Biosimilar can boost Biocon sentiment

Weak Q2 results led to downward revision of estimates

Biocon reported a muted September quarter (Q2) performance that was lower than estimates. Though the research services’ revenue, led by Syngene, rebounded, after a fire incidence in the December 2016 quarter, and branded formulations segment too saw decent growth, the decline in its small molecules business (about a third of sales) and flat biologics revenues pulled down the numbers. However, there is hope for a recovery.

Chairperson and Managing Director Kiran Majumdar Shaw said earnings performance was muted because of several factors, including plant modifications to comply with regulatory requirement, which led to production disruptions. Biocon also experienced regulatory and tender delays in some emerging markets.

Thus, revenues grew only 2 per cent year-on-year (y-o-y) to Rs 969 crore, lower than the Bloomberg consensus estimates of Rs 1,022 crore. On the cost front, commercialisation of the Malaysian plant continued to add pressure. Earnings before interest, tax, depreciation and amortisation (Ebitda) declined 24.1 per cent y-o-y to Rs 182.2 crore, and came lower than estimates of Rs 234.4 crore. Ebitda margin came at 18.8 per cent (down 630 bps y-o-y), as employee expense, as a per cent of sales, increased by about 370 bps y-o-y and raw material expense by 360 bps y-o-y. Some analysts suggest the rise in raw material costs is optically higher due to pricing pressure in the US. Consequently, net profit declined by more than half to Rs 68.8 crore and came lower than estimates of Rs 112 crore.

Ranjeet Kapadia at Centrum Broking has lowered his FY18 and FY19 earnings estimates by 10 per cent and 8 per cent, respectively. IIFL has cut its FY18 and FY19 estimates. On the bright side, the biosimilars business growth is being looked at by the Street keenly. Biosimilar launches inflated Biocon’s stock price almost 2.5 times in 18-20 months. Although regulatory issues in the past few months have seen the stock correct from its peak, approvals and launches could again rev up sentiments.

Biocon said the US FDA has issued a complete response letter for biosimilar Pegfilgrastim (oncology drug) and the application would be resubmitted after updating it with data from facility requalification activities. Besides, the FDA also extended the target action date for the biosimilar Trastuzumab (another oncology drug) application to December 3, 2017. However, Biocon feels the this will not impact the commercialisation timeline of the product. Biocon also submitted a filing for Insulin Glargine with the USFDA. Such products typically have a high margin with strong potential, given limited competition. For Europe launches, the company has implemented corrective and preventive actions and is working on re-inspection of this facility and early resubmission of dossiers.