Biocon: Why you should accumulate this stock?

Biocon got off to great start in the last few years with three launches in developed markets but has lost the momentum recently as launches were delayed and market shares stagnated.

In the third quarter results, a few positive developments may point towards a turning tide for the company. With interchangeable status for Biocon’s insulin Semglee, sales have decisively pushed past the $100 million-per-quarter mark in Biologics segment. Biocon’s new investment cycle, with an eye on second wave of biosimilars, can elevate the expectations beyond the delayed US launches — insulin Aspart and biosimilar bevacizumab, even as European sales from the two have started contributing.

Investors can accumulate Biocon on dips, for an exposure to its biosimilar portfolio, which can sustainably keep the positive news flow going over several waves in the next 5-8 years along with occasional setbacks.

Biosimilars

Biosimilars take 5-9 years and $100-150 million for development compared to 1-2 years and $1-2 million for small molecule generics. Biocon has launched three such biosimilars in the US (Fulphila in FY19, Ogivri in FY20 and Semglee in FY21) and Europe witnessed two more (Abevmy and Kixelle in late FY21). But, lower hospital visits in the pandemic and increasing competition limited the market share to around 10 per cent for earlier launches. US launches also slowed down as US-FDA inspections were closed during the pandemic and when reopened, Biocon received critical observations for insulin Aspart (Jan 2022), which may further push the launches to FY23 or beyond.

Even with increasing headwinds, Biocon can generate a high sales growth in the next one-two years with existing products, including Semglee.

Despite a lucrative $6.5 billion market in the US for insulin Glargine, Eli Lilly’s Basaglar (2016) and Biocon‘s Semglee (2020) are the only approved biosimilars. Semglee went a step further and achieved the first interchangeable status (pharmacist can replace the innovator product at the counter even without written prescription). This has resulted in a preferred coverage status, replacing the innovator, in large distributors — Express scripts, Prime therapeutics (pharmacy benefits) and Walgreen savings club (retailer). Biocon relates the $30 million sequential increase in Q3 FY22 to stocking related sales from Semglee to a large extent.

The high degree of complexity in approval not to mention the interchangeable status, chronic nature of diabetes, and a price-conscious US diabetes market allow Biocon to chart a strong path with Semglee.

With Mylan-partnered products nearing completion, Biocon is stepping up infrastructure, management and research investments in preparation for ‘Wave 2’ products, which will include a partnership with Sandoz and also possible own launches, human insulin, for instance, which is at the discussion stage with regulators followed by additional trials, if required ($2 billion innovator market).

Wave 2 products are expected to translate to a higher value at the bottom line as Biocon negotiated better terms (50 per cent on profits and costs compared with 33 per cent with Mylan). Biocon expects a few products to enter clinical trials in Q4 of FY22, which should unveil the opportunities with an eye on relevant timelines and probability-based valuations.

Biocon has always emphasised on global opportunity for its biosimilar portfolio which has resulted in emerging markets (markets other than US and Europe) contributing to close to half of biosimilar sales. For instance, Abevmy was approved in Europe in April 2021 and Biocon was able to secure partnerships in 20 markets for the product in line with its oncology portfolio present in over 40 countries, similar to insulins portfolio present in over 60 countries. This diversifies geographic concentration and allows a wide base in marketing other products.

Other opportunities

Biocon’s small molecule segment comprises complex APIs (such as immunosuppressants) and follow-on formulation sales, some of which are based on in-house API as well. The integrated product makes for a cost competent generics player in complex niche segment and Biocon has regularly added to its formulation portfolio.

At an outlay of ₹600 crore, a greenfield immunosuppressant facility is being developed at Vishakhapatnam and is expected to complete validations by FY23. The company plans on commissioning two monoclonal antibody plants (MAB’s for oncology biosimilars) in the next two years for all markets and the Malaysian facility which manufactures insulin will also be expanded to accommodate higher demand. Irrespective of the incentives, capex can continue but Biocon also secured a position in PLI scheme for ₹250 crore incentives over six years.

In an alliance with Serum Institute, Biocon has traded 15 per cent stake in Biocon Biologics (biologics subsidiary) and in return has secured 100 million vaccine doses per annum for 15 years, primarily from upcoming Serum Institute’s Pune facility. The agreement includes commercialisation rights of the Serums vaccine portfolio (including Covid) and antibodies for infectious diseases (Dengue, HIV) which is expected to generate a revenue stream from FY23-24 period.

Biocon also has a novel proprietary product Itolizumab (anti-CD6 MAB) approved in India for acute psoriasis and has been licensed to US-based firm Equillium which is conducting pivotal studies in acute graft versus host disease, an orphan disease.

Financials and valuation

Biocon reported revenues of ₹5,775 crore in 9M-FY21 and EBITDA margin of 25 per cent. Supported by Semglee and market share improvement for existing biosimilars alone (without new launches or vaccine contribution) Biocon can potentially generate sales growth of 13 per cent CAGR and EPS growth of 40 per cent in FY21-24. The strong growth is reflected in the valuation multiple at 37 times FY23 EPS/33 times FY24. The stock is fairly valued currently but can provide upside from biosimilar approvals (bevacuzumab/Aspart), Wave-2 clinical trial news flow, vaccine portfolio leveraged over its global reach, and other pipeline events. The sum of parts also indicates a positive view on valuation. The post-money valuation of Biocon Biologics at the time of Serum Institute deal valued it at $4.9 billion or ₹36,575 crore. Combined with Syngene’s market capitalisation adjusted for holdings at ₹11,143 crore (Biocon holds 70 per cent stake which is adjusted for hold-co discount of 30 per cent) implies a total of ₹47,718 crore; equal to Biocon’s current market cap of ₹47,700 crore leaving out small molecule business and vaccine potential.

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