Biocon: Biosimilar launches prop up Q2 show; healthy returns seen in future

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Biocon's September quarter (Q2) performance was strong, driven by growth across its businesses such as biologics and contract research. The Q2 numbers and future outlook suggest that the Biocon stock, which has delivered strong gains in the past one year, should deliver healthy returns going ahead as well.   

The Q2 was driven by the biologics segment (27 per cent of Biocon's sales), which clocked a robust 136 per cent year-on-year growth in sales led by the US launch of the Pegfilgrastim biosimilar (used during chemotherapy), while traction in biosimilars/insulins in emerging markets has also gained momentum. The research services business (32 per cent of sales), represented by Syngene, too, grew 25 per cent year-on-year buoyed by good growth in drug discovery services and increased traction in the dedicated R&D centres. A better product mix, too, helped the small molecules segment, which registered a 23 per cent year-on-year growth in the quarter.   

Apart from topline, strong improvement in operating performance with gross margin expanding 540 basis points (bps) year-on-year was impressive. Operating profit margin expanded 690 bps year-on-year to 25.7 per cent in Q2. While year-on-year margin expansion was helped by lower employee cost (down 120 bps), the sequential margin expansion of 450 bps was due to a strong performance of the biologics segment.

It is biologics that has kept Street sentiment firm on Biocon as progress in the developed markets remains good. European drug regulators have already issued positive opinions recommending approvals of Pegfilgrastim and breast cancer treatment Trastuzumab biosimilars, co-developed by Biocon and Mylan. Thus, expectations are running high towards approval and launch of these biosimilars by the end of the current quarter. Biocon has already launched Hulio, its biosimilar to Humira (for treatment of auto-immune diseases) in Europe a few days back, while its insulin product Semglee (glargine) is likely to be launched soon. Thus, all four of the company's planned biosimilars for Europe are progressing well and by mid-2019, Biocon should benefit from commercialisation of its entire advanced biosimilars pipeline in European markets. 

Analysts at Motilal Oswal Securities expect the biologics segment to perform strongly, led by improved traction for approved biosimilars in both regulated and emerging markets and estimate recurring earnings per share growth of 87 per cent annually to Rs 21.5 over FY18-20. The target price of Motilal Oswal, ICICI Securities and Morgan Stanley range between Rs 650-785 for the stock trading at Rs 622 levels. 

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