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Will the early end to Pfizer deal hurt Biocon? - Views on News from Equitymaster
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Will the early end to Pfizer deal hurt Biocon?
Mar 13, 2012

Indian bio pharma major Biocon and MNC Pfizer today announced the conclusion of their alliance to commercialize Biocon's biosimilar versions of Insulin and Insulin analog products. According to the circulars issued by Biocon, the companies have agreed to part ways due to their individual priorities for their respective biosimilars businesses. No further details and reasons for the deal not going through have been offered.

What was the partnership about?

In the third quarter of FY11, Biocon entered into a landmark deal with the world's largest pharma company Pfizer. This was a global commercialization agreement with the innovator (Pfizer) for Biocon's biosimilar insulin portfolio that comprises of 4 products (rH-insulin, glargine, aspart and Lispro). As per the terms of the agreement, Biocon received an upfront milestone payment of US$ 100 m in FY11 / 1QFY12. The company was to amortise the recognition of this income over five years.

Further, the company was to receive another payment of US$ 100 m that has been transferred into an escrow account. The amount was to come into Biocon's books based on the progress of the new facility being built over a period of 3-4 years. Since a part of this has come in 9mFY12, we had factored the same in our revenue growth estimates to that extent.

However, in addition to the above receipts, Biocon was set to receive another US$ 150 m, depending on certain product development milestones being met in the future. Plus, as and when these products get commercialized, Biocon was entitled to payments linked to sales. However we did not consider the US$ 150 m and payments linked to sales in our forecasts.

How does it affect Biocon's forecast?

The insulin partnership with Pfizer brought a huge licensing income for Biocon. On back of this partnership, Biocon had projected a substantial increase in R&D expenditure and committed to invest in a new facility in Malaysia.

With this deal gone, Biocon's plans will require revision. For the same reason, we have now assumed that there won't be any further licensing income from Pfizer and the construction of the new Malaysian facility will be delayed at best. This has brought down our estimates on the revenue and margins front.

What does this mean for investors?

While the sudden conclusion of the deal does warrant a change in our long term growth estimates, we would be able to revise our target price only on receipt of further details about the termination of the deal.

However, we believe that there is no reason to panic for investors who are already invested in the stock of Biocon. Despite the deal falling through, our estimates show reasonable upsides to the stock from the current levels. Hence, we suggest that investors HOLD on to the stock. Further updates on the termination of the contract will help us give more clarity on the stock of Biocon and possibility of the company fetching licensing deals from MNC innovator companies in the future.

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