Biocon: Valuations reasonable, but not cheap though

Recommendation: Add

Target Price: Rs 230

Although headline valuations at ~8x FY25 EV/EBITDA look cheap because of the high minority-interest component of ~35% at the EBITDA level, analysts at IIFL Securities estimate that Biocon’s CMP implies that Biocon Biologics (BBL) is still trading at ~12.5-13x FY25 EV/EBITDA, assuming 15% holding company discount for both Biologics and Syngene. BBL’s valuations are not cheap, given price erosion/competitive intensity in US biosimilars has been equally fierce like the generic segment, and analysts at IIFL Securities value US generics only at 10-12x 2YF EBITDA. Better commercial execution in upcoming launches (Humira in July 2023, Aspart in CY24) and equity fund raise in BBL remain critical for the stock’s performance hereon. 

Humira/Aspart need to shoulder the burden of growth

BBL’s growth in FY24/25 is largely dependent on commercial execution in Humira/Aspart. While Humira is USD18 billion market in US, 8-10 biosimilars are expected to enter in July 2023 along with Biocon, which will make it a hyper-competitive market. Although high conc. and citrate absence will not be a key determinant of success in Humira market (given EU experience), high competition might restrict Biocon’s MS uptake. Any further delay in Aspart approval can lead to Biocon missing the contracting cycle in CY24.

Analysts at IIFL Securities expect Biologics revenue to increase from USD1 billion run-rate to USD1.65 billion in FY25

This will be driven by sales of USD300/100/200m from Humira/Aspart/Vaccines. IIFL Securities’ estimates assume 3-5% MS for Biocon in Humira in FY24/25. With 26-27% post-R&D EBITDA margins, analysts at IIFL Securities expect BBL to generate USD450m EBITDA in FY25 versus current run-rate of USD250m. Serviceability of debt will not be an issue, as EBITDA run-rate is sufficient to meet interest expenses of USD115m (USD1.9bn BBL debt, 6% cost).

Commercial execution is critical to drive re-rating and value unlocking in the Biologics business

This is because Biocon/Viatris have disappointed previously with respect to MS gains in Pegfilgrastim and Trastuzumab. Although Biocon’s CMP implies that BBL is trading at a depressed MCap of USD3.5bn (versus USD4.9/7.7bn during Serum/Viatris deals), valuations are still not cheap at ~12.5-13x FY25 EV/EBITDA.