Published on 21/08/2021 11:53:04 AM | Source: Motilal Oswal Financial Services Ltd

Neutral Biocon Ltd For Target Rs.390 - Motilal Oswal

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COVID disruption impacts generics sales, earnings

Interchangeability decision for b-Glargine on the anvil

* Biocon (BIOS) delivered lower-than-expected 1QFY22 earnings, largely weighed by a weak performance from the Generics segment. The Biosimilars & Research segment benefitted from COVID-related products, to some extent.

* We lower our EPS estimate by 11%/6% for FY22/FY23, factoring in a delay in a) approvals for biosimilars in the US, b) pricing pressure in Generics / delay in new approvals / operational issues in the Generics segment on account of the pandemic.

* We continue to value BIOS at 34x 12M forward earnings to arrive at Target Price of INR390. We maintain Neutral as current valuations adequately capture the Biosimilars-led potential upside in earnings.


Lower sales, inferior product mix lead to YoY earnings decline in 1Q

* BIOS’ 1QFY22 revenues grew 5.4% YoY to INR17.6b (est. INR19.2b), led by 41% YoY growth in Research Services (INR5.9b; 32% of sales), 9.6% YoY growth in Biosimilars sales (INR7.5b; 41% of sales), and INR110m in revenues from the Novel Biologics segment (nil YoY). 22% YoY decline in generics sales (INR4.9b; 26% of sales) dragged down overall revenue growth.

* The gross margin (GM) contracted 290bp YoY to 61% due to a change in the product mix. Accordingly, the EBITDA margin contracted 260bp YoY to 22.1% (est. 22.8%). Higher employee/R&D costs (90bp/40bp YoY as a percentage of sales) were offset by lower other expenses (-170bp YoY as a percentage of sales).

* EBITDA declined 6% YoY to INR3.9b (est. INR4.4b) for the quarter.

* Adjusted for loss in an associate entity (Bicara), PAT declined at a higher rate of 19% YoY to INR1.2b (est. INR1.8b) due to a higher tax rate.


Highlights from management commentary

* BIOS would invest USD100m in Generics over the next 2–3 years (USD66m in FY22). It would further invest USD100m in the Biologics segment.

* The goal date for the granting of the interchangeability designation to bGlargine is towards the end of Jul’21. Post a successful outcome, BIOS would need to secure formulary access and subsequently acquire commercial contracts.

* The USFDA pre-approval inspection is scheduled at the Malaysia site in 3QCY21. The USFDA is yet to provide clarity on the inspection for bBevacizumab.

* Fundraise at Bicara (associate) would be subject to read-outs for certain products expected at end-CY21.

* BIOS guided for flat YoY business in the Generics segment for FY22.


Valuation and view

* We lower our EPS estimate by 11%/6% for FY22/FY23 to reflect a subdued performance from the Generics segment due to (a) the slow pace of new approvals and (b) ongoing price erosion in the base portfolio. Even the Biosimilars off-take would be impacted by delays in new approvals.

* Accordingly, we expect an earnings CAGR of 38% over FY21–23, led by a 15%/18% sales CAGR in Biologics / Research Services and 320bp margin expansion.

* We continue to value BIOS at 34x 12M forward earnings to arrive at TP of INR390. We maintain Neutral due to a limited upside from current levels.


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