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MOSL: BIOCON (Neutral)-Biologics/Small molecules progressing well; Research Services growth moderate

Biocon: Biologics/Small molecules progressing well; Research Services growth moderate

(BIOS IN, Mkt Cap USD5b, CMP INR294, TP INR300, 2% Upside, Neutral)

 

Well placed to benefit from Biosimilars; Small molecules prospects improving

• Biocon (BIOS) is steadily building a biosimilar portfolio with the pipeline mix progressing toward approved/commercialized 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 estimate 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% YoY to INR17.5b (in-line) in 3QFY20, mainly led by strong growth in Biologics (+31% YoY; 34% of sales) and Small Molecules (+16% YoY; 31% of sales).
• Research Services (30% of sales) grew 11% YoY to INR5.2b. However, Branded Formulations (9% of sales) de-grew by 26% YoY.
• Gross margin expanded 170bp YoY (-150bp QoQ) to 63.6%.
• EBITDA margin shrank 140bp YoY to 25.5% (our estimate: 26.5%) due to higher employee cost (+220bp to 19.6% of sales) and R&D expenditure (+250bp YoY o 7.5%), partly offset by the benefit of cost optimization on other expenses (-160bp YoY). EBITDA increased marginally by 7% YoY to INR4.5b (our estimate: INR4.6b).
• PAT was down 3.5% YoY at INR2.3b (our estimate: INR2.4b).