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EBITDA miss; Biosimilar outlook stands positive

Biocon has reported 1QFY23 result healthy sales growth of 21.5% YoY to Rs21.4bn. While the EBITDA margin at 18.7% (~344bps YoY and 589bps QoQ) continued to be under pressure due to higher overheads costs (Staff/ R&D/ other costs were up 18%/65%/61% YoY), expenses were higher due to annual increments and increased input & freight cost. Adjusted for Rs 380 mn of forex loss (includes MTM translation loss of Rs 430 mn related to Goldman’s OCD), EBITDA would be at Rs 4.37 with margin at 20.4%. Adj. PAT for was at Rs1.8bn up by 114% YoY on lower base (declined 25% QoQ) with an Adj. EPS of Rs 1.5 per share. We believe the ongoing earnings traction on back of insulin glargine launch should gain momentum meanwhile the R&D spend would move up towards future pipeline. We maintain our BUY recommendation, with a revised SOTP-based TP of Rs400s (FY24E).

Biosimilars drives sales growth

Sales growth of 21.5% YoY was largely led by 29% YoY growth in Biosimilar business driven by improved traction and strong market share gain in interchangeable bGlargine (Semglee) to 9% (earlier 3%) in US and Expects market share to increase to mid-teens led by contracting supplies. While bTrastuzmab saw a dip in market share in Apr’22 (to 6- 7%) due to Viatris lost a customer; however, it has got new customers and the market share is gradually picking up (~9% currently). Management stated that USFDA inspection for Bevacizumab and Aspart is expected to happen in Aug-22.

Biocon Vaccine business

In May-22, Biocon has received CCI approval for the Serum deal and revenue from this transaction will start to accumulate from 2HFY23. The deal will help Biocon to sell next generation vaccines. The US approval is important as it shapes the global acceptance. The collaboration covers all vaccines which are under development and expects viral based vaccines to continue to see better demand. Expects annual sales run-rate of more than US$300mn.

Formulations – growth driven by new product launches

Generics/small molecules, 27% of sales, contributed Rs5.8bn – grew 19% driven by continued performance in API & recently launched generic formulations, coupled with lower base last year. The headwinds of pricing pressure, rising RM cost and pricier logistics continue to dampen profitability. The Immunosuppressant facility in Vishakhapatnam is on track to qualify & validate Vizag API facility in FY23

Valuation and risks

Biocon expects strong and sustainable growth in all 3 businesses. Both Viatris and Serum deal on track to closure by H2CY22. At CMP of Rs307, Biocon trades at 34x FY23E EPS of Rs9 and 25x FY24E EPS of Rs12.4. The management has announced value unlocking for Biosimilars/Biologics segment we believe by end of FY23E. The key risk to our investment thesis remains increased competition in the US, lower than expected market share.

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