Biocon's Q1FY20 results (Underperformer) - Broadly inline; Biologics scale-up still slow

Q1FY20 result highlights

• Consolidated Revs came at Rs14.7bn vs est Rs15.8bn; Revs missed est driven by lower Syngene revs – Rs4.2bn vs est Rs4.8bn. Biologics revs grew 9% qoq at Rs4.9bn (vs est Rs5.1bn); Revenue traction pickup continues to be relatively muted despite limited competition in pegfilgrastim market in US along with multiple launches in EMs. Branded formulations and small molecules revs marginally missed est
• EBITDA came at Rs4.4bn vs est Rs4.3bn; Q4 was Rs4bn; EBITDAM – 29.8% vs 26.3% in Q4. EBITDA aided by sharp decline in other exp (-23% qoq) and improvement in GP (54% yoy); Gross R&D spends of Rs1.1bn with Rs310m capitalized
• EBITDA outperformance is starting to come through, as expected, with a pick-up in biologics revs due to it being significantly profitable; However, Biocon’s R&D spends are likely to increase meaningfully going forward. This will add to the profitability growth challenges
• PBT came at Rs3.1bn (10% qoq) inline with est. PAT below est due to higher taxes (27% vs est 20%); Rs2.1bn vs est Rs2.2bn; -3% qoq
• Mgt has guided that biologics sales will continue to grow through the quarters and will pick-up momentum from H2FY20 onwards with the bTrastuzumab launch and availability of significantly larger bPegfilgrastim capacities.

Key positives: Higher EBITDAM; Higher GM; Lower other expenses

Key negatives: Weak Syngene performance 

Impact on financials: Maintain earnings estimates

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 Rs260. ​