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Multiple headwinds affect earnings

Viatris acquisition, Vaccine deal, and potential approvals to drive performance from 2HFY23

* BIOS delivered a lower than expected 1QFY23, led by reduced traction in the Generics segment, stable performance in Biosimilars, and higher operational cost. It continues to build its Biosimilars pipeline on its own and via the partnership model, as well as launch molecules in the Generics space.

* We cut our FY23/FY24 EPS estimate by 20%/6%, factoring in: a) a delay in commercialization of b-Aspart, b) shutdown related expenses in the Generics segment, c) higher R&D spends for Biosimilars, d) and the ongoing price erosion in the base business.

* We value BIOS on a SoTP basis (at an EV/EBITDA of 30x/10 for the Biosimilars/Generics business and 70% stake in Syngene) to arrive at our TP of INR320. Even though the management is developing products in the Biosimilars and Generics space, as well as adding capacity, the current valuation adequately factors in an upside in earnings over the next two-tothree years. Hence, we maintain our Neutral rating.

Product mix and higher OPEX drag profitability

* Revenue grew 21% YoY to INR21.4b (est. INR23.8b) in 1QFY23.

* Revenue growth was led by: a) Biosimilars (46% of sales), up 29% YoY to INR9.8b, b) Generics sales up 19% to INR5.8b (24% of sales), and c) Research services (30% of sales), up 8% to INR6.4b.

* Gross margin expanded by 180bp YoY to 62.8%, led by a change in the product mix.

* However, EBITDA margin contracted by 170bp YoY to 20.4% (est. 23.4%). Higher other expenses and R&D cost (up 180bp/240bp YoY as a percentage of sales) resulted in a contraction in EBITDA margin, despite a better gross margin YoY.

* EBITDA increased by 12.3% YoY to INR4.4b (est. INR5.6b) in 1QFY23.

* Adjusted PAT grew 49% YoY to INR1.8b (est. INR2.6b), driven by higher other income and a lower tax rate.

Highlights from the management commentary

* Core EBITDA margin is expected to remain in the mid--to-high 30s, for the Biologics segment.

* Annual revenue for the integrated Viatris-BIOS will be ~USD1.1b.

* The acquired Serum business has a revenue potential of more than USD300m over the next 12-months, post completion of deal with mid-30s EBITDA margin.

* Due to a delay in the inspection and subsequent approval for b-Aspart, there can be a miss in its near-term contractual cycle for commercialization.

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