Biocon Biologics on Monday announced a transformational deal to acquire partner Viatris’ global biosimilars business for up to USD 3.335 billion in cash and stock. The acquisition of the business, which is estimated to generate revenues of USD 1 billion next year, will create a unique, fully integrated global biosimilars enterprise.

Kiran Mazumdar-Shaw, Executive Chairperson, Biocon and Biocon Biologics spoke to Nisha Poddar, CNBC-TV18 Anchor & Editor and Moneycontrol Corporate Bureau Chief following the announcement.

Here is the full transcript of the conversation:

Nisha Poddar: Hello, and welcome to the show. Today we have with us Kiran Mazumdar-Shaw of Biocon who has just dropped a large transaction which will create an international business in the biosimilars business. Kiran, many congratulations on this large transaction, and we have spoken over the week, a lot about that, we will come to that. But first I wanted to understand your vision of Biocon as a group in striking this deal and how do you see the entire group going ahead in pioneering various aspects of healthcare, as well as pharma sector for India.

Kiran Mazumdar-Shaw: Thanks Nisha, and as you know it has always been our aspiration to be a world leading, global biosimilars company. And I think this transaction catapults us into the global big league. As you know, this was a deal that we were able to strike with Viatris, who have been our partners for over a decade. So, it enables us to seamlessly move from our current partnership model into a fully integrated standalone biosimilar biologics enterprise. And I think this is a huge inflection point for us as a company, and this is a huge inflection point for our biosimilars business.

You know we’ve always wanted to bolt on a front-facing commercial engine for our biosimilars business, which we had planned to do so over the next three to four years. This transaction accelerates the process and that’s why this transaction makes a lot of sense.

As far as Viatris is concerned, they have invested significantly in the biosimilars business thus far. Obviously, unlocking value from that investment is something that augurs well, for Viatris. For Biocon Biologics, acquiring these biosimilar assets and retaining the complete economic benefits of these assets plays to our strengths and our aspirations. So, all in all, it is a hugely beneficial deal for both Viatris and Biocon Biologics, and it is a win-win transaction.

Nisha Poddar: Kiran, you have the vaccine opportunity for which you have roped in Serum Institute. Tell us about the roadmap on the opportunities that you see with Viatris now, and this particular acquisition that is underway.

Kiran Mazumdar-Shaw: So, I think this is a very unique model that we have stitched together both with the Serum Institute transaction and now the Viatris transaction because it actually gives us a very large you know tapestry, in terms of both biosimilars and vaccines to play with.

As far as vaccines are concerned, as you know, vaccination is now going to be a very large opportunity, given the pandemic scare, and we know that there is going to be a need for an annual booster for both Covid-19 and many other viral diseases. I think Serum is very well positioned as the largest vaccine maker to cater to global demand for all these vaccines.

As far as we’re concerned, we believe that this (Viatris) acquisition provides us with market opportunities in even the developed markets, apart from key emerging markets where Viatris is very strong. And we believe that we will be able to provide new market opportunities for Serum’s vaccines going forward.

Nisha Poddar: Wanted to also get a sense of what is it that this acquisition brings to the table, because it is a sizable acquisition worth over $3 billion. What is it that (this acquisition) brings for Biocon which was not there as part of the partnership that you held with Mylan?

Kiran Mazumdar-Shaw: So, our partnership got us only a small fraction of the economic benefit of these assets. Biocon’s responsibility was to develop the biosimilars and obviously manufacture the biosimilars and we had access to certain emerging markets in terms of commercialization. But when it comes to Viatris, they had the larger economic benefit out of this deal as they were really focused on the commercial opportunities in both advanced and key emerging markets. So, this deal now brings together the entire business under one umbrella.

And I think that is going to really be a big uptick for our business immediately. Of course, in the future, our growing pipeline adds to our strength. So, I think the commercial engine in the advanced markets is really a key contributor of growth for this acquisition.

Nisha Poddar: What about the R&D, tech platforms and innovation of some of the biosimilars that Viatris has in the pipeline? Are you getting access to that because certain parts of their portfolio, which is considered the crown jewels by most of the market, experts and analysts?

Kiran Mazumdar-Shaw: I would like to correct your perception about innovation and R&D. All those strengths reside within Biocon. In fact, this partnership was about the high scientific skills that Biocon had for R&D and innovation, which is why we have seven molecules in the market today.

What this partnership brings to the table, in addition to the existing portfolio of products that we collaborate on are some new assets like Aflibercept. Aflibercept is an in-licensed asset or a partnered asset, as far as, Viatris is concerned, because they’ve partnered this asset with Momenta. And therefore, this is not something that they have developed themselves. Secondly, I think, I would like to say that the option agreement is really procedural in nature, because we need to complete some aspects of due diligence, which I don’t think is going to be a showstopper for us because of the fact that Viatris has already filed the BLA for this asset as a ‘first to file.’ Therefore, we believe that it’s a matter of time before we exercise our option for this asset.

Nisha Poddar: So you’re confident that at $175 million Aflibercept will also be in your portfolio in due course of time?

Kiran Mazumdar-Shaw:  Yes, absolutely.

Nisha Poddar: What about some of the other parts of their portfolio? Are those also on the envelope, like Botox?

Kiran Mazumdar-Shaw: I would not like to comment on that, but right now I can only comment on Aflibercept.

Nisha Poddar: All right, when we talk about the margin picture and the company has stated that it will not dilute the margin, and you are looking at a stable margin performance going forward even after this acquisition. What gives you that confidence? Synergistic benefits as well as operational efficiencies or maybe economies of scale? Some of the businesses or the assets from Viatris are lower in terms of the margin performance than yours.

Kiran Mazumdar-Shaw: Well, I can only say that when we’ve looked at the numbers provided by Viatris and when we combine the business, we really believe that we can sustain the present core EBITDA margins that we enjoy today, and I think there is going to be synergy and there is going to be a strong cost benefit of bringing the two businesses together. I must inform you that this particular transaction has been very well researched very well thought out. And we’ve looked at all aspects of value accretion and cost competitiveness and cost savings, so we believe that bringing these businesses together does unleash a lot of cost savings and I think that’s what gives us the confidence that we will be able to maintain and sustain the present core EBITDA margins, because when we look at the two businesses, together, we clearly see that as a value add.

Nisha Poddar: Can you give us a few factors which drove the kind of valuation that you have paid to Viatris as part of this transaction, which is 16.7 times of CY22 EV/EBITDA estimate?

Kiran Mazumdar-Shaw: I think this is a very fair transaction. Nisha you must understand that Viatris has significantly invested in these programs over the years, just as Biocon has. Obviously the most significant investment has been made by us. The multiples that we’re giving them is very fair and the valuation is also very fair to us because of the enormous contribution of the economic benefit that will come to us.

We have looked at this transaction as (Viatris’ business) is a very strong, growth propelled business. We leveraged the (acquisition of the) business because we believe that financing growth through the kind of debt that we are planning to raise is very comfortable and very necessary. I think we can actually get a payback of acquiring this business and this debt within less than five years. That’s how confident we are about the growth trajectory.

The EBITDA margins that we will enjoy over time will enable us to really pay back the debt in a very short period of time.

So overall, I think this is a great deal. We are actually very conservative, as you know about debt. Despite that, I think we have managed to take this bold decision to leverage the business because of the growth potential.

Nisha Poddar: What about the equity fundraising? How confident are you that you will be able to get more investors to fund the company and also take the valuation higher than the $8 billion that is now being ascribed to Biocon Biologics by way of this transaction?

Kiran Mazumdar-Shaw: Nisha, this is a no brainer. The business is huge, the potential is huge. The growth potential is enormous. I think there’s a huge amount of interest in investing in us, because we are a unique business. We’re a vertically integrated business. That makes us even more attractive and the (biosimilars) pipeline we have is perhaps the deepest in the market.

This is a business that is going to have a huge amount of interest for investment. We already have a commitment for this amount of equity stake from existing investors, and I can tell you there is appetite for even more. But we would rather wait till an IPI to unlock for the value.

Nisha Poddar: Kiran, will there be two rounds of fundraising? One, immediately, which you require for this transaction and one later? Is that the plan and is Serum going to play a very important role in the fundraising process?

Kiran Mazumdar-Shaw: No, I don’t think it’s only Serum. I think many others will also be part of the fundraising process. Of course, I cannot comment on whether it will be a single round or multiple rounds. But suffice to say, that the financing that will happen prior to the IPO will look at valuation as a primary objective.

Nisha Poddar: So the market would like to get some understanding on that. If that (equity) is already tied up, it will give some bit of consolation in terms of the deal going through and the financing being in place.

Kiran Mazumdar-Shaw: Look, Nisha, I think you’re making much ado about nothing you know. Even if we had to finance the entire debt, it is very comfortable today.

But yes, I would like to actually make it a combination of equity and debt to reduce the debt to a much lower level. So I don’t think you need to keep focusing on the debt aspect.

We will raise equity. As I said, there’s a huge commitment of equity interest and equity commitment up to $800 million.

Suffice to say that we have a very comfortable debt level, which we can service very easily from the EBITDA that we see over the next several years.

Nisha Poddar: I must mention it’s not me making a big deal out of it but definitely the market and the stock reaction, right after your deal announcement.

Kiran Mazumdar-Shaw: I don’t worry about stock reactions because there’s a lot more loaded into stock reactions than just concern about debt.

I think there are many companies who have raised debt to pursue growth. This is something which we are also doing and I don’t think it should be looked at differently to others. Why am I being judged differently?

Nisha Poddar: All right, fair point from you and I’m sure the market will make a note of that Kiran. You know, several years back, we had met in Bombay for the Syngene IPO and that created value, and that was you know rolled out as a separate business. In a year or two, you will have the biosimilar business also being rolled out. So Biocon is now being seen as the holding company and that discount also kicks in from the markets point of view. How do you react to that and is the small molecule business a scalable business for the Biocon investors.

Kiran Mazumdar-Shaw: Well, it is a hugely scalable business. I think you’re already seeing Biocon rolling out many of its generic molecules into the U.S. market. It has a pipeline of very, very important ANDAs in the approval stage. I can tell you that the next few years are going to be hugely growth oriented for the Biocon business. So together, I think this is going to be a huge business which straddles biosimilars, research services and bio cons own you know genetics business. So I think this is really a very, very attractive investment opportunity for any shareholder in the near term. And, of course, in the long term we expect to do even better. I think this is not about a story that is about just one of the businesses. It’s a story about all the businesses driving growth in a very, very robust way. The biggest growth story is going to be the biosimilars growth story. But you know, close on the heels it is also going to be a strong growth pace of growth for both the Generics and Research Services business. I think that Biocon as a as a diversified portfolio is a very, very interesting investment opportunity.

Nisha Poddar: You are saying that the Small Molecules business is a scalable business. Any targets you will set, because you know the market understanding is that the profitability hasn’t grown as much, though, it still remains as your legacy business. So give us a little more roadmap on how you’re going to grow it?

Kiran Mazumdar-Shaw: The Small Molecules business, as you know, is advancing into finished formulation dosages. We have already introduced several of these finished dosages into U.S. and other advanced markets. These are really beginning to garner a lot of growth and profitability for this business, starting with the most recent launch of Everolimus, where we were the first to launch.

We have many, many other such generic molecules in the pipeline which are going to be hugely growth. I think in in the next coming years you’re going to see the Generics business, also have a very, very robust growth trajectory.

Nisha Poddar: After biosimilars and small molecules is there anything else that are working on behind the scenes which is scalable for Biocon’s future growth? Any sneak peek into that and also the R&D scientific innovation thrust from your group?

Kiran Mazumdar-Shaw: Well, at the moment I would focus on our Research Services business, which is also growing very robustly and it is at an inflection point where it is going to really take off in a bigger way. I think the same goes for the Small Molecules business. It’s at an inflection point. Because of the huge investments that have gone into a research pipeline and as approvals come through for these differentiated generics that we have been developing, you can see, the big kicker. For example, you saw the big kicker in Everolimus, where for the foreseeable future we are going to enjoy a very exclusive status both in U.S. and Europe. Going forward, we also have many more of such exclusive molecules for which we are seeking approval. So, I think you will see that we are entering into a space, which is less crowded, more accretive and I think it gives us a huge growth potential for our Small Molecules business. Biologics, as I said, continues to be the biggest opportunity in the near term.

Nisha Poddar: Kiran Shaw, many congratulations on this transaction. You have been a pioneer and visionary in the healthcare pharma space in the country. You have grown through fundraising, creating value for shareholders, value unlocking in your several businesses and you continue to do that. A remarkable story when it comes to the M&A for growth prospects. We will have to see how all this really develops and how new areas of growth really develop for Biocon. All the best for that, and thank you so much for joining us right here on CNBC-TV18.

Credit: This interview was aired on CNBC TV18 on Monday, February 28, 2022

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