Muted earnings growth ahead for Biocon

Progress of R&D programme and biopharma sales growth key factors to watch

After hitting an 18-month high on Tuesday on product launches and progress of its research and development (R&D) pipeline, Biocon slipped a bit on Wednesday on near-term sales and earnings growth worries. The stock, which has gained 20 per cent over the past couple of months, ended the day down nearly two per cent at Rs 524 a share.

CLSA in a recent report said there would be near-term pressure on profitability, owing to low revenue growth and higher R&D costs. Sales growth is expected to be impacted due to capacity constraints on its insulin business, which is a significant contributor to its biopharma sales. R&D spending at seven per cent of sales will keeps costs high as key programmes are going through clinical trials.

Recently, Biocon partner Mylan said it expected four biosimilar filings in the US and Europe in 2016. While the biosimilar partnership contains five programmes, four of these are in active Phase III trials and progress of these will act as key triggers for the stock in 2016. The four are biosimilars of existing brands Herceptin, Neulasta, Humira and Lantus used for treating cancer, infection, inflammation and diabetes, respectively. Based on branded sales, the market size is estimated at $30 billion. However, these programmes, especially in regulated markets, are expected to swell only after FY19, say CLSA analysts.

Analysts at Spark Capital say the company is a unique play on the global biosimilars opportunity and the potential for volume expansion in biologic drugs after biosimilar launches, especially in emerging markets, is significant.

On a sum-of-the-parts valuation of Rs 581, analysts attribute Rs 98 or 18 per cent to the biosimilar (R&D) portfolio. What has led to the price surge in recent times is also the listing of its contract research subsidiary Syngene and its robust sales performance. The listed subsidiary accounts for 42 per cent of the target price.

However, the earnings growth of the core Biocon operations is expected to be only 11-15 per cent annually over FY15-18 due to higher research and development expenses as well as depreciation costs after the commissioning of its greenfield facility in Malaysia. Of the 24 analysts tracking the stock, 40 per cent have a ‘sell’ and equal number are bullish on the stock, with the rest opting to stay neutral with a consensus target price of Rs 487. Given the run-up, await a correction before taking an exposure to the same.