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Biosimilar off-take, lower R&D spending drive earnings

Work-in-progress to improve business outlook across segments

*  Biocon (BIOS) delivered better-than-expected adjusted earnings in 4QFY24, led by improved biosimilar sales and lower R&D spending. While EBITDA maintained its uptrend in FY24 and grew to INR29.4b, adj. PAT hit a 10-year low of INR2.6b, largely due to increased financial leverage and higher depreciation.

*  We cut our earnings estimates by 19%/12% for FY25/FY26 to factor in a) a delay in inspection and subsequent approval for potential biosimilars, b) persistent challenges in API business, c) moderation in outlook for research services business, and d) higher leverage. We value BIOS on SOTP basis (17x EV/EBITDA for 70% stake in Biocon Biologics, 54% stake in Syngene and 10x EV/EBITDA for generics business) to arrive at a TP of INR280.

*  BIOS is making efforts to improve the outlook for the generics and biosimilars segments by enhancing its product pipeline and improving its market share in existing products. A successful USFDA inspection is vital for new approvals and subsequent improvement in financial performance. Maintain Neutral on the stock as the current valuation factors in the upside in earnings.

Better show in biosimilar partly offset by lower generics/research services business YoY

*  4QFY24 revenues grew 7.4% YoY to INR39b (est. INR37.7b). Revenue growth was led by Biosimilars (59% of sales), which grew 21% YoY to INR23.6b. Research services (24% of sales) declined 8% YoY to INR9.2b. Generics sales declined 4% YoY to INR7.2b (20% of sales).

*  Gross margin (GM) expanded marginally by 60bp YoY to 63.8%.

*  However, EBITDA margin contracted 50bp YoY to 23.4% (est: 18.5%) due to higher other expenses (+520bp YoY as % of sales), offset by lower employee/R&D expenses (-90bp/-310bp YoY as % of sales).

*  EBITDA grew 5% YoY to INR9.2b (est: INR7b) for the quarter.

*  After adjusting a one-off expense of INR420m, adj. profit grew 24.8% YoY to INR1.9b (est. PAT: INR1.3b). Despite YoY growth in EBITDA, PAT declined YoY due to higher depreciation/tax outgo.

*  In FY24, revenue/EBITDA grew 30%/18% YoY to INR144b/INR29.5b, while PAT declined by 65% YoY to INR2.6b.

Highlights from the management commentary

*  FY25 will be the year of consolidation, transitional and growth acceleration.

*  Capex would be tapered down going forward.

*  The USFDA has accepted bUstekinumab filing. BIOS has settled with J&J for a launch in Feb’25, subject to USFDA approval.

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