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Biocon Rating ‘Neutral’; firm in position to revive earnings growth

Earnings CAGR of 36% estimated over FY21-23e; ‘Neutral’ retained with TP of Rs 360 as price factors in upside over medium term

While the earnings outlook remains promising, we maintain our Neutral stance with a TP of Rs 360 per share (32x 12-month forward earnings) as current valuations factor in an earnings upside over the medium term.
While the earnings outlook remains promising, we maintain our Neutral stance with a TP of Rs 360 per share (32x 12-month forward earnings) as current valuations factor in an earnings upside over the medium term.
We recently met with BIOS’ management to understand its business outlook in greater detail. Here are the key takeaways: After two years (FY20/FY21) of earnings decline, BIOS is well-positioned to revive earnings growth meaningfully. In addition to steady traction in already launched Biosimilars, BIOS has Insulin Glargine (Semglee) contracts starting Q4FY22. This would be further supported by b-Aspart, subject to regulatory clearance. The recent agreement with the Serum Institute of India (SII) to market its COVID-19 vaccine further increases its prospects from H2FY23e onwards.

We expect 36% earnings CAGR over FY21-23e, led by Insulin Glargine, scaling up of the Biologics business in emerging markets, and ramp-up in research services. We are yet to factor in the Vaccine business in our estimates. While the earnings outlook remains promising, we maintain our Neutral stance with a TP of Rs 360 per share (32x 12-month forward earnings) as current valuations factor in an earnings upside over the medium term.

Vaccine – Potential opportunity in the offing: BIOS has partnered with the SII to market 100m vaccine doses annually for 15 years, to be manufactured by Serum Life Sciences (SILS). The business opportunity is expected to start after the deal’s conclusion, likely, in Oct’22. Considering the rising COVID-19 cases and current global vaccine pricing ($3-5/dose range), the business potential can be $300-500 m for BIOS. The margin on vaccines can be in line with its current core Ebitda margin of ~30%. The agreement is not limited to COVID-19 products. It can further funnel the vaccine for malaria and other therapies.

Robust runway for commercial as well as upcoming products: Semglee’s inclusion in the formularies of Express Scripts and Prime Therapeutics provides a boost to its revenue potential as these formularies cover ~60m US lives. Semglee has also been included in Walgreens’ loyalty programme. BIOS has submitted a Corrective and Preventive Action Plan (CAPA) with the USFDA in response to a pre-approval inspection of its Malaysia facility. Viatris has gained 5% market share for b-Adalimumab in the EU since its launch in Oct’18. Considering its profit share agreement, a further market share gain would enhance BIOS’ income prospects.

Valuation and view: We expect Semglee to ramp-up with the new formulary listing with Express Scripts. We expect 36% earnings CAGR over FY21-23E, led by a 14%/17% sales CAGR in Biologics/Research Services and 300bp margin expansion. We value BIOS at 32x 12-month forward earnings to arrive at our TP of Rs 360.

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