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Approvals/faster traction to lead to better future growth

Leadership changes in place now for Biocon Biologics

* BIOS delivered lower-than-expected 4QFY21 result due to: a) moderation in performance of Biosimilars, and b) sluggish growth in Generics. While the business environment remains challenging on account of COVID-19, it continues to build a product pipeline of Biosimilars/Generics to create a foundation for growth over the next 4-5 years.

* We lower our FY22E/FY23E EPS estimate by 10%/3%, factoring in a delay in: a) approvals for Biosimilars in the US, b) award of tenders in emerging markets, c) gradual build-up of the insulin glargine business, and d) increased competition in already commercialized products. We value BIOS at 34x 12-month forward earnings to arrive at our TP of INR390. We maintain our Neutral stance as current valuations adequately captures potential Biosimilar-led upsides in earnings.

Revenue below our estimate, lower R&D spend led to in line EBITDA

* Revenue grew 18% YoY to INR18.4b in 4QFY21 (v/s our estimate of INR20.2b), led by: a) Biosimilars (36% of sales) up 53% to INR6.6b, b) Research Services (36% sales) up 8% to INR6.6b. Growth was dragged down by sales of Generics, which rose 3% YoY to INR5.8b (28% of sales).

* Gross margin expanded 360bp YoY to 65% due to superior product mix. Accordingly, EBITDA margin expanded 350bp YoY to 23.7% (v/s our estimate of 22.4%). As a percentage of sales, higher other expense (+170bp YoY) was offset by lower R&D cost (-110bp).

* EBITDA grew 37% YoY to INR4.4b (v/s our estimate of INR4.5b), partly on a lower base.

* BIOS saw an exceptional gain of INR130m (net of insurance claims for a fire incident at Syngene and severance cost on exit of certain key personnel), Adjusting for the same and gain of INR1.6b (fair valuation of investment in Bicara Therapeutics), PAT grew 30% YoY to INR1.6b (v/s our estimate of INR1.9b).

* Sales/EBITDA grew 13%/3% YoY to INR71b/INR16.6b in FY21, while adjusted PAT declined 10.6% to INR6.6b.

Highlights from the management interaction

* The considerable leadership team change is in place now at Biocon Biologics, with Ms. Shreehas Tambe being appointed as Deputy CEO and Mr. Susheel Umesh being appointed as Chief Commercial Officer. BIOS expects performance to improve going forward.

* The management guided at growth in the biologics segment to be higher in FY22 than that in FY21 (which was 21% YoY), led by new launches and better traction in already commercialized products. It indicated double-digit growth in formulations/flat to low single-digit growth in API within Generics.

* Insulin glargin offtake has been gradual on account of timing of approval, impacting formulary contracting cycles in CY21. Partner Viatris is working to gain access in formularies for CY22.

* Gross R&D spend would be 12-14% of FY22 revenue, excluding Syngene.

Valuation and view

* We lower our FY22E/FY23E EPS estimate by 10%/3%, factoring in: a) gradual uptick in sales of Biosimilars, b) delay in approvals for products in the Generics segment, and c) lower operating leverage.

* We expect 42% earnings CAGR over FY21-23E, led by a 22%/16%/12% sales CAGR in Biologics/Research Services/small molecules and 320bp margin expansion.

* We value BIOS at 34x 12-month forward earnings to arrive at our TP of INR390. We maintain our Neutral stance as the stock is fairly valued, factoring in biologics led earnings growth over the next 2-3 years.

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