Buy Biocon Ltd For Target Rs. 430 by Motilal Oswal Financial Services Ltd
‘VAI’ status for Malaysian site provides regulatory boost
B-Aspart – Potential product from the Malaysian site
*Biocon (BIOS) has received ‘Voluntary Action Indicated’ (VAI) status for its Malaysian site.
*With this, BIOS now has all critical sites for biosimilars under USFDA compliance, improving its business prospects in the US market.
*Regulatory compliance at the Malaysian site paves the way for commercial opportunities for B-Aspart. We believe the contractual cycle will pose a limited hurdle, as there is currently no biosimilar competition for this product.
*BIOS has experienced a significant earnings decline over the past two years (a 50% compounded decline over FY22-24), led by a lack of potential approvals for the US market and increased financial leverage.
*BIOS has implemented considerable remediation measures to overcome regulatory issues over the past two years. With compliance in place for the Biocon Park/Malaysian site, we expect product approvals/launches to boost the company’s growth outlook over the next 2-3 years. We expect a 21% EBITDA CAGR over FY25-27. We re-rate the biologics business to 22x 12M forward EV/EBITDA (from 18x earlier) to factor in regulatory compliance. Accordingly, we arrive at an SOTP-based TP of INR430 (22x EV/EBITDA for the biologics business, 53% stake in Syngene, 14x EV/EBITDA for the generics business). Upgrade to BUY
VAI classification for Malaysian site
*BIOS filed a Biologic License Application (BLA) for B-Aspart for the USFDA market from its Malaysian site in mid-CY20.
*The Malaysia site inspection was classified as Official Action Indicated (OAI) in Oct’23. The company also received a Complete Response Letter (CRL) for B-Aspart in Oct’23. Interestingly, the CRL did not cite scientific issues with this product
.*With the VAI now in place at the Malaysian site and the CRL containing very limited product-specific queries, it implies that the product approval was stuck due to manufacturing site compliance issues.
*The US market size for this product is about USD800m. Timely approval/biosimilar acceptance by the doctor community/patients remain critical to the product’s prospects. Potential sales for BIOS from this product can be at least USD80-100m.
Supply constraints in the US further boost the outlook for B-Aspart
*Currently, insulin is in short supply in US markets. This is partly due to NovoNordisk building/allocating manufacturing capacity toward GLP-1, as these drugs (Ozempic/Vegovy) have posted a strong CAGR of 60% over CY19-24.
*Despite stable demand, Insulin Aspart has witnessed an 8% compounded decline over CY19-24. Interestingly, there has been a 19% YoY sales growth over the past 12M
BIOS could become an early entrant for B-Aspart in the US market
*Currently, no biosimilar has been approved for Insulin Aspart. Apart from BIOS, two other companies have pending approvals from USFDA.
*Another competitor (Sanofi) has a product in Phase 1 clinical trials.
Strong progress in regulatory compliance across sites for biologics
*Over the past six months, BIOS has achieved significant regulatory milestones, despite multiple observations issued by the USFDA at its sites (drug substance/drug product manufacturing plants, analytical QC lab, microbiology lab at Biocon Park, and the Malaysian site).
*In Nov’24, it received the VAI classification at its Biocon Park site. Subsequently, it received approval for b-Ustekinumab in Dec’24.
*The recent VAI classification at the Malaysian site reinforces the company’s efforts toward compliance, providing improved visibility for commercial success.
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*Delayed compliance at the Biocon Park/Malaysian site and increased debt (due to the Viatris deal) led to a significant earnings decline for BIOS over the past two years.
*Compliance at Biocon Park also provides potential opportunities for BIOS from Liraglutide.
*Additionally, the Malaysian site enhances the scope for broadening BIOS’s biosimilar offerings in the US market.
*Overall, we expect a 16% CAGR in biologics sales over FY25-27.
*On an overall basis, we expect 21% EBITDA CAGR over FY25-27. Considering the efforts toward compliance and potential business from upcoming products, we increase the EV/EBITDA multiple for the biologics business to 22x on a 12M forward basis. We further add 53% stake of Syngene and value the generics business at 14x EV/EBITDA to arrive at an SOTP-based TP of INR430.
*The timely approval for B-Aspart can provide further potential upside to biologics sales over FY25-27. Upgrade to BUY.
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