Home / Markets / Mark To Market /  Biocon looks at tough path ahead

For Biocon Ltd, the path ahead is tough. The stock has underperformed the Nifty Pharma index sharply in CY22, declining by about 23% so far. One reason for the underperformance is the decision to acquire Viatris’ biosimilars business, which was announced in February. Analysts point out that the deal is expensive and the execution remains to be seen.

“While Viatris would be an important growth driver, it is likely to keep Biocon’s return ratios muted after the acquisition," said Tushar Manudhane, institutional research analyst - healthcare, Motilal Oswal Financial Services. Given this, investors would keenly follow the execution, commercial traction and synergy benefits from the deal, he added.

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Another trigger for the Biocon stock is the vaccine sales under the strategic alliance with the Serum Institute Life Sciences that contribute from October 2022. According to Biocon, “The consolidation of Viatris’ global biosimilars business and the strategic vaccines alliance with Serum Institute will add to the growth of the Biosimilars business in H2FY23."

Meanwhile, the September quarter results (Q2FY23) are not too exciting. While revenue performance was decent, profitability was weaker. Consolidated revenue increased by 26% year-on-year (y-o-y) to 2,320 crore. Revenue growth was primarily driven by the biosimilars business, which saw 34% growth and accounted for 42% of revenues in Q2. Sequentially, biosimilars grew by 2%.

Biocon’s earnings before interest, tax, depreciation and amoritization (Ebitda) margin contracted by almost 400 basis points y-o-y to 20.3% owing to higher operating costs and research & development (R&D) expenses. One basis point is 0.01%. Continued progress on two molecules, bDenosumab and bUstekinumab, that are undergoing global clinical trials, as well as other pipeline molecules, led to higher R&D investments in Q2.

“Biocon’s R&D engine has successfully led to first wave biosimilar approvals and its R&D efforts in products like bDenosumab and bUstekinumab should ensure strong revenue stream beyond FY24," said a Nuvama Research report on 15 November. Even so, R&D expenses are expected to remain elevated in the foreseeable future and that could weigh on profit margin.

Nuvama remains cautious. “Biocon’s promising pipeline and continuous investments in next generation biosimilars is undercut by aggressive price erosion in developed markets, increasing competition in MAbs and a rising interest rate environment," pointed out the brokerage.

Successful execution of the Viatris deal would go a long way in improving sentiments for the stock.

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