Biocon bags PE funding to prep biologics spinoff—but did it give away too much?

Bicon Managing Director Kiran Mazumdar-Shaw
Biocon chairperson and managing director Kiran Mazumdar-Shaw said the private equity raise serves as a benchmark valuation for its biosimilars business before an IPO. (Biocon)

Biocon's eyeing an IPO for its biologics unit, and Monday, it snared a private equity injection from local investment fund True North to help it do just that. But as some investors see it, the deal price is anything but “true north.”

True North is paying Rs 536 crore ($74.6 million) to acquire a 2.44% stake in its Biocon Biologics business. The deal essentially values the biosimilar-focused subsidiary at Rs 21,450 crore ($3 billion), the Indian drugmaker said.

The plan is to get a benchmark equity valuation for the business before an IPO, according to Kiran Mazumdar-Shaw, chairperson and managing director of Biocon. “We might raise little more private equity prior to IPO. This basically gives an idea of where we believe we can unlock the value in terms of Biocon Biologics in the next few years,” she said in an interview with CNBC-TV18.

The unit is on its way to $1 billion in revenue for fiscal 2022, Mazumdar-Shaw said. And to hear her tell it, the True North infusion is “an endorsement of the value that Biocon Biologics has demonstrated as a global biosimilars player, having commercialized three of its molecules in developed markets like the E.U., U.S., Japan and Australia,” she said in a statement.

Endorsement, yes; but the purchase price does not reflect the biologics subsidiary’s true value, some investors argue.

Given that $1 billion revenue target, True North’s investment values the subsidiary at three times its near-future sales, market watchers said after the deal was announced.

“For a business with high entry barriers, the valuation multiple should have been higher,” Livemint reported an unnamed analyst as saying. “The valuation should have been northwards of four times revenues.”

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However, $1 billion is quite an ambitious target, even as biosimilars have been a major growth driver for the India-based drugmaker.

In its fiscal year ended in March, the biologics portfolio almost doubled its revenue to Rs 15.17 billion ($210 million). In the company’s second quarter ended in September, the most recent quarterly figure available, the biosimilars turned in another 40% revenue growth to Rs 516 crore ($71.8 million). And that didn’t count contributions from Ogivri, a copycat to Roche’s blockbuster breast cancer drug Herceptin Biocon and partner Mylan just launched in the U.S.

Impressive as 40% growth is, though, the figure looks less inspiring when compared to the 80% annual growth rate Biocon needs to hit the next two years to meet its $1 billion goal.

To add another file in the bear case against Biocon, manufacturing woes like the one that previously derailed a U.S. application for its Mylan-partnered knockoff to Sanofi’s Lantus insulin could delay the company’s launch timelines and seriously hobble its growth prospects.

RELATED: Mylan's Lantus copy derailed in U.S. again by manufacturing ills

Biocon management’s enthusiasm depends heavily on timely approvals and successful execution, which still face uncertainties given manufacturing compliance risks and potential counteractions from competitors, Nirmal Bang Institutional Equities said in a September investor’s note, while refusing to dial up its forecast to the $1 billion mark, Livemint reported.

According to the Indian newspaper, most analysts pegged the biologics products to only reach around $700 million by the 2022 fiscal year. At that revenue number, the valuation represents a multiple of more than four times.

Biocon, for its part, hopes to realize its biosimilar franchise’s full potential with a pipeline of 28 candidates, including 11 partnered with Mylan; a set of oncology and immunology products partnered with Novartis’ Sandoz under a deal penned in 2018; and several drugs it’s developing independently.

On the manufacturing side, it just picked up a 60,000-square-foot R&D site from Pfizer in India to “fast-forward development of our biosimilars from lab to pilot scale.” And a pre-approval FDA inspection cleared its biosimilar plant in Bengaluru, India, leading to a renewed FDA nod for the site to make Fulphila, which is a copy to Neulasta.