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Tepid organic growth

Biocon Limited’s (Biocon) Q4FY23 performance was boosted by consolidation of the acquired business of biosimilars (segment revenue up 114% YoY) from Viatris. Reported gross margin was inflated by ~150bps and EBITDA margin by 360bps due to licensing income of Rs1.75bn. Biocon is gearing up for regulatory clearances of Malaysian and Bengaluru facilities which will likely pave the way for approval of Aspart and Adalimumab. While growth in biologics has so far fared better, the space has attracted competition, and volume ramp up in Semglee, Fulfilla and Ogiviri in the US may hit a hurdle. Viatris deal brings access to an established biosimilar front-end in developed markets, but absence of near-term synergies and overhead cost could weigh down heavily on near-term financials. We downgrade the stock to HOLD (from Add) with a revised SoTP-based target price of Rs250/share (earlier: Rs265/share).

Business review: Revenue grew 56.7% YoY (+28.3% QoQ) to Rs.37.7bn. Biosimilars grew 114% YoY (+39.5% QoQ) led by acquisition and licensing income of Rs1.75bn. Market share for Fulphila and Semglee in the US stood at 14% and 12%, respectively. Volume ramp up in existing products and launch of Adalimumab and Aspart remain key going forward. Generics was flat YoY and QoQ at Rs7.2bn, mainly due to product mix. New launches in formulation segment and capacity addition in API should support near- term growth. Research services was up 31.2% YoY led by growth across segments. Serum Institute of Lifesciences (SILS) witnessed a restructuring of its alliance with conversion of US$150mn loan provided to Biocon Pharma into equity in BBL.

* Margins improve with operational performance: Gross margins expanded 180bps YoY and 70bps QoQ to 67.4% due to product mix. R&D stood at 9.1% (12% ex-Syngene sales) in Q4FY23 vs 7.9%/11.5% in Q4FY22/Q3FY23, respectively. Biocon expects R&D spending to remain at 12% (ex-Syngene) in FY24. EBITDA margin improved 190bps YoY and 450bps QoQ due to gross margin expansion and operating leverage. Adjusted PAT was up 15.8% YoY (+76.9% QoQ) to Rs.3.2bn.

* Outlook: We expect revenue / PAT CAGR of 24.7% / 33.8% over FY23-FY25E mainly due to consolidation of Viatris business, coupled with new launches including Adalimumab in the US and healthy growth outlook of Syngene business. We expect EBITDA margin to trend between ~23-24% due to Viatris acquisition and higher R&D. Barring divestments, we see limited scope for reduction in FY23 net debt levels of Rs143bn.

* Valuation and risks: We retain our EBITDA estimates for FY24E/25E. At CMP of Rs243, the stock trades at 13.9x/11.8x FY24E/FY25E EV/EBITDA, respectively. While we remain positive on research services segment, increased competition in biosimilar space and limited synergies from Viatris deal will likely exert pressure on earnings. We downgrade the stock to HOLD (from Add) with a revised SoTP-based target price of Rs250/share (earlier: Rs265/share). Key upside risks: Healthy launches in biosimilars and generics segments. Key downside risks: Adverse regulations, higher competition in products, delay in launch of products.

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