Biocon: Scope for long-term gains

There is little doubt about the strength of the company's biosimilar portfolio but upsides are a couple of years away

The Biocon stock has more than doubled over the past year, with a third of the gains coming over three months. The benchmark Sensex, on the other hand, has gained only 6.3 per cent in the past year.   

The trigger for the stock, which had underperformed pharmaceutical peers over the past few years, has been the progress on its biosimilar portfolio and upsides from its base portfolio. Like their generics counterpart that are a copy of a patented drug, biosimilars are a copy of a patented biologic drug. However, the key difference is that unlike inert chemicals that are used in a generic drug, biosimilars consist of living organisms. Manufacturing biosimilars is perceived to be more complex than generics drugs.

Analysts have highlighted that biosimilars are expected to be among key growth drivers for Indian companies, which are facing increasing competition in this segment and, thus, seeing a price erosion in the US market. While for generic drugs, the price erosion (versus the original or innovator drug) is significant at nearly 90 per cent, the discount for biosimilars to the original biologic drug is 20-30 per cent, point out analysts at Bank of America Merrill Lynch. Further, given that the development and approval process for biosimilars is also tougher and longer than generic molecules, entry barriers remain high.

The recent spurt in the stock price of Biocon is on account of biosimilar applications for cancer drugs trastuzumab and pegfilgrastim being filed with the European Medicines Agency. The marketing authorisation application filed by Biocon’s partner, Mylan, to the European Union drug body will, if approved, help the companies take a shot at the $6.8-billion market for trastuzumab. With filings for the US market to follow, the company is on course to meet its target of up to four biosimilar filings in FY17.

Given the smaller size of its base business, the company’s current research tie-ups with Mylan and Lab PiSA de-risk its business both on the funding side as well as marketing support, given the large pipeline. The company has five drugs in the clinical stage, in addition to two in an early stage of development. Analysts at Citi say that the company has to absorb significant pressure on profitability and balance sheet due to the small size of its legacy business, but it also implies higher leverage on commercialisation of its biosimilar business. Over the next four years, the company will be hoping to commercialise four of its drugs — glargine (diabetes) which has been approved in Japan, trastuzumab, pegfilgrastim and adalimumab (arthritis). The size of glargine market in Japan is expected to be $144 million.

The other trigger would be upside from the launch of multiple sclerosis drug copaxone (size  $3 billion), which could result in $150-200 million of sales for the company. What should add to the growth is the start of product approvals (FY18) for the Malaysian facility wherein Biocon had incurred $200-million capex. Good growth for the domestic formulation business (August sales were robust) and the ramping up of contract research business in the second half of the current financial year are positives.

There is little doubt about the potential of biosimilar drugs in the regulated markets. At 26 times its FY18 estimates, the Biocon stock is among the most expensive frontline pharma stocks. Morgan Stanley analysts say the stock is likely to get rerated to 30 times one-year forward multiple, given the higher valuations of global pure play biosimilar companies. Its research subsidiary, Syngene, in which Biocon has 72.6 per cent stake, has gained more than 46 per cent over the past year. Launches in each of the drugs mentioned above are a couple of years away and the stock require a longer holding period.