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  • CMP : 352.6 Chg : -12.65 (-3.46%)
  • Target : 320.0 (3.56%)
  • Target Period : 12-18 Month
Result Update

28 Jul 2022

Miss on estimates; Margins key monitorable…

About The Stock

Biocon mainly operates in biologics (biosimilars), small molecules (generics), branded formulations and contract research (Syngene). Biocon Biologics (BBL), a subsidiary of Biocon, entered into an arrangement to acquire Viatris’ biosimilars assets for US$3.335 billion. Biocon Biologics entered into a strategic alliance with SILS for access to 100 million vaccine doses per annum for 15 years.

  • Biosimilar US pipeline: (approvals - Pegfilgrastim, Trastuzumab, Glargine, Adalimumab); filed - Aspart and Bevacizumab
  • In generics, it is among the world’s largest manufacturers of immunosuppressant and statin APIs
  • Revenue breakup FY22: Biosimilars (41%), Generics (28%), CRAMS (31%)
Q1FY23

 Biocon reported lower than expected sales and margins.

  • Revenue was up 22% YoY to ₹ 2140 crore
  • EBITDA in Q1FY23 was ₹ 400 crore, up 3% YoY with margins at 18.7%
  • Consequent adjusted PAT was at ₹ 144 crore (up 71% YoY)
What should Investors do?

Biocon’s share price has grown by ~1.3x over the past three years (from ~₹ 237 in July 2019 to ~₹ 309 levels in July 2022).

  • We maintain HOLD due to 1) growing margins sensitivity, 2) Viatris deal and subsequent execution risks and 3) impending price erosion risks, regulatory issues and increasing competitive landscape 
Target Price Valuation

We value Biocon at ₹ 320 on SOTP basis 

Key Triggers for future price performance
  • Biosimilars- 1) market share gains in existing biosimilars, 2) approvals and launches of bBevacizumab and bAspart, 3) bGlargine ramp up, 4) Expected Adalimumab launch in FY23
  • Generics- 1) Expansion beyond fermentation based APIs, 2) Capacity augmentation in immunosuppressants and synthetic APIs and 3) expanding formulations portfolio through vertical integration
  • CRAMs- Syngene’s consistent growth in Discovery, Dedicated, Development and Manufacturing services
  • Execution on vaccines front post strategic alliance with Serum and potential synergies with acquisition of Vitaris biosimilar business from H2FY23
Alternate Stock Ideas

Besides Biocon, in formulations space we like Sun Pharma.

  • Higher contribution from specialty and strong domestic franchise is likely to change the product mix towards more remunerative businesses by FY23
  • BUY with a target price of ₹ 1070

Particulars

Particulars (₹ crore) Amount
Market Capitalization 57,145.1
Debt(FY22) 4,904.0
Cash(FY22) 1,748.0
EV 40,201.0
52 week H/L (₹) 425.0/299.0
Equity Capital 600.3
Face Value (₹) 5.0

Price Chart

Recent Events & Key Highlights

  • 3 USFDA observations at site-3, Hyderabad
  • Key Risk: (i) Better traction for launches in pipeline, (ii) pricing pressure in US

Research Analyst

Siddhant Khandekar
siddhant.khandekar@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues (| crore) 5,514.4 6,367.2 7,143.1 8,184.0 15.9 11,119.4 14,694.0 34.0
EBITDA (| crore) 1,361.2 1,603.1 1,674.0 1,915.2 17.6 2,302.1 3,434.4 33.9
EBITDA margins (%) 24.7 25.2 23.4 23.4 - 20.7 23.4 -
Net Profit (| crore) 744.8 698.2 751.7 683.8 -0.6 654.4 1,361.3 41.1
EPS (|) 6.2 5.8 6.3 5.7 - 5.5 11.3 -
P/E (x) 49.1 59.4 58.3 74.8 - 56.6 27.2 -
RoCE (%) 10.9 10.2 7.7 7.5 - 4.1 6.5 -
RoE (x) 12.2 10.4 9.9 8.1 - 2.8 5.5 -
- - - - - - - - -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q1FY23 Results: Margins plummet amid higher operating cost

  • Revenues grew 21.5% YoY to | 2139.5 crore. Biosimilars grew 28.8% YoY to | 976.6 crore driven by sales of Glargine in the US, and key biosimilars in emerging markets. Research Services segment grew 8.4% YoY at | 644.5 crore, while Generic sales increased 19.2% YoY to | 579.7 crore amid traction for key new products launched in previous quarters, while base business continued to encounter pricing pressure. EBITDA margins came lower than our expectations amid a 344 bps YoY contraction to 18.7% due to 1) higher employee cost (up 17.6% YoY) due to impact of annual increments, 2) R&D expenditure (up 65% YoY), largely due to pipeline progression and 3) other expense (up 61% YoY) amid increase in freight cost, being partly offset by higher gross margin (up 192 bps YoY) at 67.2%. Overall EBITDA improved 2.6% YoY to | 399.4 crore as against I-direct estimate of | 561.2 crore. Adjusted PAT grew 71.1% YoY to | 144.4 crore (I-direct estimate: | 97.9 crore). Delta vis-a vis EBITDA was on account of lower tax expense and higher other income.
  • Biocon’s Q1FY23 revenues were below estimates amid lower than expected traction in generics and research services while margins were also a miss due to higher employee cost, R&D expenditure, other expenditure and forex loss. In Generics, Biocon’s focus is on expediting product pipeline (launched Mycophenolic Acid Delayed-Release Tablets in US) and operationalizing new capacities (Vizag API facility in FY23). On Biosimilars front, two strategic transactions with Serum and Viatris are likely to contribute from H2FY22 while timely launches and ramp up of Biosimilars in the developed as well as emerging markets remain key to capture market share in the projected 3.3x increase in Biocon’s target addressable market from US$21 billion in FY22 to US$69 billion in FY26. Syngene’s ability to take advantage in CRAMS space with operating leverage will be important factor for company.

 

Q1FY23 Earnings Conference Call highlights

  • Generics – The business saw YoY growth on a low base due to continued performance in API (Statins and Immunosuppressant’s) & recently launched generic formulations. Generics business continued to witness pricing pressure and inflationary cost. Sequentially, sales were impacted due to planned capacity expansions to augment growth in H2FY23, that required temporary manufacturing stoppages.
  • Biocon received approvals for Lenalidomide in EU, Mycophenolic Acid DR Tablets in US. Company got the GMP certificate from the MHRA, UK for Oral Solid Dosage facility in Bengaluru.
  • Greenfield immunosuppressant API facility in Vizag remains on track with qualification and validation activities planned in FY23
  • Generics revenues in Q2FY23 is expected to be largely on lines with Q1FY23
  • Biosimilars – Revenue growth excluding Covid-19 related sales at 46% YoY. Growth in revenues this quarter was led primarily by sales of interchangeable bGlargine in US while in Europe, bPegfilgrastim and bTrastuzumab reported an increase in market share. Sequentially, sales were largely flat due to lower realizations from Viatris EU business mainly due to Euro depreciations versus US dollar.
  • Biocon started 2022, with 3% market share in Glargine which has progressed to ~10% in July,2022 and management expects this to further ramp-up towards mid-teen by year end. Trastuzumab market share dipped from ~ 10-11% in April-May,2022 to 7-8% due to some customer loss. Market share is back at ~10%. In Pegfilgrastim, market share is held at ~ 8-9% amid loss of market share by innovator.
  • Company launched bBevacizumab in Canada with bGlargine and bAspart expected to be launched in CY22.
  • Biocon expects site inspections by USFDA in August 2022, for bBevacizumab and bAspart approval in US
  • Initiation of global clinical trials (Phase-I and Phase-III) for two monoclonal antibodies (bUstekinumab & bDenosumab) and advancement of other pipeline assets led to a 120% YoY increase in R&D investments this quarter to | 130 crore (13% of Biocon Biologics revenue). R&D investments guidance reiterated for 10-15% of revenue.
  • EBITDA for the quarter was lower by 12% YoY at | 190 Crore on account of higher R&D investments and non-cash foreign currency translational loss of | 43 Crore on Goldman Sachs OCD investment.
  • Research Services - The decline in profit in Q1FY23 compared to Q1FY22 was expected given the strong sales of Remdesivir last year. Syngene signed a 10-year agreement with Zoetis for the commercial manufacturing of the drug substance for Librela. Syngene has raised Revenue guidance for FY23 from mid-teens to high teens.

The two strategic transactions with Serum Institute Life Sciences (SILS) and Viatris announced in FY22 are progressing towards various regulatory approvals. The deals are expected to be closed in H2FY22. Biocon will get access to SILS vaccine portfolio (Covishield and Covovax) and other next generation vaccines (like mosquito-borne disease vaccines).

 

  Q1FY23 Q1FY23E Q1FY22 YoY (%) Q4FY22 QoQ (%)   Comments
Revenue 2,139.5 2,337.2 1,760.6 21.5 2,408.8 -11.2   Revenue growth below estimates amid lower than expected traction in generics and research services 
Raw Material cost 702.8 794.6 612.1 14.8 828.3 -15.2    
Gross margins 67.2 66.0 65.2 192 bps 65.6 154 bps    
Employee cost 512.6 467.4 436.0 17.6 470.3 9.0    
R & D Expenditure  198.0 198.4 120.0 65.0 191.0 3.7   Gross R&D spend was | 223 crore in Q1FY23
Other Expenditures 326.7 315.5 203.2 60.8 327.3 -0.2    
Total Expenditure  1,740.1 1,776.0 1,371.3 26.9 1,816.9 -4.2    
EBITDA 399.4 561.2 389.3 2.6 591.9 -32.5    
EBITDA (%) 18.7 24.0 22.1 -344 bps 24.6 -590 bps   Lower than estimates due to 1) higher employee cost due to impact of annual increments, 2) R&D expenditure largely due to pipeline progression and 3) other expense amid increase in freight cost
Interest 19.9 147.3 19.9 0.0 10.5 89.5    
Depreciation 217.5 227.5 194.8 11.7 212.2 2.5    
Other income 77.9 60.7 47.2 65.0 67.3 15.8    
EO 0.0 0.0 0.0 0.0 41.0 0.0    
PBT 239.9 247.1 221.8 8.2 395.5 -39.3    
Tax 29.5 54.4 57.3 -48.5 58.6 -49.7    
MI 23.0 41.8 24.0 -4.2 45.3 -49.2    
Adj. PAT 144.4 97.9 84.4 71.1 238.6 -39.5   Delta vis-a vis EBITDA wdue to lower tax expense and higher other income
Key Metrics                
Generics 579.7 632.2 486.3 19.2 717.2 -19.2   YoY growth on a low base amid traction for key new products launched, while base business continued to encounter pricing pressure.
Biosimilars 976.6 1007.5 758.1 28.8 982.3 -0.6   YoY growth driven by sales of Glargine in the US, and key biosimilars in emerging markets
Contract Research  644.5 683.7 594.5 8.4 758.1 -15.0   YoY growth on a high base of Remdesivir sales largely driven by momentum in Development and Manufacturing Services

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I/We, Siddhant Khandekar, Inter CA, Raunak Thakur, PGDM, Kush Mehta, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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