Biocon (BIOS) is steadily building a biosimilar portfolio with the pipeline mix progressing toward approved/commercialised products. In addition to CRAMS (Syngene)/Biosimilars, BIOS is building another lever – i.e. Small molecules—for growth over the next 4-5 years. We cut our EPS estimates by 5%/1%/2% for FY20/21/22 to factor in the gradual uptick in Biosimilars market share and moderate growth in Syngene. Maintain Neutral given the limited upside from current levels.
Operationally in line; Biologics traction improves sequentially: Revenue increased 13% y-o-y to Rs 17.5 bn (in-line) in Q3FY20, mainly led by strong growth in Biologics (+31% y-o-y) and Small Molecules (+16% y-o-y). Research Services grew 11% y-o-y to Rs 5.2 bn. However, Branded Formulations de-grew by 26% y-o-y. Gross margin expanded by 170bp y-o-y (-150bp q-o-q) to 63.6%. Ebitda margin shrank by 140bp y-o-y to 25.5% (our estimate: 26.5%) due to higher employee cost and R&D expenditure, partly offset by the benefit of cost optimisation on other expenses. Ebitda increased marginally by 7% y-o-y to `4.5 bn (our estimate:
Rs 4.6 bn). Adj. PAT was down 3.5% y-o-y to Rs 2.3 bn (our estimate: Rs 2.4 bn).
Highlights from management commentary: The benefit of business from Trastuzumab biosimilar was offset to some extent by remediation measures at the Malaysia plant, increased R&D spend (+46% y-o-y) and deferred Pegfilgrastim biosimilar sales. Gross margin is likely to improve in the coming quarters with ramp-up in production of Pegfilgrastim and better traction in Trastuzumab. BIOS incurred capex of ~Rs 15 bn for 9MFY20. Overall capex is estimated at `20 bn for FY20. BIOS aims for single-digit ANDA filings annually over the next 2-3 years.
Valuation and view: Over FY19-22, we expect earnings CAGR of 28%, led by a CAGR of 36% in Biologics and 17% in Small molecules, with a 360bp margin improvement. We continue valuing BIOS at 25x and roll our TP to `300 (prior: Rs 305) on 12M forward earnings basis.
