The Biocon-Pfizer Cookie Crumbles

The largest bio-pharmaceutical company in India, Biocon, has suffered a very big setback for its insulin business. The two-year-old landmark deal of Biocon with Pfizer, worth USD 350 million, has come to an end this week. The company which was expecting to boost its revenues from FY12 and also expand its reach to the European and other emerging markets will now either have to market the products on its own or find a new business partner.

This strategic deal was announced in October 2010 as a part of which Biocon and Pfizer were to commercialize Biocon’s bio-similar versions of insulin and insulin analog products such as Recombinant Human Insulin, Glargine, Aspart and Lispro worldwide. Biocon’s Recombinant Human Insulin and Glargine have been approved in India and the company was looking forward to market these products in partnership with Pfizer. As per its conference call last year, this deal was expected to kick off by FY12. The scope for these products was predicted to be worth about USD 100 - 200 million in the emerging markets alone.

Pfizer has already made a milestone payment of USD 100 million upfront to Biocon and had also deposited another USD 100 million in an escrow account to cover the expenses related to capacity expansion and R&D activities. Besides, the third and the largest payment of USD 150 million was to be received upon commercialization of the deal. Biocon was also to receive some smaller payments every year from Pfizer based on sales in the global markets.

According the conference call, the big revenues were to start from the year 2015 onwards as its products would have entered the regulated markets. Biocon had a subsidiary named Axicorp in Germany with which it was expecting to earn insulin revenues in that country. In the other markets, where Pfizer is a very established name, Biocon was supposed to gain the benefits of the Pfizer brand. Now that Biocon has sold Axicorp, its business opportunity in Germany has been lost. With the Pfizer deal discontinued, we believe its business opportunity in the emerging and regulated markets has also come under threat.

With the deal having been called off, Biocon will retain the milestone payment of USD 100 million received upfront. Further, the company will keep USD 75 million of the USD 100 million received in the escrow account for the expansion of capacity it had undertaken in Malaysia. Biocon will get back the rights that it had licensed to Pfizer. The amount of USD 175 million, however, may not be enough to cover the potential future expenses required for the clinical trials, product registrations, etc. Some of the products in the above list would be ready for launch in 2014 for which Biocon will now need to find a new partner.

The insulin market is highly concentrated with companies like Novo Nordisk, Eli Lilly and Sanofi. We believe that Biocon will face strong competition going ahead. Even though the growth rates in the markets are very attractive, Biocon won’t have a very smooth landing after losing out on such a grand opportunity.

Post this announcement the shares of Biocon have tanked by 9 per cent in value. At the moment however, the counter doesn’t look attractive. It would be best to avoid this scrip for now.