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Q3 witnesses recovery but regulatory hurdles persist

Biocon Limited (Biocon) reported better-than-estimated revenue and PAT, but missed our estimate on the margin front. Biosimilar segment revenue grew 32.2% QoQ, mainly due to initial supply of interchangeable Semglee in the US. Generics business and research services grew 8.3% and 9.7% YoY, respectively. Consolidated revenue grew 17.5% YoY to Rs21.7bn (I-Sec: Rs18.8bn), adjusted EBITDA margin improved 90bps YoY (-170bps QoQ) to 22.5% (I-Sec: 24.9%) and adjusted PAT grew 11.0% YoY to Rs1.9bn (I-Sec: Rs1.4bn). Launch of Insulin Aspart, Bevacizumab and vaccine products with SILS alliance may provide some catalysts going forward, but plant inspection and resolution of CRL may delay monetisation of the opportunities. Hence, we reiterate HOLD with a revised target price of Rs374/share (earlier: Rs371/share).

* Business Outlook: Biosimilars grew 27.6% YoY (32.2% QoQ) mainly due to initial supply of interchangeable Glargine in the US. Generics segment reported 8.3% YoY (+14.6% QoQ) led by Everolimus launch in the US and demand recovery in API segment. Research services grew 9.7% YoY led by discovery services and dedicated centers. Gross margin contracted 260bps YoY with higher costs. However, operational leverage and lower R&D spend supported EBITDA margin which improved 90bps YoY to 22.5%. PBT margin for biosimilars declined to 12.6% from 23.5%/14.4% Q3FY21/Q2FY22 mainly due to MTM losses of Rs770mn related to minority investment in Adagio. New launches and recovery in business environment are likely to support margins, which, however, could be restricted by expansion-linked expenses and rising R&D.

* Key concall highlights: 1) Despite CRL, management expects to get Insulin Aspart US approval in 2HFY23, 2) Launched dual version of Semglee to cover both insured and non-insured patients in the US, 3) Biosimilar segment core EBITDA margins (ex R&D) expected to remain at 38%, 4) R&D spend expected to increase from Q4FY22 and 5) Maintained steady US market share of 8-10% in both Fulphila and Ogivri 6) Malaysia plant expected to be profitable from Q4FY22.

* Outlook: We expect revenue CAGR of 14.4% over FY21-FY24E driven by new biosimilar launches in developed markets, resulting in EBITDA margin expansion of 630bps and earnings CAGR of 34.1%. This would help generate healthy FCFF of ~Rs12bn over FY21-FY24E. Return ratios are also likely to improve with RoE and RoCE reaching to 14.6% and 9.0%, respectively, by FY24E.

* Valuation and risks: We cut our revenue and EBITDA estimates by 5-7% and 10- 12% respectively over FY23E-FY24E due to launch delay in Insulin Aspart and Bevacizumab coupled with rising costs. Maintain HOLD with a revised SoTP-based target price of Rs374/share (earlier: Rs371/share) as we roll over to Sep’23. Key downside risks: Adverse regulations, higher competition in products Key upside risks: higher than expected growth in biosimilar.

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