Biologics, also known as biosimilar products, continue to power growth at Biocon Ltd. The 14% revenue growth in the December quarter was driven by biologics, which clocked a year-on-year increase of 31%. The growth comes on a 136% jump in revenue in the year-ago quarter. On a cumulative basis, revenues at the division were up 50% in the nine months to December 2019.

The growth so far has been driven by the company’s biosimilar pegfilgrastim. Following its success, Biocon has expanded the manufacturing capacity for the product, which should aid sales momentum.

The company launched another major biosimilar, trastuzumab, in the US last month. It is scaling up the product with its partner Mylan. “We are very much looking forward to significant growth in coming quarters; (there is) huge opportunity to grow and (we are) well positioned to gain share," the management told analysts.

Graphic by Satish Kumar/Mint
Graphic by Satish Kumar/Mint

Combine this with the approval, launch and scaling up of other products (insulin glargine) in the US and other markets, and Biocon’s $1 billion revenue target by FY22 for its biologics unit no longer looks far-fetched.

But, as is often the case with attempts to scale up, the growth is yet to yield commensurate benefits. Operating earnings grew only 18%, despite a significant jump in the more profitable biologics revenues—up 31% last quarter. No wonder investors are not excited. The Biocon stock was little changed in Friday’s trade.

Operating profit margins expanded just one percentage point from a year ago to 27% last quarter. Add the significant jump in research and development (R&D) expenses, and net profit before exceptional items grew just 6% last quarter. Remedial costs pertaining to a manufacturing plant weighed on operating earnings, the management told analysts.

Scaling up trastuzumab should help Biocon in the current quarter. “(In Q3, we) began supplies. This will translate into higher secondary sales (leading to) enhanced performance in Q4," the management told analysts.

Still, large product development costs and investments mean that expectations remain subdued. “With better visibility, the company has accelerated the scalability capex and R&D, which is likely to push related expenses higher in the near term," ICICI Direct Research said in a recent note.

To mitigate the impact and monetize growth, Biocon is raising growth capital by selling a stake in the biologics unit. It aims to list the unit on the stock exchanges through a share sale. This will unlock value for shareholders.

However, the process will transform Biocon into a holding company, posing a valuation challenge. Its research services business is already listed.

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