Biocon: FY25 to be another washout year

12 Feb 2024 , 12:41 PM

Analysts of IIFL Capital Services downgrade Biocon from ADD to REDUCE and cut their TP from ₹250 to ₹225 (21% downside), as they expect FY25 to be another washout year for the company given the slow ramp-up expected in bHumira for CY24 as well and persistent delays in USFDA approvals for bAspart and Bevacizumab. With the overall traction for all bHumira players in the US being modest including Amgen, analysts of IIFL Capital Services also cut their bHumira sales assumptions for Biocon from USD100/180m to USD40/100m for FY25/26 resp. This, along with 120-230bps lower margin assumptions p.a. has driven 10-15% Ebitda downgrades and 25-45% EPS downgrades for FY25/26. Analysts of IIFL Capital Services revised Ebitda estimates, though 20-25% being lower than consensus, still factors-in a robust 13/33% growth in FY25/26. There is still downside risks to FY26 estimates, given Biocon will likely miss the contracting cycle for Aspart for CY25 as well owing to the OAI on the Malaysia facility. With BBL ND/Ebitda of ~6.5x, incremental funding/divestments are critical for debt reduction. 

Biologics Ebitda margins were ~15/20% on a reported/adjusted basis in Q3, as mgmt highlighted ~500bps of one-off transition-related costs for the Biologics business. Despite Biologics’ R&D declining from 16% in FY23 to 12% in 9MFY24, Biologics’ Ebitda margins (ex. one-off costs) have contracted from 25% to 20-21% likely implying pricing pressure in the base biosimilar products in the US. Led by Biologics’ margin miss, Biocon’s Q3 overall Ebitda was 30% below IIFLe and was 17% below IIFLe adjusting for 500bps of one-off costs. 

Humira ramp-up will get delayed to CY25, while Aspart will likely miss contracting cycle for CY25:

While Biocon has garnered incremental contracts for Pegfilgrastim, Trastuzumab and Glargine, analysts of IIFL Capital Services believe the volume increases on these products will help to just offset the price erosion in FY25. Biocon’s contracts for Humira imply 10% of covered lives in the US, but Humira will see a meaningful pick-up only in CY25. Analysts of IIFL Capital Services estimates assume USD100m sales from Aspart in FY26ii, on which there will be further downside risks if the OAI on the Malaysia plant is not cleared within 6 months. 

Analysts of IIFL Capital Services value Biologics/Syngene/Generics business at ~13/19/12x FY26 EV/Ebitda to arrive at their TP of Rs225. 

With the high competitive intensity in the biosimilars segment from innovator companies (e.g. Amgen, Pfizer) and fairly aggressive price erosions, analysts of IIFL Capital Services think that Biologics’ business should trade at multiples of a pure US-Generic biz only.