Biocon: Retain ‘hold’ with higher TP of Rs 405 from Rs 390

Despite strong sales growth, ebitda margins at 22.5% declined 177bps QoQ on higher raw material costs), higher other costs (e.g. R&D, logistics) and mark-to-market (MTM) losses of Rs770million related to its investment in Adagio (Biocon looks to exit this investment).

Progress in Semglee will be keenly tracked as it will be crucial to support margins growth while Biocon expects spend on R&D and marketing infrastructure to increase ahead.
Progress in Semglee will be keenly tracked as it will be crucial to support margins growth while Biocon expects spend on R&D and marketing infrastructure to increase ahead.

Good start for Semglee: Biocon reported biosimilars sales of Rs 9.8billion (~$132million) in 3QFY22, which were up 32.2% QoQ, primarily helped by launch of ‘interchangeable’ Semglee in the US. Biocon’s partner Viatris launched the product in two formats in Nov 2021 — branded version (Semglee) and unbranded insulin glargine to widen access across patient groups with different affordability and insurance coverage. Preferred formulary listing of Semglee with leading PBMs (Express Scripts and Prime Therapeutics) is helping it gain prescriptions from Lantus (the reference brand) in the covered accounts. Besides PBM formularies (~30% of US market for insulin glargine), Viatris aims to improve penetration in other channels (e.g. Medicare Part D, managed Medicaid, etc. where Lantus has stronghold) through the low-cost unbranded version.

 Higher costs and MTM losses hit 3Q ebitda despite strong sales: In addition to biosimilars, other segments also saw notable pick-up in sales. Generics sales at Rs 6.1billion grew 14.6% QoQ in 3Q driven by Day-1 US launch of generic everolimus. Research services (Syngene) revenues at Rs 6.4billion grew 5.1% QoQ and Syngene has inched up its revenue guidance for FY22 to high teens from mid-teens. Despite strong sales growth, ebitda margins at 22.5% declined 177bps QoQ on higher raw material costs), higher other costs (e.g. R&D, logistics) and mark-to-market (MTM) losses of Rs770million related to its investment in Adagio (Biocon looks to exit this investment).

All eyes on Semglee pick-up: We remain positive on prospects of interchangeable Semglee (addressable market is ~$2billion) though we believe execution remains the key to realise benefits in a market which is closely held by Lantus (Lantus hold c74% of prescription share despite entry of competition since Dec 2016). Progress in Semglee will be keenly tracked as it will be crucial to support margins growth while Biocon expects spend on R&D and marketing infrastructure to increase ahead.

Retain ‘hold’ with higher target price of Rs405 (from Rs390): We remain positive on long-term prospects of biosimilars though we believe competition remains intense both from incumbents as well as from new entrants. We remain watchful about step-up in commercial execution of key launches (e.g. pick-up of Semglee in accounts not covered by PBMs) and retain our ‘hold’ rating. Outlook remains steady for research services and generics. Post 3Q results, we increase our EPS estimates for FY22/23/24e by 4.8%/1.5%/0.3%, respectively, as we adjust our model assumptions for updates on key segments and costs. Our revised target price is Rs 405 (from Rs 390).

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