Company Update August 26, 2016 Rating matrix Rating Target Target Period Potential Upside : : : : Biocon (Biocon) Buy | 1030 15-18 months 19% EMA review acceptance a positive development… What’s Changed? Target EPS FY17E EPS FY18E EPS FY19E Rating Changed from | 800 to | 1030 Unchanged Changed from | 37.2 to | 38.4 Introducing at | 48.2 Changed from Hold to Buy Key Financials (| Crore) Revenues EBITDA Adj. Net Profit Adj. EPS (|) FY16 3485.4 820.0 450.3 22.5 FY17E 4273.6 1065.5 666.4 33.3 FY18E 5059.2 1274.7 767.6 38.4 FY19E 5986.3 1555.5 963.8 48.2 FY16 19.1 45.7 11.1 9.1 11.2 4.3 FY17E 26.0 30.9 14.7 13.1 8.5 3.8 FY18E 22.6 26.8 15.0 14.8 6.9 3.4 FY19E 18.0 21.4 16.4 17.4 5.3 3.0 Valuation summary PE(x) Target PE (x) EV to EBITDA (x) Price to book (x) RoNW (%) RoCE (%) Stock datawe Amount | 17312 crore | 2457 crore | 1921 crore | 17848 crore 897/420 | 100 crore |5 Particular Market Capitalisation Debt (FY16) Cash (FY16) EV 52 week H/L Equity capital (|Crore) Face value (|) Price Chart 16000 1000 12000 800 600 8000 400 4000 200 0 0 Jul-16 Jan-16 Jul-15 Jan-15 Jul-14 Jan-14 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 CNX Pharma | 866 Alembic Pharma Research Analyst Mylan-Biocon Announce Regulatory Submission for Trastuzumab Biocon and Mylan have received European Medicines Agency’s (EMA) acceptance to review Mylan’s marketing authorisation application (MAA) for a proposed biosimilar Trastuzumab used to treat certain HER2-positive breast and gastric cancers. This is the second biosimilar submission developed by the partnership that has been accepted for review in Europe. In July, Mylan’s MAA for the proposed biosimilar Pegfilgrastim was accepted for review by EMA. Trastuzumab filing includes analytical, functional and pre-clinical data, as well as results from pharmacokinetics (PK) and confirmatory efficacy/safety global clinical trials for Trastuzumab. The PK study had demonstrated measured bioequivalence of Mylan’s and Biocon’s proposed Trastuzumab biosimilar relative to that of the reference drug. The second study, the ‘Heritage Study’, evaluated the efficacy, safety and immunogenicity of the proposed biosimilar Trastuzumab in comparison to branded Trastuzumab. Biologics to grow at CAGR of ~40% in FY16-19E The biosimilar segment accounts for ~12% of turnover. The company has invested heavily in this space over the last two or three years, especially the Malaysian facility. We expect biologics to grow at a CAGR of ~40% to | 669 crore in FY16-19E. Biosimilars progress getting momentum; upgrade to BUY Encouraging developments on the biosimilars front over the last six months have demonstrated the capability in the biosimilars space. What has cemented Biocon’s position as perhaps the best placed candidate among Indian companies is the series of positive outcomes from developed markets, be they approval and launch of Glargine in Japan or presentation of Trastuzumab data to ASCO or review acceptance from EMA. The launches in emerging markets are also getting momentum. This is likely to improve the share of biosimilars in total revenues from 10% in FY16 to 20% by FY19. With the Malaysian facility getting ready for global filings, we believe the future bodes well for the company on the biosimilars front. It will also provide an extra lever for growth besides Syngene and branded formulations. Although the actual biosimilar launches in EU (and US) are some distance away, we believe the acknowledgement from developed market regulators is likely to improve the valuation perspective. We have introduced FY19 estimates (both for Biocon and Syngene) on account of better visibility and proven capability. Our SOTP target price is now | 1030. Exhibit 1: SOTP valuation Particulers Biocon (ex Syngene) Syngene Targeted Market Cap Biocon's Holding Holding Company Discount Syngene valuation Per share valuation Siddhant Khandekar siddhant.khandekar@icicisecurities.com Mitesh Shah mitesh.sha@icicisecurities.com SOTP valuation ICICI Securities Ltd | Retail Equity Research FY19E EPS (| cr) 32.0 Multiple (x) 22.0 Per share (| ) 703.4 11000 74.6% 20.0% 6560 328 1,030 Recent progress in biosimilar Date Aug-16 Event European Medicines Agency has accepted Biocon-Mylan Proposed Biosimilar Trastuzumab (gHerceptin) for Review Jul-16 European Medicines Agency has accepted Biocon-Mylan Proposed Biosimilar Pegfilgrastim (gNeulasta) for Review Jul-16 Biocon's Insulin Glargine Launched in Japan Jun-16 Biocon and Mylan to Present Phase 3 Trastuzumab Biosimilar Data at the American Society of Clinical Oncology (ASCO) Annual Meeting Mar-16 Biocon's Insulin Glargine Receives Regulatory Approval in Japan Mar-16 Biocon Inks Co-Development & Commercialization Agreement with Lab PiSA for rh- Insulin in USA May-15 Biocon-Mylan's PEG-G-CSF and Adalimumab enter Phase 3 clinical trials; Patient recruitment for one Insulin Glargine Phase 3 study completed Source: Company, ICICIdirect.com Research Exhibit 2: Biosimilars: Insulins pipeline Molecule Rh Insulin Glargine Aspart Lispro Type Recombinant Human Insulin Long Acting Basal Insulin Rapid Acting Insulin Analog Rapid Acting Insulin Analog Status EU Phase III complete Global Phase III Preclinical/Scale Up Preclinical/Scale Up Total Market Size Market Size (US$ billion) 3.1 7.1 4.7 2.8 18.0 Source: Company, ICICIdirect.com Research Exhibit 3: Biosimilars: MAbs & biologics pipeline Molecule Adalimumab Trastuzumab Pegfilgrastim Bevacizumab Filgrastim Etanercept Indication Chronic Plaque Psoriasis mBreast Cancer Chemo-induced Neutropenia mColorectal Cancer Chemo-induced Neutropenia Auto-immune Status Market Size (US$ billion) Global Phase III 14.0 Global Phase III 6.8 Global Phase III 4.7 EU Phase 1, RoW Phase III 6.9 Preclinical/Scale Up 1.0 Preclinical/Scale Up 8.7 Total Market Size 42.0 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Financial summary Profit and loss statement (Year-end March) & (| crore) Total Operating Income Growth (%) Raw Material Expenses Employee Expenses R&D Expenditure Other Expenditures Total Operating Expenditure Operating Profit (EBITDA) Growth (%) Depreciation Interest Other Income PBT before Exceptional Items Less: Exceptional Items Total Tax PAT before MI Minority Interest Adjusted PAT Growth (%) EPS (Adjusted) | Crore FY16 3485.4 12.8 1330.1 636.3 275.3 423.7 2665.4 820.0 17.8 242.3 10.2 84.5 652.0 -575.4 256.9 970.5 74.4 FY17E 4273.6 22.6 1571.7 782.2 370.2 484.0 3208.1 1065.5 29.9 260.9 11.6 153.1 946.2 0.0 196.2 750.0 89.0 FY18E 5059.2 18.4 1821.3 925.8 430.2 607.1 3784.5 1274.7 19.6 342.4 6.2 173.5 1099.7 0.0 219.9 879.7 112.1 FY19E 5986.3 18.3 2107.2 1095.5 509.8 718.4 4430.8 1555.5 22.0 386.6 4.1 205.3 1370.1 0.0 274.0 1096.1 132.3 450.3 10.2 22.5 666.4 48.0 33.3 767.6 15.2 38.4 963.8 25.6 48.2 Source: Company, ICICIdirect.com Research (Year-end March) & (| Crore) Profit/(Loss) after taxation Add: Depreciation & Amortization Net Increase in Current Assets Net Increase in Current Liabilities Other Operating Activities CF from operating activities (Increase)/Decrease in Investmen (Purchase)/Sale of Fixed Assets Increase/ (Decrease) in Minority I Other Investing Activities CF from investing activities Proceeds from issues of Equity Sh Inc/(dec) in loan funds (Payment) of Dividend and Divide Interest Paid Other Financing Activities CF from financing activities Net Cash flow Opening Cash Closing Cash Free Cash Flow | Crore FY16 896.1 242.3 -204.5 -159.7 -247.9 526.4 -198.2 -957.7 139.0 62.9 -954.0 0.0 1432.7 -116.5 -10.2 105.4 1411.4 983.8 937.5 1921.3 -431.3 FY17E 666.4 260.9 -376.3 120.0 11.6 682.5 -200.0 -200.0 89.0 0.0 -311.0 0.0 -500.0 -190.9 -11.6 0.0 -702.5 -330.9 1921.3 1590.4 482.5 FY18E 767.6 342.4 -371.6 197.2 6.2 941.8 -500.0 -100.0 112.1 0.0 -487.9 0.0 -500.0 -191.9 -6.2 0.0 -698.1 -244.2 1590.4 1346.2 841.8 FY19E 963.8 386.6 -425.9 216.3 4.1 1144.9 -500.0 -100.0 132.3 0.0 -467.7 0.0 -500.0 -202.4 -4.1 0.0 -706.5 -29.3 1346.2 1316.9 1044.9 FY16 FY17E FY18E FY19E 45.3 202.8 5.9 96.1 33.3 226.6 9.5 79.5 38.4 255.3 9.6 67.3 48.2 293.4 10.1 65.8 61.8 23.5 16.6 12.9 53.6 86.2 57.3 0.5 64.2 63.2 24.9 18.8 15.6 51.9 88.3 49.2 0.6 64.1 64.0 25.2 18.4 15.2 51.9 88.3 49.2 0.7 73.9 64.8 26.0 19.5 16.1 51.9 88.3 49.2 0.8 73.6 11.1 9.1 18.5 14.7 13.1 22.5 15.0 14.8 18.4 16.4 17.4 19.4 19.1 11.2 2.6 2.5 4.3 26.0 8.5 2.1 2.0 3.8 22.6 6.9 1.7 1.7 3.4 18.0 5.3 1.4 1.4 3.0 3.0 0.6 1.7 1.2 1.8 0.4 1.8 1.3 1.1 0.3 1.8 1.3 0.6 0.2 1.8 1.3 Source: Company, ICICIdirect.com Research Balance sheet (Year-end March) & (| Crore) Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability (Net) Minority Interest Other NCL & LT Provisions Source of Funds Assets Gross Block Accumulated Depreciation Net Block Capital WIP Total Fixed Assets Other Investments Inventory Debtors Loans and Advances Cash Other Current Assets Total Current Assets Creditors Provisions Other Current Liabilities Total Current Liabilities Net Current Assets Other Non Current assets Application of Funds Cash flow statement | Crore FY16 FY17E FY18E FY19E 100.0 3955.6 4055.6 2456.9 34.6 311.2 380.2 7238.5 100.0 4431.1 4531.1 1956.9 34.6 400.2 380.2 7303.0 100.0 5006.8 5106.8 1456.9 34.6 512.3 380.2 7490.8 100.0 5768.3 5868.3 956.9 34.6 644.6 380.2 7884.5 3489.1 1766.5 1722.6 2187.5 3910.1 428.5 511.4 822.9 597.6 1921.3 123.8 3977.0 547.1 87.7 608.3 1243.1 2733.9 166.0 7238.3 3739.1 2027.4 1711.7 2137.5 3849.2 628.5 607.2 1033.4 647.6 1590.4 143.8 4022.4 575.8 117.9 669.5 1363.1 2659.2 166.0 7302.8 4907.9 2369.7 2538.1 1068.8 3606.9 1128.5 718.8 1223.4 697.6 1346.2 163.8 4149.8 681.6 148.0 730.7 1560.3 2589.5 166.0 7490.8 5542.2 2756.4 2785.8 534.4 3320.2 1628.5 850.5 1447.6 747.6 1316.9 183.8 4546.4 806.5 178.2 791.8 1776.6 2769.8 166.0 7884.5 Source: Company, ICICIdirect.com Research Key ratios (Year-end March) Per share data (|) Reported EPS BV per share Dividend per share Cash Per Share Operating Ratios (%) Gross Margin EBITDA margin EBIT Margin PAT Margin Inventory days Debtor days Creditor days Asset Turnover EBITDA Conversion Ration Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt / EBITDA Debt / Equity Current Ratio Quick Ratio Source: Company, ICICIdirect.com Research . ICICI Securities Ltd | Retail Equity Research Page 3 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 4 ANALYST CERTIFICATION We /I, Siddhant Khandekar, CA INTER and Mitesh Shah, MS (finance) Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 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