies in the series of positive outcomes from
Mitesh Shah developed markets. It will also provide an extra lever for growth besides
mitesh.sha@icicisecurities.com Syngene and branded formulations. Apart from this, increase in biosimilar
licensing deal in emerging markets would further improve the overall
performance. As for developed markets foray, the current institutional
acceptance of various biologics assets may set the launch pad two years
hence. We have ascribed a target price of | 1120 (SOTP basis).

ICICI Securities Ltd | Retail Equity Research

Variance analysis
Q3FY17 Q3FY17E Q3FY16 Q2FY17 YoY (%) QoQ (%) Comments
Revenue 1,044.4 996.3 807.1 954.1 29.4 9.5 YoY growth mainly on the back of a sharp jump in licensing income and strong
growth in biologics segment. Beat vis-à-vis I-direct was mainly due to higher-than-
expected licensing income and biologics sales
Raw Material cost 374.7 369.5 303.1 353.8 23.6 5.9
Employee cost 194.2 180.0 152.2 180.4 27.6 7.6
R & D Expenditure 85.0 85.7 67.9 65.0 25.2 30.8
Other Expenditures 114.4 119.6 99.1 114.9 15.4 -0.4
Total Expenditure 768.3 754.8 622.3 714.1 23.5 7.6
EBITDA 276.1 241.5 184.8 240.0 49.4 15.0
EBITDA (%) 26.4 24.2 22.9 25.2 354 bps 128 bps YoY improvement was mainly due to lower raw material and other expenses.
Higher licensing income also contributed to EBITDA. Beat vis-à-vis I-direct was
mainly due to higher-than-expected licensing income
Interest 8.8 6.5 1.5 6.5 486.7 35.4
Depreciation 70.3 68.3 63.9 68.3 10.0 2.9
Other income 47.5 31.5 21.6 38.4 119.9 23.7 YoY increase was mainly due to higher interest income registered in Syngene

EO 0.0 0.0 0.0 0.0 0.0 0.0

PBT 244.5 198.2 141.0 203.6 73.4 20.1
Tax 54.4 40.6 21.8 41.7 149.5 30.5
MI 19.5 22.0 17.7 19.8 10.2 -1.5
Adj. Net Profit 170.6 135.5 101.5 142.1 68.1 20.1 YoY increase was mainly due to strong operational performance and higher other
income
Key Metrics
Biopharmaceuticals 390.0 400.5 315.0 389.0 23.8 0.3 YoY growth was mainly due to strong demand for Rosuvastatin API in the US
market
Biologics 120.0 101.0 75.0 96.0 60.0 25.0 YoY growth was led by the expansion of commercial footprint and increased
traction in some of the key emerging markets
Branded Formulations 123.0 137.9 104.0 137.0 18.3 -10.2 Sequental de-growth in branded business due to discontinuation of in-licensing of
Abraxane
Contract Research 317.0 324.1 270.1 286.0 17.4 10.8 Strong YoY growth was on the back of robust growth registered across all verticals

Licensing income 79.0 20.0 32.0 32.0 146.9 146.9 Sharp jump in licensing income was mainly related to rights assignment for
biosimilar products in emerging markets
Source: Company, ICICIdirect.com Research

Change in estimates
FY17E FY18E
(| Crore) Old New % Change Old New % Change
Revenues 4,009.2 4,041.2 0.8 4,678.9 4,684.8 0.1

EBITDA 1,013.0 1,052.3 3.9 1,182.8 1,199.3 1.4

EBITDA Margin (%) 25.3 26.0 74 bps 25.3 25.6 30 bps
Net Profit 619.6 652.9 5.4 680.0 688.4 1.2
EPS (|) 31.0 32.6 5.3 34.0 34.4 1.2 Changed in FY17E due to higher-than-expected operational performance and increase
in other income
Source: Company, ICICIdirect.com Research

Assumptions
Current Earlier
Growth (%) FY15 FY16 FY17E FY18E FY17E FY18E Comments
Biopharmaceuticals 1,765.0 1,729.0 2,057.0 2,396.4 2,018.2 2,342.3

Branded Formulations 430.0 440.0 541.9 555.2 567.4 628.8 Changed mainly due to slower-than-expected growth in Q3FY17 and
discontinuation of in-licensing product Abraxane
Contract Research 822.0 1,060.0 1,239.9 1,544.0 1,280.9 1,585.1
Licensing income 43.0 108.0 148.0 120.0 89.0 60.0 Increased mainly due to growth in rights assignment for biosimilar products in
emerging markets
Source: Company, ICICIdirect.com Research; * excludes Licensing income

ICICI Securities Ltd | Retail Equity Research Page 2

 Company Analysis
Biocon was established in 1978 by first generation entrepreneur Dr Kiran
Mazumdar-Shaw. Unlike most pharma companies that are chemical
based, Biocon has carved out its niche in the more complex
biotechnology field. Over the decades, Biocon has successfully evolved
into an emerging global biopharma enterprise, serving its partners and
customers in over 75 countries. As a fully integrated biopharma company,
it delivers innovative biopharmaceutical solutions, ranging from discovery
to development & commercialisation. In 2004, it came out with its maiden
IPO.

Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab

and Insulin Glargine) have already reached the critical milestone of global
Phase III clinical trials. The company has initiated filings of biosimilars in
the US and EU besides launches in Japan. Biocon entered into a
partnership with Mylan for six biosimilar programs (Trastuzumab,
Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept and Filgrastim) and
three insulin analog programs (Glargine, Lispro and Aspart).

Biocon’s Japanese partner Fujifilm Pharma (FFP) has launched Insulin

Glargine in Japan. The company received approval for its Insulin Glargine
from the Japanese regulator in March 2016. Insulin Glargine BS Injection
Kit (FFP) has been developed and manufactured by Biocon and is being
commercialised by FFP in Japan.

Exhibit 1: Biosimilars: Insulin pipeline

Molecule Type Status Market Size (US$ billion)
Rh Insulin Recombinant Human Insulin EU Phase III complete 3.1
Glargine Long Acting Basal Insulin Global Phase III 7.1
Aspart Rapid Acting Insulin Analog Preclinical/Scale Up 4.7
Lispro Rapid Acting Insulin Analog Preclinical/Scale Up 2.8
Total Market Size 18.0
Source: Company, ICICIdirect.com Research
Exhibit 2: Biosimilars: MAbs & biologics pipeline
Molecule Indication Status Market Size (US$ billion)
Adalimumab Chronic Plaque Psoriasis Global Phase III 14.0
Trastuzumab mBreast Cancer Global Phase III 6.8
Pegfilgrastim Chemo-induced Neutropenia Global Phase III 4.7
Bevacizumab mColorectal Cancer EU Phase 1, RoW Phase III 6.9
Filgrastim Chemo-induced Neutropenia Preclinical/Scale Up 1.0
Etanercept Auto-immune Preclinical/Scale Up 8.7
Total Market Size 42.0
Source: Company, ICICIdirect.com Research

Exhibit 3: Revenues to grow at CAGR of 17.5% in FY16-19E

6000.0 5657.8

5000.0 4684.8
4041.2
4000.0 3485.4
3089.8
(| crore)

2877.3
3000.0 2485.3
2086.5
2000.0

1000.0

0.0
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Revenues

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

 Biocon has realigned its segments after the adoption of Ind AS. They are-
1) small molecules, 2) research services (Syngene), 3) branded
formulations and 4) biologics.

Small molecules- The small molecules segment accounts for ~42% of the
turnover and comprises APIs like statins, immunosuppressants, specialty
APIs and also includes generic formulations business. This vertical is
witnessing pricing pressure in some products. The company is exploring
fewer opportunities but with higher profitability in this segment such as
moving into formulations and filing own ANDAs, 505 (b)(2) filings etc. It
has already filed seven to eight ANDAs cumulatively. These include
complex generics and injectables. We expect the small molecules
segment to grow at a CAGR of 11% to | 1897 crore in FY16-19E.

Biologics – The biologics segment include novel biologics and

biosimilars, including Rh-insulin, insulin analogs, monoclonal antibodies
and recombinant proteins. This segment accounts for ~12% of the
turnover. Biocon is mainly focusing on the following therapies-
diabetology, oncology and immunology. This segment has been
specifically carved out to tap numerous biosimilar opportunities
especially in the next three to five years. Globally, the biosimilar space is
still in a nascent state for want of guidelines by most countries including
the US. The now defunct Pfizer deal was also based on biosimilar
opportunities. Biocon’s biosimilar pipeline currently includes 10 products
in different phases of completion. Out of these 10 products, the four
diabetic products- Rh Insulin, Glargine, Lispro and Aspart were the
subject matter of two deals first with Pfizer and then with Mylan
(excluding Rh Insulin). The company has invested heavily in this space
over the last two to three years, especially the Malaysian facility. The
progress, so far, has been encouraging with launches in emerging
markets, Glargine launch in Japan and filing arrangements in the EU and
US. We expect biologics to grow at ~43% CAGR to | 1008 crore in FY16-
19E.

ICICI Securities Ltd | Retail Equity Research Page 4

 Exhibit 4: Small molecules & biologics to grow at CAGR of 18.9% in FY16-19E

3500
2904.8
3000
2396.4
2500
2057.0
2000 1732.0 1765.0 1729.0

(| crore)
1503.7
1500 1259.3

1000

500

0
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Small Molecules+Biologics

Source: Company, ICICIdirect.com Research

Exhibit 5: Licensing income

140 126.5
120.0 120.0
120 108.0 108.0
100

80
(| crore)

60
43.0
40 25.0
15.4
20

0
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Licensing income

Source: Company, ICICIdirect.com Research

Branded formulations - It comprises Indian domestic formulations. Biocon

owns 80+ brands encompassing seven therapeutic segments viz.
diabetology, oncology, nephrology, cardiology, immunotherapy,
comprehensive care and bio-products. However, with ~0.38% market
share and 57th rank in the IPM market (AIOCD), the company is still a
marginal player in the Indian context. Among therapies, diabetology is the
largest therapy, which accounts for 60% of branded formulations. Some
of its unique launches are INSUPen (insulin delivery device), Biomab
(novel biologic for Oncology) and Alzumab (novel biologic for Psoriasis)
and the pipeline includes CANMAb (biosimilar version of oncology
product Herceptin). This segment constitutes ~15% of overall sales.

ICICI Securities Ltd | Retail Equity Research Page 5

 Exhibit 6: Branded formulations sales to grow at CAGR of 14.8% in FY16-19E

700 666.3

600 555.2

500 430.0 440.0 440.0

391.4
400 347.9

(| crore)
300 256.5

200

100

0
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Branded Formulations

Source: Company, ICICIdirect.com Research

Research services (Syngene) - Biocon’s research arm Syngene

contributes ~32% to its turnover. This is the CRO business of Biocon,
which deploys over 2570 scientists. The company provides end-to-end
Research services revenues (FY16) discovery and development services for novel molecular entities (NMEs)
across industrial sectors including pharmaceutical, biotechnology,
agrochemicals, consumer health, animal health, cosmetic and nutrition
companies under one roof with a distinctive economic advantage. It also
Dedicated provides support for biosimilar and generic molecules development. The
33%
company provides variable cost alternative like full-time equivalent (FTE)
and fee-for-service (FFS) to the traditionally fixed cost, in-house, resource
Others intensive business model of R&D focused organisations. Currently, the
(FTEs+FFS)
company has 256 clients ranging from large multinational corporations to
67%
start-ups, including seven of the top 10 global pharmaceutical companies.
The company has developed long-term relationships and has multi-year
contracts with its clients, including four long-duration multidisciplinary
partnerships with Bristol-Myers Squibb (BMS), Abbott Laboratories
(Singapore), Baxter International and Amgen. The company also provides
clinical research and clinical trial services through its subsidiary Clinigene.
In August 2015, Syngene had raised | 550 crore through an IPO.

Exhibit 7: Contract research to grow at CAGR of 21.1% in FY16-19E

2000 1883.1
1800
1544.0
1600
1400
1200 1060.0 1060.0
(| crore)

1000 822.0
714.7
800
558.0
600 411.2
400
200
0
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Contract Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 6

 Exhibit 8: Trends in overall R&D cost

400 399.3 9.0

329.5 8.5
8.2 8.5
7.9
300 7.5 275.3 7.5
6.8

(| crore)
200 167.8 168.8 6.0

(%)
156.9
130.6 5.5

100 4.5 4.5

0 3.0
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
R & D cost R & D cost (% revenues)

Source: Company, ICICIdirect.com Research

Exhibit 9: Trends in EBITDA margins

1199.3
1200 1052.3 28
26.0
1000 26
820.0
800 695.8 26.1
687.1 25.6
24.8 543.0 23.9 24
517.3 23.5
(| crore)

600
22.5

(%)
21.8 22
400

200 20

0 18
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

EBITDA EBITDA Margins (%)

Source: Company, ICICIdirect.com Research

Exhibit 10: Net profit to de-grow at CAGR of 1.2% in FY16-19E

1200 28
26
1000 917.8 884.8 24
26.3
22
800 20.5 16.2 20
652.9 688.4
16.1 18
(| crore)

600 508.9 14.4 497.4 16

(%)

413.8
16.2
338.4 14.7 15.6 14
400 12
10
200 8
6
0 4
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Net Profit Net Profit Margins (%)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 7

 Exhibit 11: Return ratios likely to be under pressure on the back of reduced profitability…

22 15.4 16
14.9
14.4
13.7 13.7 14
18 12.6 12.5
12
11.4
16.5
14 10

(%)

(%)
13.7
13.0 13.0
11.7 8
10 11.9 10.4
9.1 6

6 4
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

RoCE (RHS) RoNW (LHS)

Source: Company, ICICIdirect.com Research

SWOT Analysis
Strengths – It is an early entrant in a more lucrative biotech space with
proven track records. The space has high entry barriers due to complexity
of the molecules and tougher trials requirement. Four dedicated centres
catering to the top global players.

Weakness - Its largest segment i.e. small molecules is witnessing constant

pricing pressure and capacity constraints. Other emerging segments such
as biosimilars will take some time to scale up.

Opportunities - Huge opportunity beckons for biosimilars as globally

seven out of the top 10 drug brands are biologics. Some of them will lose
patent exclusivity in the next five to seven years. The price erosion in
biosimilars is much less than that of chemical compound based drugs.

Threats- (i) Backtracking by Mylan may increase the R&D cost sharply, (ii)
pricing pressure in branded formulations.

ICICI Securities Ltd | Retail Equity Research Page 8

Exhibit 12: Trends in quarterly performance
(| Crore) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 YoY (%) QoQ(%)
Revenues 707.3 728.5 725.3 757.6 769.1 837.3 813.9 796.2 807.1 945.0 982.4 954.1 1044.4 29.4 9.5
Raw Material Cost 294.8 292.6 291.1 309.8 317.6 337.5 293.9 326.3 303.1 322.6 357.3 353.8 374.7 23.6 5.9
% to revenues 41.7 40.2 40.1 40.9 41.3 40.3 36.1 41.0 37.6 34.1 36.4 37.1 35.9
Gross Profit 412.5 435.9 434.2 447.8 451.5 499.8 520.0 469.9 504.0 622.4 625.1 600.3 669.7 32.9 11.6
Gross Profit Margin (%) 58.3 59.8 59.9 59.1 58.7 59.7 63.9 59.0 62.4 65.9 63.6 62.9 64.1 168 bps 121 bps
Employee cost 115.5 122.4 125.5 135.4 136.0 136.6 148.3 143.1 152.2 166.5 178.5 180.4 194.2 27.6 7.6
% to revenues 16.3 16.8 17.3 17.9 17.7 16.3 18.2 18.0 18.9 17.6 18.2 18.9 18.6 -26 bps -31 bps
R&D 20.0 29.0 31.0 35.0 46.9 56.0 50.0 57.4 67.9 100.0 93.3 65.0 85.0
% to revenues 2.8 4.0 4.3 4.6 6.1 6.7 6.1 7.2 8.4 10.6 9.5 6.8 8.1 -27 bps 133 bps
Other Expenditure 101.3 109.0 103.8 104.3 108.7 122.4 113.4 100.3 99.1 159.0 90.2 114.9 114.4 15.4 -0.4
% to revenues 14.3 15.0 14.3 13.8 14.1 14.6 13.9 12.6 12.3 16.8 9.2 12.0 11.0 -132 bps -109 bps
Total Expenditure 531.5 553.0 551.4 584.5 609.2 652.5 605.6 627.1 622.3 748.1 719.3 714.1 768.3 23.5 7.6
% to revenues 75.1 75.9 76.0 77.1 79.2 77.9 74.4 78.8 77.1 79.2 73.2 74.8 73.6
EBIDTA 175.8 175.6 173.9 173.1 160.0 184.9 208.3 169.1 184.8 196.9 263.1 240.0 276.1 49.4 15.0
EBITDA Margin (%) 24.9 24.1 24.0 22.9 20.8 22.1 25.6 21.2 22.9 20.8 26.8 25.2 26.4 354 bps 128 bps
Depreciation 51.3 54.0 51.9 54.2 56.3 58.5 59.0 61.0 63.9 64.8 66.1 68.3 70.3 10.0 2.9
Interest 0.3 0.7 0.6 5.0 4.8 0.0 4.4 2.9 1.5 16.6 5.7 6.5 8.8 486.7 35.4
OI 12.3 17.2 16.6 15.0 9.8 16.8 19.9 22.7 21.6 21.4 40.9 38.4 47.5 119.9 23.7
PBT 136.6 138.1 138.1 128.9 108.6 143.2 164.8 127.9 141.0 136.9 232.2 203.6 244.5 73.4 20.1
Tax 26.2 19.2 30.9 21.8 11.2 21.9 37.6 28.2 21.8 59.1 55.2 41.7 54.4 149.5 30.5
Tax Rate (%) 19.2 13.9 22.4 16.9 10.3 15.3 22.8 22.1 15.5 43.2 23.8 20.5 22.2
PAT 110.4 118.9 107.2 107.1 97.5 121.3 127.2 99.7 119.2 77.8 177.0 161.9 190.1 59.5 17.4
PAT Margin (%) 15.6 16.3 14.8 14.1 12.7 14.5 15.6 12.5 14.8 8.2 18.0 17.0 18.2
Exceptional Items (EI) 0.0 0.0 0.0 0.0 0.0 -95.2 0.0 107.8 0.0 -268.4 0.0 0.0 0.0
Net Profit before MI 110.4 118.9 107.2 107.1 97.5 216.4 127.2 -8.1 119.2 346.2 177.0 161.9 190.1 59.5 17.4
Add/(less) MI 5.4 5.8 4.3 5.0 6.6 15.3 7.1 12.5 17.7 21.1 15.8 19.8 19.5
Net Profit 105.0 113.1 102.9 102.1 90.9 201.2 120.1 -20.6 101.5 325.1 161.2 142.1 170.6 68.1 20.1
Net Profit (excl.EI) 105.0 113.1 102.9 102.1 90.9 106.0 120.1 87.2 101.5 56.7 161.2 142.1 170.6 68.1 20.1

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9

 Conference call Highlights

• USFDA accepted for review of biologics license application (BLA)

for proposed biosimilar Trastuzumab co-developed by Biocon and
Mylan; this marks first US regulatory submission through the
Mylan/Biocon collaboration
• Higher licensing income was primarily due to incremental
Trastuzumab contribution (for emerging markets) whereas higher
statins sales contributed to the higher revenues from small
molecules segment
• Revenues from branded formulations QoQ were impacted due to
discontinuance of in-licensed Abraxane. However, the
management plans to strengthen the segment by taking measures
such as change in product leadership, new customer relationship
management (CRM) tool and by talking to multiple companies for
in-licensing opportunities
• The company has received USFDA approval for Generic
Rosuvastatin Calcium tablets. Rosuvastatin is the first generic
approval received by the company from USFDA
• Biocon’s Malaysian plant received a three-year contract for
supplying Rh-Insulin cartridges & re-usable insulin pens by
Ministry of Health (MoH) Malaysia, for MYR300 million (~| 460
crore)
• The Malaysian plant has been commissioned. The company
expects additional US$17-18 million of depreciation and US$30 of
additional Opex due commissioning of this plant from FY18. It
expects revenue from this facility would be US$50-60 million. It
also expects a minor loss in FY18 for this facility. The Malaysian
plant will be depreciated over 14 years
• The R&D spend for 9MFY17 was at | 201 crore. The management
has guided for less than | 300 crore spend in FY17E
• The management has guided for 32-33% of EBITDA margins
(including other income), going forward
• The capex for oral solid dosage facility is largely complete. The
management has guided for a maintenance capex of | 75-100
crore, going forward. It has also planned for MAb facility at
Bangalore in partnership with Mylan, for which it is yet to disclose
details
• Major part of the capex funding would be from operating profits,
going forward
• The company is still responding to USFDA queries on Copaxone
20 mg
• The company has guided for single digit growth in the biopharma
business. It expects single digit price erosion in the US
• The Indian facility is currently operating at full capacity for insulin
production

ICICI Securities Ltd | Retail Equity Research Page 10

 Valuation
Encouraging developments on the biosimilars front in the last nine
months have demonstrated the capability in the biosimilars space. What
has cemented Biocon’s position as perhaps the best placed candidate
among Indian companies in the series of positive outcomes from
developed markets. It will also provide an extra lever for growth besides
Syngene and branded formulations. Apart from this, increase in biosimilar
licensing deal in emerging markets would further improve the overall
performance. As for developed markets foray, the current institutional
acceptance of various biologics assets may set the launch pad two years
hence. We have ascribed a target price of | 1120 (SOTP basis).

Exhibit 13: Valuation

Particulers FY19E EPS (| cr) Multiple (x) Per share (| )
Biocon (ex Syngene) 30.0 26.0 780.0
Syngene
Targeted Market Cap 11400
Biocon's Holding 74.6%
Holding Company Discount 20.0%
Syngene valuation 6799
Per share valuation 340
SOTP valuation 1,120 [

Source: ICICIdirect.com Research

Exhibit 14: One year forward PE

800
700
600
500
400
(|)

300
200
100
0
Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17
Price 23.2x 19.8x 14.0x 11.7x 9.4x
[

Source: Company, ICICIdirect.com Research

Exhibit 15: One year forward PE of company vs. CNX Pharma Index
45 29% Premium
40
35
30
25
(x)

20
15
10
5
0
Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Biocon CNX Pharma

Source: Company, ICICIdirect.com Research

Exhibit 16: Valuation

Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE
(| crore) (%) (|) (%) (x) (X) (%) (%)
FY16 3485 12.8 23.1 13.3 21.6 24.8 11.4 9.1
FY17E 4041 15.9 32.6 41.1 30.3 19.2 14.4 13.0
FY18E 4685 15.9 34.4 5.4 28.8 16.6 13.7 13.7
FY19E 5658 20.8 44.2 28.5 22.4 13.2 15.4 17.7
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

Recommendation history vs. Consensus
1,200 60.0

1,000 50.0

800 40.0
(|)

600 30.0

(%)
400 20.0

200 10.0

0 0.0
Jan-15 Mar-15 Jun-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Nov-16 Jan-17
Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICIdirect.com Research

Key events
Date Event
May-09 Launches long lasting human insulin Basalog in Indian market. The drug is similar to Sanofi's Lantus
Oct-10 Enters into an agreement with Pfizer for worldwide commercialisation of biosimilar versions of insulin and insulin analogue products: Recombinant human insulin,
Glargine, Aspart and Lispro
Jan-11 Novel oral insulin IN-105 fails to meet its primary end point of lowering HbA1c levels compared to available drugs in the market (placebo)
Mar-12 Biocon and Pfizer conclude their alliance to commercialise Biocon's biosimilar versions of insulin and insulin analogue products worldwide
Nov-12 Enters into an option agreement with Bristol-Myers Squibb (BMS) for Biocon's IN-105 (oral insulin product candidate)
Feb-13 Out-licenses three insulin analogue products to Mylan. Mylan will have the rights to develop and market Biocon's Glargine, Lispro and Aspart.
Nov-13 Receives marketing approval from Drugs Controller General of India to launch its biosimilar Trastuzumab (anti-cancer) in Indian market.
Jan-14 Biocon launches its biosimilar CanMab in Indian market
Sep-14 Biocon Research buys back the 7.69% stake held by GE Equity International Mauritius valuing Syngene at | 2800 crore.
Jan-15 Silver Leaf Oak acquires 10% stake in Syngene International, Biocon's Research Services Subsidiary at a valuation of | 3800 crore
Jul-15 Syngene IPO starts from July 27, 2015 at a price range of | 240-250
Oct-15 Acquired API unit of Acacia Life Sciences Private Limited at Vizag
Jun-16 Biocon and Mylan to Present Phase 3 Trastuzumab Biosimilar Data at the American Society of Clinical Oncology (ASCO) Annual Meeting
Jul-16 Biocon's Insulin Glargine launched in Japan
Jul-16 European Medicines Agency accepts Biocon-Mylan proposed biosimilar Pegfilgrastim (gNeulasta) for review
Aug-16 European Medicines Agency accepts Biocon-Mylan proposed biosimilar Trastuzumab (gHerceptin) for review
Jan-17 USFDA accepts Biocon’s biologics licence application for its biosimilar oncology drug Trastuzumab
Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S Position Position Chan (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
1 Shaw (Kiran Mazumdar) 30-Sep-16 41.4 82.8m 0.0 Promoter 60.7 60.7 60.7 60.7 60.7
2 Glentec International 30-Sep-16 19.8 39.5m 0.0 Public 39.3 39.3 39.3 39.3 39.3
3 OppenheimerFunds, Inc. 30-Nov-16 2.3 4.5m 2.2
4 Templeton Asset Management Ltd. 30-Sep-16 2.1 4.1m -3.1
5 Biocon India Ltd Employee Welfare Trust 21-Nov-16 1.9 3.7m -0.2
6 Dimensional Fund Advisors, L.P. 31-Oct-16 1.1 2.2m -0.1
7 Chandavarkar (Arun Suresh) 30-Sep-16 1.1 2.2m 0.0
8 Krishnan (Murali K N) 30-Sep-16 1.1 2.1m 0.0
9 ICICI Prudential Asset Management Co. Ltd. 30-Nov-16 1.0 2.0m 0.2
10 Birla Sun Life Asset Management Company Ltd. 31-Dec-16 0.9 1.7m 0.0
Source: Reuters, ICICIdirect.com Research

Recent Activity
BUYS SELLS
Investor Name Value ($ mn) Shares Investor Name Value ($ mn) Shares
OppenheimerFunds, Inc. 29.59 2.21 Templeton Asset Management Ltd. -43.71 -3.12
Waddell & Reed Investment Management Company 8.66 0.62 Reliance Nippon Life Asset Management Limited -22.39 -1.60
Franklin Templeton Asset Management (India) Pvt. Ltd. 4.65 0.35 Tata Asset Management Limited -4.11 -0.30
ICICI Prudential Asset Management Co. Ltd. 2.62 0.20 Biocon India Ltd Employee Welfare Trust -2.51 -0.19
Prasad (B S V) 1.20 0.09 IDFC Asset Management Company Private Limited -2.06 -0.15

ICICI Securities Ltd | Retail Equity Research Page 12

Financial summary
Profit and loss statement | Crore Cash flow statement | Crore
Year-end March FY16 FY17E FY18E FY19E Year-end March FY16 FY17E FY18E FY19E
Total Operating Income 3485.4 4041.2 4684.8 5657.8 Profit/(Loss) after taxation 896.1 652.9 688.4 884.8
Growth (%) 12.8 15.9 15.9 20.8 Add: Depreciation & Amortization 242.3 272.9 371.8 421.3
Raw Material Expenses 1330.1 1463.2 1680.8 1985.9 Net Increase in Current Assets -204.5 -297.5 -316.4 -445.5
Employee Expenses 636.3 750.4 866.7 1035.4 Net Increase in Current Liabilities -159.7 92.4 177.8 223.1
R&D Expenditure 275.3 329.5 399.3 479.8 Other Operating Activities -247.9 27.4 20.4 13.4
Other Expenditures 423.7 445.7 538.8 678.9 CF from operating activities 526.4 748.1 942.0 1097.1
Total Operating Expenditure 2665.4 2988.9 3485.5 4180.0 (Increase)/Decrease in Investments -198.2 -200.0 -500.0 -500.0
Operating Profit (EBITDA) 820.0 1052.3 1199.3 1477.7 (Purchase)/Sale of Fixed Assets -957.7 -300.0 -100.0 -100.0
Growth (%) 17.8 28.3 14.0 23.2 Increase/ (Decrease) in Minority Int 139.0 80.5 105.0 128.1
Depreciation 242.3 272.9 371.8 421.3 Other Investing Activities 62.9 0.0 0.0 0.0
Interest 10.2 27.4 20.4 13.4 CF from investing activities -954.0 -419.5 -495.0 -471.9
Other Income 84.5 168.3 184.6 223.0 Proceeds from issues of Equity Sha 0.0 0.0 0.0 0.0
PBT before Exceptional Items 652.0 920.3 991.7 1266.0 Inc/(dec) in loan funds 1432.7 -500.0 -500.0 -500.0
Less: Exceptional Items -575.4 0.0 0.0 0.0 (Payment) of Dividend and Dividend -116.5 -187.0 -172.1 -185.8
Total Tax 256.9 197.6 198.3 253.2 Interest Paid -10.2 -27.4 -20.4 -13.4
PAT before MI 970.5 722.6 793.4 1012.8 Other Financing Activities 105.4 0.0 0.0 0.0
Minority Interest 74.4 80.5 105.0 128.1 CF from financing activities 1411.4 -714.4 -692.5 -699.2
Net Cash flow 983.8 -385.8 -245.4 -74.0
Adjusted PAT 462.9 652.9 688.4 884.8 Opening Cash 937.5 1921.3 1535.5 1290.1
Growth (%) 13.3 41.1 5.4 28.5 Closing Cash 1921.3 1535.5 1290.1 1216.0
EPS (Adjusted) 23.1 32.6 34.4 44.2 Free Cash Flow -431.3 448.1 842.0 997.1
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios

Year-end March FY16 FY17E FY18E FY19E Year-end March FY16 FY17E FY18E FY19E
Liabilities Per share data (|)
Equity Capital 100.0 100.0 100.0 100.0 Reported EPS 45.9 32.6 34.4 44.2
Reserve and Surplus 3955.6 4421.5 4937.8 5636.8 BV per share 202.8 226.1 251.9 286.8
Total Shareholders funds 4055.6 4521.5 5037.8 5736.8 Dividend per share 6.0 9.4 8.6 9.3
Total Debt 2456.9 1956.9 1456.9 956.9 Cash Per Share 96.1 76.8 64.5 60.8
Deferred Tax Liability (Net) 34.6 34.6 34.6 34.6 Operating Ratios (%)
Minority Interest 311.2 391.7 496.7 624.8 Gross Margin 61.8 63.8 64.1 64.9
Other NCL & LT Provisions 380.2 380.2 380.2 380.2 EBITDA margin 23.5 26.0 25.6 26.1
Source of Funds 7238.5 7284.9 7406.2 7733.2 EBIT Margin 16.6 19.3 17.7 18.7
Assets PAT Margin 13.3 16.2 14.7 15.6
Gross Block 3489.1 3739.1 4957.9 5617.2 Inventory days 53.6 52.2 52.1 52.1
Accumulated Depreciation 1766.5 2039.4 2411.3 2832.6 Debtor days 86.2 88.9 88.7 88.7
Net Block 1722.6 1699.7 2546.6 2784.7 Creditor days 57.3 49.5 49.4 49.4
Capital WIP 2187.5 2237.5 1118.8 559.4 Asset Turnover 0.5 0.6 0.6 0.7
Total Fixed Assets 3910.1 3937.2 3665.3 3344.0 EBITDA Conversion Ration 64.2 71.1 78.5 74.2
Other Investments 428.5 628.5 1128.5 1628.5 Return Ratios (%)
Inventory 511.4 578.0 669.2 808.2 RoE 11.4 14.4 13.7 15.4
Debtors 822.9 983.8 1139.0 1375.5 RoCE 9.1 13.0 13.7 16.5
Loans and Advances 597.6 647.6 697.6 747.6 RoIC 18.5 22.2 16.6 17.7
Cash 1921.3 1535.5 1290.1 1216.0 Valuation Ratios (x)
Other Current Assets 123.8 143.8 163.8 183.8 P/E 21.6 30.3 28.8 22.4
Total Current Assets 3977.0 3888.7 3959.6 4331.1 EV / EBITDA 24.8 19.2 16.6 13.2
Creditors 547.1 548.1 634.6 766.4 EV / Net Sales 5.8 5.0 4.3 3.5
Provisions 87.7 117.9 148.0 178.2 Market Cap / Sales 5.7 4.9 4.2 3.5
Other Current Liabilities 608.3 669.5 730.7 791.8 Price to Book Value 4.9 4.4 3.9 3.5
Total Current Liabilities 1243.1 1335.5 1513.3 1736.4 Solvency Ratios
Net Current Assets 2733.9 2553.2 2446.3 2594.7 Debt / EBITDA 3.0 1.9 1.2 0.6
Other Non Current assets 166.0 166.0 166.0 166.0 Debt / Equity 0.6 0.4 0.3 0.2
Application of Funds 7238.3 7284.7 7406.2 7733.2 Current Ratio 1.7 1.8 1.8 1.8
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 13

ICICIdirect.com coverage universe (Healthcare)
Company I-Direct CMP TP Rating M Cap EPS (|) PE(x) RoCE (%) RoE (%)
Code (|) (|) (| Cr) FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
Ajanta Pharma AJAPHA 1757 1,960 Buy 15458.1 45.4 59.7 66.3 75.3 38.7 29.4 26.5 23.3 42.9 39.2 34.9 31.7 34.2 33.1 28.4 25.6
Apollo Hospitals APOHOS 1173 1,440 Buy 16324.3 22.2 23.1 33.0 47.1 52.9 50.7 35.6 24.9 8.2 8.4 10.7 13.7 8.9 8.7 11.2 14.0
Aurobindo Pharma AURPHA 711.4 1,100 Buy 41629.0 33.9 41.5 48.0 54.8 21.0 17.2 14.8 13.0 23.3 24.5 25.4 25.1 28.1 26.0 23.5 21.5
Alembic Pharma ALEMPHA 585 700 Hold 11034.8 38.2 20.3 24.3 31.9 15.3 28.8 24.1 18.4 51.5 23.7 23.1 25.9 44.9 20.4 20.8 22.9
Biocon BIOCON 990 1,120 Buy 19800.0 23.1 32.6 34.4 44.2 42.8 30.3 28.8 22.4 9.1 13.0 13.7 16.5 11.4 14.4 13.7 15.4
Cadila Healthcare CADHEA 359 450 Buy 36778.0 15.0 13.8 18.2 22.7 24.0 26.0 19.7 15.9 26.7 19.6 24.1 27.2 28.6 22.1 23.9 24.4
Cipla CIPLA 579.8 575 Hold 46639.9 18.5 19.0 25.2 31.9 31.3 30.5 23.0 18.2 12.0 11.3 14.1 16.4 12.5 11.6 13.5 14.9
Divi's Lab DIVLAB 683 1,415 Buy 18130.2 41.8 43.6 51.9 59.3 16.3 15.7 13.2 11.5 30.7 28.0 28.4 27.1 25.9 22.6 22.3 21.2
Dr Reddy's Labs DRREDD 2974 3,300 Hold 49248.3 142.1 61.1 133.0 164.9 20.9 48.7 22.4 18.0 17.3 5.6 13.3 16.0 20.7 8.3 15.7 16.7
Glenmark Pharma GLEPHA 858 1,200 Buy 24720.8 32.2 44.0 54.4 62.4 26.7 19.5 15.8 13.8 16.2 19.0 21.9 22.6 21.2 22.7 22.2 20.4
Indoco Remedies INDREM 273 365 Buy 2515.7 9.4 11.0 15.4 20.2 29.1 24.8 17.7 13.5 12.9 12.0 16.5 20.0 14.8 15.3 18.2 20.1
Ipca Laboratories IPCLAB 550 605 Buy 6935.3 10.0 15.3 25.7 33.7 54.8 36.0 21.4 16.3 5.7 10.0 12.7 14.9 5.5 7.9 12.0 13.9
Jubilant Life VAMORG 694.2 795 Buy 11058.6 26.0 43.2 53.8 66.3 26.7 16.1 12.9 10.5 12.0 15.7 17.4 19.0 14.2 19.4 19.7 19.8
Lupin LUPIN 1504 1,890 Buy 67894.4 50.4 62.9 67.1 85.7 29.8 23.9 22.4 17.5 18.6 19.6 20.6 24.3 20.7 21.3 19.1 20.3
Natco Pharma NATPHA 638.6 750 Buy 11131.3 8.5 14.9 13.4 15.5 75.2 42.9 47.7 41.3 16.0 22.2 17.5 17.9 11.9 17.7 14.0 14.2
Sun Pharma SUNPHA 642 850 Buy 154550.8 23.4 30.1 31.9 38.7 27.4 21.3 20.1 16.6 18.6 19.6 18.2 18.8 18.0 19.4 17.6 18.1
Syngene Int. SYNINT 565 570 Hold 11307.0 11.1 15.5 18.9 23.0 51.1 36.5 29.9 24.6 13.2 17.8 19.6 22.3 21.0 23.3 22.6 22.0
Torrent Pharma TORPHA 1295 1,700 Buy 21914.8 107.8 57.4 68.4 84.9 12.0 22.6 18.9 15.2 46.7 22.6 25.6 28.1 53.8 23.6 23.2 23.7
Unichem Lab UNILAB 275.8 285 Hold 2505.9 12.3 13.2 17.5 23.7 22.4 20.9 15.7 11.6 13.8 14.5 16.2 18.9 11.7 11.3 13.3 15.6
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 14

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research Page 15

ANALYST CERTIFICATION
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ICICI Securities Ltd | Retail Equity Research Page 16