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‘VAI’ brings much-needed regulatory respite

Await clarity on Malaysia inspection

* Biocon (BIOS) has received ‘voluntary action indicated’ (VAI) for its Biocon Park, Bengaluru. The approvals for these sites were stuck for more than 15 months.

* A favorable compliance outcome provides visibility for product approvals, namely b-Bevacizumab and b-Ustekinumab. Further, the VAI classification for this park provides a boost to the Liraglutide opportunity as well.

* While VAI is positive for BIOS, competition has intensified in some products over the past two years.

* BIOS’ earnings declined significantly over the past two years (50% compounded decline over FY22-24), led by the lack of potential approvals for the US market and increased financial leverage. With compliance in place for Biocon Park, we expect product approvals/launches to boost the company’s growth outlook over the next 2-3 years. Accordingly, we maintain our Neutral stance on the stock, as the current valuation captures the earnings upside.

VAI classification for Biocon Park

* USFDA in Jul’24 inspected four drug substances, two drug products, four QA/QC, and one microbiology labs, and issued 10 observations.

* BIOS has implemented appropriate comprehensive and preventive action to address the issues highlighted by USFDA, which led to the VAI classification. This implies sites are under compliance from the approval perspective.

* The potential products from this park are: b-Bevacizumab, b-Ustekinumab and generic Liraglutide.

Competition intensifies in Bevacizumab/Ustekinumab for US market

* BIOS has filed Bevacizumab/Ustekinumab in US market in Apr’20/Feb’24.

* Currently, there are 5 biosimilars of Bevacizumab and 5 biosimilar of Ustekinumab commercialized in US market (Exhibit 2). Further, there are 6 competitors, including Biocon, which have filed the drug and are waiting for USFDA approval for marketing of Ustekinumab.

* Accordingly, its biosimilars market share has reached 88% in b-Bevacizumab. Likewise, the innovator (avastin) sales have declined from the peak (USD3b) in 2019 to USD453m in the past 12 months. Ustekinumab has seen four biosimilar approvals since Apr’24.

* With delay in compliance and subsequent approvals, the scope of business has reduced for BIOS over the past two years in these products.

* Liraglutide can be an interesting opportunity in GLP-1 space, subject to timely ANDA approval. Innovator annual sales for this product are USD300m

Valuation and view

* Delayed compliance at Biocon Park/Malaysia site and increased debt (due to Viatris deal) had led to a significant deterioration in earnings for BIOS over the past two years. While Malaysia site classification is awaited, the biocon park compliance should boost its business performance going forward.

* We maintain our Neutral stance, as the improved business outlook is priced in the current valuation (67x FY26E/33x FY27E PE).

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