Biocon considers selling generic API business – Implications explained for investors

Introduction

Indian pharmaceutical company Biocon is considering selling its generic Active Pharmaceutical Ingredient (API) business as part of its strategy to reduce debt, according to a recent report in the Economic Times.

Analysis for Layman

Active Pharmaceutical Ingredient (API) refers to the key component or substance in a pharmaceutical drug that produces its therapeutic effect. In simple terms, it’s the core ingredient that makes a medicine work. Biocon, a prominent Indian pharmaceutical company, has a division that manufactures and supplies these API to other pharmaceutical companies, which use them to produce generic medicines. This API business is estimated to be worth around $1.5 billion.

In November 2022, Biocon made a significant acquisition of assets from the global drug major Viatris, valued at $3.34 billion. This acquisition was aimed at expanding Biocon’s portfolio of biosimilars. Biosimilars are essentially almost identical versions of approved biological drugs, and they have been proven to have similar efficacy and safety. However, this acquisition significantly increased Biocon’s debt levels. Now, the company is exploring the possibility of selling its legacy generic API business as a means to reduce its overall debt burden. It’s worth noting that Biocon has consulted with investment banks regarding this move, but concrete actions have not been taken as per the Economic Times report.

Original Analysis

The potential sale of Biocon’s generic API business indicates a strategic shift for the company, with a strong focus on biosimilars as its primary growth area. Biosimilars already contribute to 50% of Biocon’s revenues as of FY23, compared to less than 25% from the API and generics portfolio. CEO Kiran Mazumdar-Shaw is aggressively driving the company’s biosimilars efforts, as they offer higher growth potential and profitability on a global scale.

However, it’s worth noting that the report mentions regulatory issues with one of Biocon’s API manufacturing facilities. These issues could complicate matters or potentially affect the valuation if Biocon decides to move forward with the sale. Nonetheless, divesting the legacy generics business to support its biosimilars ambitions would be seen as a credit positive move. It would enable the reduction of debt and provide more resources for investments in the high-growth biosimilars segment. Additionally, it would simplify the company’s operations, allowing for a sharper focus on establishing global leadership in the biosimilars market.

Impact on Retail Investors

For retail investors in Biocon, the potential sale of the API business brings both positive and negative implications. On the positive side, reducing debt through a multi-billion dollar deal would significantly improve the company’s credit profile and financial flexibility for future growth plans. However, in the short term, this move could lead to a decrease in revenues and profits as Biocon would lose the steady income generated by its legacy business.

The impact on retail investors will depend on how Biocon utilizes the proceeds from the sale. If the investments made in expanding biosimilars result in rapid sales and profitability growth, the long-term growth story remains intact. However, this outcome is not guaranteed. Retail investors should carefully assess the risks associated with the successful execution of this strategic transformation against the benefits of debt reduction. While biosimilars already contribute nearly 50% of revenues, the generic API unit still plays a crucial role in generating steady cash flows.

Impact on Industries

If Biocon proceeds with the sale of its generic API business, it could have significant implications for both the generic API and biosimilars industries globally. The $1.5 billion API unit is among the leading suppliers of affordable active ingredients to generic drug manufacturers worldwide. Its potential sale and likely acquisition by a major competitor could trigger consolidation in this highly competitive industry. Smaller API-focused companies might benefit from the supply uncertainty created by this move, but they could also face challenges due to the dominance of the merged entity.

In the biosimilars industry, the sale proceeds that support Biocon’s investments would intensify the ongoing competition. While a deleveraged Biocon may be better positioned financially against deep-pocketed global pharmaceutical rivals, it would also lead to increased competition within the biosimilars space. Biosimilar development and commercialization require substantial capital investments. While more affordable biologic drugs improve access for patients worldwide and benefit healthcare overall, they also lead to lower drug prices and potentially reduced industry profitability in the long term as adoption increases.

Long Term Benefits & Negatives

Strategic focus is essential for achieving sustained leadership in the complex field of biosimilars development and commercialization on a global scale. Therefore, exiting the legacy generic API business could offer significant long-term benefits for Biocon if executed successfully. The company can channel its energy, top talent, and board-level attention fully toward building scale, profitability, and a distinct market position in biosimilars.

However, the generic API unit currently provides steady, low-risk cash flows that fund ongoing research and development (R&D) initiatives and investments in sales infrastructure. Replicating this financial stability through biosimilar revenues may take years of patient nurturing, especially in developed markets. Any execution challenges or external shocks that delay the growth and profitability of biosimilars could leave Biocon vulnerable to liquidity issues, without the cushion of API profits. Therefore, there are notable long-term risks associated with aggressively prioritizing the future over the present.

Short Term Benefits & Negatives

Selling a steady profit contributor like the generic API business would immediately reduce Biocon’s overall revenues, profits, and cash flows over the next 1-2 years. However, addressing the high debt levels would be a major short-term benefit, resulting in lower interest costs and an improved balance sheet. This enhanced financial flexibility would help Biocon navigate potential market challenges that may arise during the execution of its long-term biosimilars strategy.

Additionally, there would likely be one-time accounting gains from the multi-billion dollar deal, which could be viewed positively by investors. The reduction in debt and the increased focus on high-growth biosimilars in the near term might be well-received. However, it’s important to note that patience will be required to translate this strategic focus into market share gains and profit growth that surpass the low-risk generic API profits being sacrificed. Execution missteps or unforeseen industry competition could quickly erode investor optimism if the progress of biosimilars slows down.

Companies that will Gain from This

Companies that could benefit from Biocon selling its generic API business include:

1. Aurobindo Pharma: A leading Indian generic drug manufacturer that might consider acquiring Biocon’s API unit to enhance vertical integration and secure a low-cost input source. This move could strengthen its position in global generic drug export markets in the long term.
2. Divi’s Laboratories: A specialty API manufacturer that could benefit from reduced competition if Biocon exits this business. The company’s stock might see an upward revaluation as its growth outlook improves.
3. Sun Pharma: India’s largest pharmaceutical company could also potentially bid for Biocon’s API arm, further accelerating its vertical integration efforts.
4. Dr. Reddy’s Laboratories: Another major Indian generic pharmaceutical player that might contemplate acquiring the API business to enhance input access and cost competitiveness.
5. Cipla Ltd.: Cipla’s focus on vertical integration has contributed to industry-leading profitability. Acquiring Biocon’s API unit could further improve its margins and export potential in the long term.

Companies which will Lose from This

Companies that could face challenges or setbacks due to Biocon selling its generic API business include:

1. Biocon Biologics: This Biocon subsidiary may experience a near-term dip in revenues without the reliable income generated by the API unit. Additionally, the execution risks associated with the biosimilars strategy may rise.
2. Syngene International: Another Biocon subsidiary, Syngene, could see its valuations pressured if the parent company divests another growth-focused business. Syngene has already experienced a partial stake sale to fund the Viatris acquisition.
3. Biocon Investors: While the reduction of debt offers financial stability, the success of the biosimilars strategy in matching the low-risk API profits may be challenging to achieve. Biocon’s stock may remain range-bound in the near term.
4. Torrent Pharmaceuticals: This company is currently a major customer of Biocon’s API business. If the API business is sold, Torrent Pharmaceuticals may face input cost pressures, impacting its profitability.
5. Intas Pharmaceuticals: Another Indian pharmaceutical company that relies on Biocon as a trusted source of low-cost API. If the API business is sold, Intas Pharmaceuticals would need to develop alternative sources.

Additional Insights

The potential Biocon deal follows Aurobindo Pharma’s acquisition of Sandoz’s US business for $900 million in September 2022. This suggests that consolidation pressures are building in India’s pharmaceutical export industry, and this trend could accelerate if Biocon initiates a trend where larger players acquire available API assets to enhance vertical integration.

Conclusion

Biocon’s contemplation of selling its $1.5 billion generic API business marks a significant moment in the company’s transformation into a global leader in biosimilars. Unlocking substantial value to reduce debt would provide financial stability while allowing the company to double down on next-generation biological drugs. However, it’s crucial for Biocon to ensure a smooth transition of revenues, profits, and talent during this strategic reorganization, given the associated execution risks. Retail investors should carefully evaluate these risks and rewards to determine whether this strategic shift aligns with their confidence in the Biocon story.

A proper citation to ensure consistency and provide more detailed information about the source. : Bhalla, Mohit.