Decent quarter; Focus on R&D
Biocon Limited is an integrated biopharmaceutical company engaged in discovering, developing and producing biologics in chronic therapies. Key products include statins, immunosuppressants, anti-diabetic drugs and specialty enzymes.
* Revenue rose 19.0% YoY to Rs. 1,572cr in Q2FY20, led by robust growth in Biologics (+40.4%) and Small Molecules segments (+22.6%).
* EBITDA margin declined 170bps to 28.1%, primarily impacted by higher operating costs. Overall EBITDA stood at Rs. 441cr (+12.0% YoY).
* Gross R&D spends were Rs. 123cr in Q2FY20 (~11% of revenue exSyngene); FY20 R&D guidance at 13-15% of revenues ex-Syngene.
* While fundamentals remain strong, concerns evolve over regulatory approvals for new facilities post recent FDA observations. We rate the stock a HOLD with target price of Rs. 260 based on ~24x FY21E adj. EPS.
Robust revenue growth across segments
Consolidated operating revenue grew 19.0% YoY to Rs. 1,572cr, primarily driven by growing revenue from Biologics (+40.4% YoY to Rs. 516cr on higher sales in developed and emerging markets) and Small Molecules segments (+22.6% to Rs. 530cr backed by substantial growth in generic formulations business). Revenue from Research Services business stood at Rs. 465cr (+10.9% YoY) aided by continued growth in the Discovery Services business. However, Branded Formulation revenue fell 21.7% YoY to Rs. 128cr impacted by subdued performance in UAE. EBITDA margin fell 170bps to 28.1% due higher employee benefit and R&D expenses. Going forward, management expects growth momentum to continue in Biologics and Small Molecules operations on account of a higher order book and new upcoming projects and product launches.
Key concall highlights
* Biocon continued to expand its Research footprint by acquiring Pfizer Healthcare India’s R&D assets to setup ~60k sq. ft. R&D facility at TICEL Bio Park in Chennai.
* The company has strong product pipeline of ~28 molecules, including 11 with Mylan. Additionally, company plans to launch anti-breast cancer biosimilar trastuzumab in the US by Dec, as well as insulin glargine in FY20
Strong pipeline, but concerns evolve with recent FDA observations
Biocon continues to expand its capacity to catch up with higher volume growth, new biosimilar pipeline development and product launches. The company launched new products with its partner Mylan. Moreover, agreement with China Medical Holdings should allow the company to enter Chinese market (USD 0.8bn market size), with three generic formulation products. Separately, Company had multiple FDA inspections at its Biologics Drug Product facilities in Bengaluru during the quarter and recently received a Form 483 with four observations for the new DS facility, three observations for the new DP facility and one general observation. This raises uncertainty around getting necessary regulatory approvals for these facilities.
We expect earnings to grow at healthy 34.6% CAGR over FY19-21E. Increasing R&D investment should support topline with new product launches and continued growth across the segments. However, concerns remain over FDA approvals for new facilities. We provide a HOLD rating on the stock with a target price of Rs. 260 based on ~24x FY21E adj. EPS.
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