A host of upcoming catalysts behind the good outlook; recent fall makes short-term valuations compelling; ‘OW’ retained.
We believe the share price will rise in absolute terms over the next 60 days. This is because the stock has traded off recently, making short term valuation much more compelling. Biocon is down 11% from the recent peak in September18 vs. 5% Sensex return during the same period. Some of the upcoming stock catalysts include – (i) strong Q2FY19 results driven by USD gains (especially, contract research business) and biosimilar business (2% relevant market share in Fulphila, as per IQVIA), (ii) two potential EU launches (glargine and adalimumab) planned in Q4FY18, and (iii) two EU approvals (trastu and pegfil) in Q4FY18.
We retain an OW rating on the stock. We estimate that there is about an 80% probability for the scenario.
Our price target of Rs 785 is our base case scenario value. We derive it by applying a target P/E multiple of 40x to our EPS estimate of Rs 19.62 for the 12 months ending March, 2020.
Our target P/E multiple of 40x is at a 10% premium to the stock’s two-year average. It is a 50-60% premium to Indian pharmaceutical industry multiples. To note, Asian biosimilar stocks are commanding much higher multiples (60-80x one-year forward consensus earnings). Our FY20 EPS estimate is 14% higher than consensus, because we believe that the global biosimilar monetisation story for 2019-2021 is getting clearer as regulatory, legal, and market uncertainties are being addressed.
Biocon’s rich pipeline (partnered with Mylan) has four lead biosimilars in advanced stages of approval in various markets (US, EU, EMs). It includes Trastu, recently approved by the US FDA, which should result in significant monetisation in 2019 and onwards. We also reflect improving visibility of the second wave of the company’s five biosimilar assets, steady base business fundamentals, prospects of global biosimilar opportunities coming to fruition in the coming years (through 2020), and commercialisation of its greenfield Malaysian facility ($200 mn capex).
Key risks to our price target
Regulatory risks include delay in product approvals, indication extrapolation, clinical trial design.Delay in resolution from France’s ANSM and the US FDA for manufacturing site at Bangalore are also risks. Legal risks include at-risk launches, delay in market entry, 30m NDA stay. Asset monetisation risks include innovator defence, marketing challenges, slower biosimilar update from physicians.