Strong prospects of Biologics business keep Street positive on Biocon

Even though Q2 performance missed estimates, analysts expect a stronger second half

A lower-than-expected performance by Biocon in the September quarter (Q2) saw its stock fall nearly 3 per cent to Rs 417 on Friday. It could have been worse, but analysts say the strong prospects of its biologics business lent comfort.

In Q2, revenue from operations grew by just 11 per cent year-on-year (YoY) to Rs 1,760 crore, falling short of Bloomberg consensus estimates of Rs 1,834 crore, due to slower-than-expected growth in biologics and research services.

Biologics sales at Rs 676 crore grew 11 per cent YoY. Though revenue was similar to Q1 at Rs 692 crore, the segment had posted 29 per cent YoY growth in FY20. Analysts feel there is still some impact of Covid-19 led disruption on sales of niche products in developed markets, even though Indian companies are gaining on supplies of active pharmaceutical ingredients and cashing in on opportunities from generic drug shortages.

Research services (30 per cent of revenue), represented by Syngene, grew by 12 per cent. However, analysts say margins were below expectations due operational expenses at the Mangaluru API plant and costs of ESOP plan.

Thus, operating profit at Rs 407 crore was down 8 per cent YoY and fell short of estimates of Rs 480 crore. Lower other income also impacted net profit before exceptional items (down 12 per cent YoY to Rs 174 crore, against estimate of Rs 216 crore).

The bad news ends there. 

Analysts expect better growth in the second half of FY21. “We expect FY21 to be an inflection point for Syngene as capital expenditure intensity tapers and newly-added capacities ramp up from FY22, driving sharp expansion in return ratios,” say analysts at Dolat Capital.

The prospects of the biologics business remain robust, driven by a strong pipeline. Biocon has already commercialised Insulin Glargine in the US, the third US launch in collaboration with Mylan. This product was also launched in Spain, the third largest EU market. Besides, Mylan has launched arthritis treatment Etanercept in Europe, where Biocon has economic interest. Biocon also had five launches and three new biologics (for oncology and diabetes treatment) in other developing markets.

Among biologics products in various stages of development, Biocon has initiated phase IV clinical trials of Itolizumab in India for Covid-19 treatment. Syngene has also commenced manufacturing of Covid-19 treatment drug Remdesivir in Bengaluru.

Recently, HSBC said it prefers names with clear earnings growth drivers such as Biocon, and gave a revised target price of Rs 535, while HDFC securities estimated 43 per cent annual growth in earnings during FY20-22.