The Bicon’s share price dropped 12 per cent on Monday as its arm, Biocon Biologics Limited (BBL), announced it would acquire Viatris’ biosimilar asset rights (including Viatris’ global commercial infrastructure) for up to $3.335 billion (₹25,128 crore) .

Until now, BBL was receiving only close to 33 per cent of revenues from the partnership with Viatris. Going forward, it will completely flow to the company.

The price paid to Viatris, though is expensive on a relative basis, (16 times EBITDA for the biosimilar segment Vs 6 times for Viatris as a whole, which includes generics, OTC, Branded product sales) and on implied valuations of BBL (explained below). Besides, while BBL will realise full share from products sold, its margin profile will decline on incurring selling costs. Recouping this premium investment for BBL will depend on the extent of product approvals and penetration that can be achieved going forward, leveraging the infrastructure.

Margin dilutive

BBL partners Viatris to market its biosimilars in developed markets. The portfolio includes bGlargine, bTrastuzumab, bPegfilgrastim which are marketed in US/Europe, bAspart and bBevacizumab which are next in line products and in-licensed assets, bAdalimumab, bEtanercept. 

Viatris’ global biosimilar business generated $875 million in revenue and $200 million in EBITDA in CY2022, with BBL (whose products account for a large portion of Viatris’ sales), realising only part of it in the current arrangement.

BBL reported around $465 million in revenues from biosimilar business in the same period which may be split equally between developed (sourced largely from the Viatris partnership) and developing markets. BBL’s share in Viatris’ sales may be around 33 per cent (excluding manufacturing margin) which can scale up in the revised structure without a marketing partner cut. While revenues can go up, the margin will be impacted due to additional selling and distribution costs. The margin profile of biosimilar business of Biocon hovering around 35-40 per cent currently may be diluted. EBITDA margin for Viatris for CY22 stands at 23 per cent ($200 million /875 million).

The announcement may raise questions on the collaboration with Sandoz for next gen biosimilars, as BBL equips itself with commercial infrastructure in developed markets as well.

Huge debt

The transaction will be financed by $800 million equity infusion in BBL (equity commitments from existing shareholders), $1.2 billion by debt, $1 billion in CCPS to Viatris upon closing and rest by a combination of equity and debt payable in 2024.

A back-of-the envelope calculation shows that net debt to EBITDA for Biocon (consolidated) may increase from 1.5 times to 3.5 times on LTM (last twelve months) basis, and assuming full $1.2 billion of debt. But the higher revenue base (even on lower EBITDA margin) can soften the impact as the transaction accrues.

As part of the transaction, $1 billion will be paid by way of CCPS (Compulsorily Convertible Preference Shares) for an equity stake of at least 12.9 per cent , implying a valuation of $7.75 billion to BBL. The total price paid to Viatris, its marketing partner in US and Europe, accounts for 42 per cent of BBL’s implied valuation.. Viatris’ transaction price ($3.3 billion) also accounts for 67 per cent of post money valuation ($4.9 billion) in the last round of stake sale in BBL to Serum Institute in Sept-21.

The premium paid to Viatris may be due to the commercial infrastructure developed by it in marketing the biosimilar products in US and Europe and developing markets. From the first product commercialization (bPegfilgrastim in 2018), Viatris has developed a commercial infrastructure in the US and Europe which BBL can leverage for its portfolio of over 20 biosimilars in development. This eliminates marketing partner share, and the risk of execution here is lower than what when setting a front-end in developed markets. Viatris will provide commercial and other transition services for two years to ensure a smooth transition. 

Related Topics