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Enhanced efforts needed to improve biosimilars outlook

* Biocon (BIOS) has delivered 22%/25% revenue/EBITDA CAGR over FY18-23, led by robust traction in biosimilars and research services. However, earnings CAGR have been lower at 15% over FY18-23 due to increased financial leverage and depreciation.

* While BIOS continues to work on enhancing its biosimilar (49% of FY23 sales) pipeline and expand the reach of commercialized products, regulatory issues at its sites may prolong the approval process for potential filed products. Also, the competitive scenario seems intense for products under development.

* Syngene (SYNG; 28% of FY23 sales) is not only broadening its research services on biologics, but also adding capacities in API/biological manufacturing. We expect operating leverage to gradually pick up over the medium term.

* In addition to the base portfolio of immuposuppressants/statins in the generics segment (23% of FY23 sales), BIOS is building capabilities as well as capacities toward formulation/API in areas of peptides, high potent APIs and synthetic APIs

* We cut our earnings estimate by 23%/9% for FY24/FY25, factoring in a) delay in biosimilar approvals, b) reduced guidance in SYNG, and c) elevated finance costs. We value BIOS on a SOTP basis (15x EV/EBITDA for 70% stake in Biocon Biologics (BBL), 54% stake in Syngene, and 10x EV/EBITDA for generics business) to arrive at a price target of INR220. We reiterate our Neutral stance on the stock, given limited upside from its current levels.

Biosimilars – Regulatory constraints/competition lowering growth outlook

* BIOS journey has been phenomenal in the biosimilar space with 44% sales CAGR over FY18-23, led by commercialization of products in developed/emerging markets as well as addition of Viatris business.

* However, we expect the growth trajectory to moderate with competition building up at a faster rate in pipeline products (b-Denosumab/bUstekinumab). With respect to b-Denosumab, peers such as Samsung Bioepis have already completed Phase III clinical trials; Celltrion is expected to complete trials in Nov’23; and Enzene Biosciences is expected to complete trials in Aug’24. BIOS is expected to complete Phase III clinical trials by Jun’24.

* For b-Ustekinumab, five peers have already completed clinical trials till Nov’22, while BIOS is expected to complete clinical trials soon.

* Also, enhanced efforts to resolve regulatory issues at Malaysia/Bengaluru site would keep potential approvals (b-Bevacizumab/b-Insulin Aspart) under check.

* Accordingly, we expect 13% sales CAGR to INR103b in the biologics segment over FY24-26.

Syngene – Steady execution; operating leverage to pick up gradually

* SYNG has undergone a significant investment phase (USD398m) over the past five years. These investments were made in research services, the Mangalore API plant, and the Bengaluru biologic manufacturing site.

* Further, the EBITDA CAGR of 15% over FY18-23, along with a YoY growth of 20% for 1HFY24, falls short of the revenue CAGR of 17.5% and 22% YoY for the same period. This is attributed to the expansion of commercial teams, expenses related to new facilities, and increased automation initiatives implemented across the business.

* With robust order book, gradual pick-up in capacity utilization, we expect 19% sales CAGR in SYNG research services to INR45b over FY23-25.

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