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Generics & research grow; biosimilar stagnates

Biocon Limited (Biocon) has reported Q4FY22 financials above our estimates led by strong growth in generics and research services. While biosimilars grew 48% YoY due to launch of Semglee in the US, it has remained flat QoQ. Generics business and research services grew 25.7% and 15.1% YoY, respectively. Consolidated revenue grew 30.8% YoY to Rs24.1bn (I-Sec: Rs22.9bn), adjusted EBITDA margin improved 90bps YoY (210bps QoQ) to 24.6% (I-Sec: 23.1%) and adjusted PAT grew 181% YoY to Rs2.7bn (I-Sec: Rs2.2bn). Ramp up in Semglee, Fulfilla and Ogiviri in the US is necessary for growth. The recent Viatris deal brings access to an established biosimilar front end in the developed market, but it heavily weighs on near-term financials. Additionally, successful execution is quintessential for the transaction to be accretive. Hence, we reiterate HOLD rating with a revised target price of Rs356/share (earlier: Rs353/share).

Business outlook: Biosimilars grew 48% YoY mainly due to market share gain in Semglee post the approval of interchangeability. However, it remained flat QoQ despite market share gain due to higher inventory base with the initial supply in Q3FY22. Generics reported 25.7% YoY (+18.1% QoQ) growth led by continuous traction from Everolimus in the US and recovery in API segment. Research services grew 15.1% YoY led by growth across segments. Gross margin contracted 300bps YoY due to elevated costs. However, lower employee cost supported EBITDA margin which grew 90bps YoY to 24.6%. New launches and change in mix are likely to support margins; however, rising R&D cost may weigh on margins

Key concall highlights: 1) Interchangeable Glargine market share reached double digit by the end of the quarter and the company expects mid to high teen market share by the end of CY22, 2) Inspection at Bengaluru plant is expected in Q2FY23, 3) guided for 10-15% R&D of total revenue in FY23 (9% in FY22), 4) Malaysia plant achieved breakeven in Q4FY22 with profit of US$10mn, 5) Viatris and Serum deals are expected to close in H2CY22 and 6) insulin Aspart – responded to the CRL

Outlook: We expect revenue CAGR of 35.6% over FY22-FY24E mainly due to consolidation of Viatris business. Expect EBITDA margin expansion of 230bps and earnings CAGR of 64.8% over FY22-FY24E. However, due to the recent acquisition, free cashflow and margins are expected to remain under pressure. Also, net debt/EBITDA is expected to increase 4.8x in FY23E.

Valuation and risks: We increase our revenue and EBITDA estimates by 3-4% and 4-5%, respectively, over FY23E-FY24E factoring in better growth in generic and research business as well as reducing losses in Bicara therapeutics. Maintain HOLD with revised SoTP-based target price of Rs356/share (earlier: Rs353/share) Key downside risks: Adverse regulations, higher competition in products, delay in launching of products. Key upside risks: Higher than expected growth in biosimilars.

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