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MOSL: BIOCON (Neutral)-COVID disruption impacts generics sales, earnings

BIOCON: COVID disruption impacts generics sales, earnings

(BIOS IN, Mkt Cap USD6.4b, CMP INR398, TP INR390, 2% Downside, Neutral)

 

Interchangeability decision for b-Glargine on the anvil

• Biocon (BIOS) delivered lower-than-expected 1QFY22 earnings, largely weighed by a weak performance from the Generics segment. The Biosimilars & Research segment benefit from COVID-related products, to some extent.
• We lower our EPS estimate by 11%/6% for FY22/FY23, factoring in a delay in a) approvals for biosimilars in the US, b) pricing pressure in Generics / delay in new approvals / operational issues in the Generics segment on account of the pandemic.
• We continue to value BIOS at 34x 12M forward earnings to arrive at Target Price of INR390. We maintain Neutral as current valuations adequately capture the Biosimilars-led potential upside in earnings.

 Lower sales, inferior product mix lead to YoY earnings decline in 1Q

• BIOS' 1QFY22 revenues grew 5.4% YoY to INR17.6b (est. INR19.2b), led by 41% YoY growth in Research Services (INR5.9b; 32% of sales), 9.6% YoY growth in Biosimilars sales (INR7.5b; 41% of sales), and INR110m in revenues from the Novel Biologics segment (nil YoY). 22% YoY decline in generics sales (INR4.9b; 26% of sales) dragged down overall revenue growth.
• The gross margin (GM) contracted 290bp YoY to 61% due to a change in the product mix. Accordingly, the EBITDA margin contracted 260bp YoY to 22.1% (est. 22.8%). Higher employee/R&D costs (90bp/40bp YoY as a percentage of sales) were offset by lower other expenses (-170bp YoY as a percentage of sales).