Jefferies downgrades Biocon to ‘underperform’, sees 11% downside; here's why

Despite an almost 27 percent jump since November, global brokerage house Jefferies has downgraded the pharma stock Biocon to 'underperform' from 'hold'. However, Jefferies has maintained its target price of ₹250 for the stock, implying an 11 percent downside from its current market price of ₹281.50.

"We downgrade Biocon to Underperform from Hold with an unchanged PT of ₹250. We are 17-19 percent below consensus for FY25-26 and believe earnings downgrades will continue due to a lack of new launches in the biosimilars segment and a weak FY25 outlook for Syngene due to a lack of major manufacturing contract wins. With weak free cash flow (FCF) generation, high leverage will hurt Biocon unless it looks at fundraise options, like stake sale in biosimilars and Syngene," rationaled the brokerage.

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Stock price trend

The stock has gained 24 percent in the last 1 year and over 11 percent in 2024 YTD. It rose almost 4 percent in February so far, extending gains for the fourth straight month. Before this, it rose 7.4 percent in January 2024, 4.7 percent in December 2023 and 8.5 percent in November 2023.

The stock also hit its 52-week high of ₹307 earlier this month on February 6, 2024. At its CMP, the stock has jumped 47 percent from its 52-week low of ₹191.60, hit on March 21, 2023.

Earnings

In the December quarter, the company reported a consolidated net profit of ₹660 crore on the back of robust sales as against a net loss of ₹42 crore in the October-December period of the last fiscal.

Its total revenue also rose almost 50 percent year-on-year (YoY) to ₹4,519 crore in Q3FY24 versus ₹3,020 crore in the year-ago period, while revenue from operations stood at ₹3,954 crore, up 34 percent YoY.

Downgrade Rationale

Challenges across all business verticals for Biocon: The brokerage expects continued challenges across all three business segments of Biocon in 2024. Biosimilars (60 percent of 9MFY24 revenue) may witness muted growth, as market share gains in existing products (assuming new players do not make an impact) may not be enough due to delays in new launches from ongoing US FDA compliance issues at Bangalore/Malaysia plants, it noted. Also, the upcoming launches are highly competitive already with four to five players ahead of Biocon. 

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For Syngene (23 percent of 9MFY24 revenue), funding revival for biotech companies in the next two quarters is crucial for achieving overall mid-teen growth, as Zoetis mfg contract is in the base and there is a lack of visibility on other contracts, it added.

The API segment within generics is witnessing pricing pressure currently but Biocon expects to achieve mid-teen revenue growth for generics in FY25, stated Jefferies.

Leverage to remain a concern: Given muted revenue growth and margin pressure, Jefferies believes FCF will remain weak for Biocon, as capex intensity for the next wave of biosimilars and generics will remain high. While Biocon has repaid $200 million of debt in Q3FY24, with a weak operating matrix, Jefferies estimates a net debt to Ebitda to be in the 2-3x range over FY24-26E. As per media reports (Economic Times), Biocon is looking at stake sale in biosimilars or Syngene (54 percent ownership) to pare down debt, noted the brokerage. However, the company has not commented on these news reports.

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What can change things for Biocon?

As per the brokerage, the key for Biocon will be the timely resolution of US FDA compliance issues in Bangalore and Malaysia, which can pave the way for new launches. While bBevacizumab is already competitive, bAspart should be a reasonable addition to biosimilar revenue. On the generics front, earlier-than-expected approval and commercialization of peptide products like Liraglutide (Para IV filer for Victoza and Saxenda) could be the key triggers for the division, explained Jefferies.

Bear and bull case scenarios

Base Case | Target: ₹250, -11 percent

Assumptions: 1) Revenue growth at 13 percent CAGR over FY24-26E, and 2) Syngene valued at 19x Mar-26E EV-EBITDA, Biocon Biologics valued at EV-EBITDA of 10x Mar-25 and Generics at 12x.

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Bull case Scenario | Target: ₹290, +3 percent

Assumptions: 1) Revenue growth at 16 percent CAGR over FY24-26E, and 2) Syngene valued at 20x Mar-26E EV-EBITDA, Biocon Biologics valued at EV-EBITDA of 10.5x Mar-26 and Generics at 13x.

Bear case Scenario | Target: ₹230, -18 percent

Assumptions: 1) Revenue growth at 11 percent CAGR over FY24-26E, and 2) Syngene valued at 18x Mar-26E EV-EBITDA, Biocon Biologics valued at EV-EBITDA of 9.5x Mar-25 and Generics at 10x.

Downgrade rating to Underperform

The brokerage said that it sees too many moving parts and uncertainties for Biocon in 2024. With an unfavorable risk-reward, it has downgraded Biocon's rating to Underperform from Hold.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.