Rumours about Biocon Ltd’s deal with Pfizer Inc. have been in the markets for a while now. Still, investors liked what they saw in the actual announcement and drove Biocon’s share price up by 13% to Rs 455. This is on the back of a 13% rise in the company’s shares in the past month, during which time the BSE Healthcare Index has risen by 7%.
Biocon announced on Monday that it has forged a strategic deal with Pfizer for worldwide commercialization of four insulin products, seeking to address a market worth a combined $14 billion (Rs 62,300 crore). The key factor in the Biocon-Pfizer transaction is the size of the upfront payment. Pfizer will pay Biocon $200 million, or Rs 900 crore, upfront, half of which will be kept in an escrow, to be released over two years. Thus, Rs 450 crore will be accounted for as a one-time income in its profit and loss account and the rest will reflect in its balance sheet. Pfizer will pay an additional sum of $150 million over a longer period, subject to completion of milestones.
The upfront payment represents a partial net present value of the future cash flows Biocon would have otherwise got from selling the insulin products. In return, it will give Pfizer the worldwide rights to market four of its key insulin products—glargine, aspart, lispro and recombinant human insulin. Biocon will have co-exclusive rights in Germany, India and Malaysia. The company will do the clinical development work, production and get regulatory approvals for the products. It has already made headway, with commercial approvals got for 23 developing countries.
Graphic: Yogesh Kumar/Mint
Biocon has a debt of Rs 514 crore and a debt to equity ratio of 0.3 time. It could use the upfront payment to lower debt, but it also needs cash for investing in development and getting marketing approvals. Besides, it will incur expenditure in clinical trials for its new products in Europe and the US, which will increase as the product progresses to the next phase. The company had estimated R&D expenditure of Rs 150 crore for the year. It has also planned an investment to upgrade the capability of its contract research division to offer integrated drug development services. The upfront payment will allow it to fund these investments.
Apart from the upfront payment, Biocon will also receive additional payments linked to Pfizer’s sales of the insulin products. While this will restrict the company’s gains to a certain revenue share, the tie-up allows it to lower risk, minimize investments and working capital requirements. It is thus riding piggyback on Pfizer’s financial and marketing muscle.
Biocon can reinvest the funds in its other businesses, which will propel its growth in the next phase. While the upfront payment will boost profits in fiscal 2011, it is a one-time payment and can fluctuate across quarters. It is only when the actual sale of its products in these markets reaches a critical mass that a steady accretion to earnings will be visible. In a few days, Biocon’s September quarter results will be announced, which will provide the next clues on its performance and, hence, share price movement.
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