Biocon India's Q3FY19 results (Underperformer) - Biosimilars pick-up; higher costs mitigate gains

Q3FY19 result highlights

• Consolidated gross revenues stood higher at Rs16bn (+44%/16% yoy/qoq) vs est of Rs14.5bn driven by beat across segments primarily by biosimilars. Net revenues stood at Rs15.4bn (+46%/17% yoy/qoq) vs est of Rs13.7bn. BioPharma revenues came at Rs11.3bn vs est of Rs9.7bn.
• Biologics revs came at Rs4.5bn (+136%/22% yoy/qoq) vs est of Rs3.7bn led by contribution from US market Fulphila (Pegfilgrastim) supplies to Mylan along with growth in other biosimilars across EMs. Small molecules came in higher at Rs4.7bn vs est of Rs4.3bn and branded formulations too came in higher at Rs2.1bn vs est of Rs1.6bn
• EBITDA came at Rs3.8b (+71%/12% yoy/qoq) vs est of Rs3.8bn. GMs were flat sequentially at 61.5% despite sharp qoq pick up in biosimilar sales. Other exp at Rs2.2bn (+126%/66% yoy/qoq; est of Rs1.4bn) led by higher sales expenses linked to biosimilar sales and forex loss of Rs280mn; Mgmt has guided that other expenses will continue grow in-line with the pickup in the biosimilar sales going forward. and  R&D costs at Rs767m (Rs769mn in Q2) vs est Rs700m
• PAT came at Rs2.1bn vs est of Rs2.09bn.

Key positives: Higher biosimilar sales led by Pegfilgrastim launch in US and higher biosimilar sales in EMs; higher sales across most segments;

Key negatives: Higher SG&A cost and R&D cost 

Impact on financials: We have broadly maintained our earnings estimate.

Valuations & view

With commencement of Pegfilgrastim revenues in the US, Biocon’s biosimilar portfolio commercialization has well and truly begun. Going forward, Biocon-Mylan’s ability to compete with fairly formidable competitors/innovators will determine the scale of their success. We believe that while Biocon is best positioned amongst Indian players to leverage on the global biosimilar theme and will have the best earnings growth amongst peers over the next 2-3 years, the same is already adequately captured in current valuations. Given that meaningful biosimilar revenues are yet to accrue and a fairly muted core business, the current stock price factors in most positives and doesn’t account for uncertainties inherent in monetization of biosimilars in developed as well as emerging markets. Sharp increase in biosimilar linked selling expenses underline the possibility of negative surprises on the profitability front. Maintain Underperformer rating with a SOTP target price of Rs537. ​