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Commercialization issues impact earnings

Change of guard at Biocon Biologics

* Dr. Christiane Hamacher has stepped down as MD as well as from the board of Biocon Biologics (BB) effective 20 Jan’21, due to professional differences with the chairperson on strategic priorities and the vision for BB. Dr. Kiran will assume the position of Executive Chairperson at BB. Dr Arun Chandavarkar will be the new MD and CEO for the next two years.

* Biocon (BIOS) delivered lower-than-expected 3QFY21, largely weighed by: a) decline in Generics sales, and b) slower ramp-up in Biosimilars off-take due to COVID-19. It continues to build a product pipeline of Biosimilars/Generics.

* We lower our FY21E/FY22E/FY23E EPS estimate by 16%/12%/7%, factoring in a delay in: a) approvals for Biosimilars, b) award of tenders in emerging markets, c) gradual build-up of insulin Glargine business and reduced operating leverage. We value BIOS at 34x 12 months forward earnings to arrive at our price target of INR385/share (from INR430 earlier). We maintain our Neutral stance as current valuations adequately capture potential Biosimilar-led upsides in earnings.

Increased operational cost/depreciation led to a YoY decline in earnings

* Revenue grew 8% YoY to INR18.5b (v/s our estimate of INR20.1b), led by: a) 11% YoY growth in Biosimilars (INR7.7b, 40% of sales), b) 13% YoY growth in Research Services (INR5.9b, 30% sales). Generics, down 3% YoY (30% of sales), dragged overall growth to some extent.

* Gross margin rose 120bp YoY to 65.9% due to superior product mix.

* EBITDA margin contracted 440bp YoY to 21.5% (v/s our estimate of 25.7%), dragged by increased other expenses/R&D cost/employee cost (+170bp/+160bp/+230bp YoY) as a percentage of sales.

* EBITDA declined 10.6% YoY to INR4b (v/s our estimate of INR5.2b).

* PAT declined 19.6% YoY to INR1.6b (v/s our estimate of INR2.4b) due to higher depreciation and tax rate.

* For 9MFY21, sales grew 11% YoY to INR52.7b, while EBITDA/PAT fell 5%/18% YoY to INR12.2b/INR5.1b.

Highlights from the management commentary

* Insulin Glargine – The management expects a gradual ramp up over the next 9-12 months, with favorable formulary coverage and award of contracts. BIOS is progressing well on the interchangeability aspect of insulin Glargine.

* Bevacizumab – The company has answered all queries and there has been no further request of technical data by the USFDA. However, physical inspection is required before approval.

* Insulin Aspart may also require inspection before approval from the USFDA.

* BIOS expect to respond to the Copaxone CRL over the next few months.

Valuation and view

* We expect 23% earnings CAGR over FY20-23E, led by a 25%/13% sales CAGR in Biologics/Research Services, and 140bp margin expansion. We expect RoE to improve to 17% by FY23E from 12% in FY20.

* We lower our FY21E/FY22E/FY23E EPS estimate by 16%/12%/7% to account for COVID-led delays of approval for potential products in the Biosimilars/Generics segment, slower off-take of Biosimilars in emerging markets, and lower operating leverage.

* We value BIOS at 34x 12 months forward earnings to arrive at our price target of INR385/share. Maintain Neutral given the limited upside from current levels.