Biocon Biologics' Viatris Deal To Aid Value Chain But Risks Persist: Analysts

Analysts expect Biocon Ltd.'s $3.34-billion acquisition of Viatris Inc.'s biosimilars assets to support its value chain, but concerns over stiff competition, expensive deal valuation and leverage risk persist.

Biocon Biologics Ltd., a wholly owned subsidiary of Biocon, will pay $2 billion in cash upfront to Viatris. It will issue $1 billion worth of compulsorily convertible preference shares -- equivalent to at least 12.9% stake -- to Viatris, on a fully diluted basis. It will also pay up to $335 million in 2024, including $175 million for acquiring another biosimilars product Aflibercept injection (to treat age-related blurred vision and blindness).

Of the upfront cash payment, $1.2 billion will be funded by debt, according to the company. The remaining $800 million will come as an equity infusion from parent Biocon.

That's expected to lead to a fivefold jump in Biocon Biologics' debt. Investors were worried, causing shares of Biocon to plunge the most in 13 months on Monday after the deal's announcement.

Kiran Mazumdar-Shaw, executive chairperson at Biocon, in her emailed statement to BloombergQuint, maintained that the debt assumed in this transaction will be supported by a larger Ebitda base, a combination of Biocon Biologics, Viatris and vaccines income streams, and future equity infusion from existing shareholders.

Moody's Investor Service sees the deal as “credit positive” for Viatris. But earnings pressure in Viatris' core business could offset its credit profile. The credit rating agency maintained its Baa3 senior unsecured rating (stable outlook) on Viatris.

The Biocon stock has declined 4.3% so far this year compared with 9.11% losses in the Nifty Pharma Index. It is the fifth-best performer in the 20-stock gauge.

Shares of Biocon fell over 1% to Rs 344.85 apiece. Of the 21 analysts tracking Biocon, 12 maintain a 'buy', five recommend a 'hold' and four suggest a 'sell', according to Bloomberg data. The 12-month consensus price target implies a 17% upside.

Here's what analysts have to say about Biocon Biologics-Viatris deal.

Nirmal Bang

• Upgrades to 'accumulate' from 'sell' post the steep price correction; price target reduced to Rs 358 from Rs 360—an implied upside of 2.62%.

• Biocon's access to commercial infrastructure of Viatris has potential to turn it into a vertically-integrated player in the biosimilars space.

• Potential upside from the deal rests on the performance of key assets that are up for approval in the U.S. markets like Adalimumab (used to treat inflammation of joints, skin) or bHumira (Crohn's disease).

• Remains cautious on Humira opportunity due to stiff competition for the drug from Amgen, Pfizer and Merck.

• Views the deal as a bold step from Biocon's perspective, a risky proposition that is likely to lead to high risk-high reward play.

• Revises target PE multiple to 24x from 25x for additional leverage risk due to higher debt and execution risk in regulated markets.

Motilal Oswal

• Reiterates 'neutral' given the limited upside from the current levels, cuts target price to Rs 385 from Rs 410—still an implied upside of 10.36%.

• Viatris deal enhances Biocon Biologics' capabilities in developed markets.

• The deal also allows Biocon Biologics the option to acquire rights for b-Aflibercept.

• While the deal forward integrates the company in biologics value chain, the valuation paid for the acquisition is expensive.

• Overall outlook on the company's biosimilars/small molecules remains encouraging, based on product pipeline and existing commercial traction.

Jefferies

• Upgrades to 'buy' from 'hold', raises target price to Rs 413 apiece from Rs 362—an implied return of 18.39%.

• Biocon becomes an independent, vertically integrated player with full revenue realisation from its assets after the deal.

• Major assets in terms of sales potential are bAdalimumab, bAspart, rh-Insulin, bGlargine and bAflibercept.

• Viatris and Serum Institute of India deal will put Biocon's financials on high growth trajectory on vaccine sales and full biosimilar revenue recognition.