30 JUL 2019 Result Update

BIOCON
BUY
Higher profitability led by biologics; Long-term visibility strong; Maintain BUY… Target Price : Rs 300
Biocon (BIOS) reported robust revenue growth of ~30% YoY at Rs1,465Cr (vs. CMP : Rs 234
estimate of Rs1,548Cr), aided by strong growth in biologics (up 96% YoY) and small Potential Upside : 28%
molecule (up 20% YoY). Branded formulation (down 9% YoY) and Research service Relative to Sector : Positive

business (up 4% YoY) dragged the growth in Q1. EBITDA margins came at 29.8%
(vs estimates of 25.9%), primarily on account of better product mix, higher profit
MARKET DATA
share from Mylan and decline in raw material cost. Reported PAT came in Rs206Cr No. of Shares (Cr.) : 120.0
(up ~72% YoY). Management has guided for stronger H2FY20, primarily on account
FV (Rs) :5
of new launches coupled with increase in penetration of the existing products. BIOS Market Cap (Rs Cr.) : 28,063
expects to maintain current margin levels going ahead, despite of high investment 52-week High / Low : 359/230
phase, both towards R&D as well as capex. Maintain BUY. We have revised our Avg. Daily vol. (6mth) : 902,362
target price to Rs300 (Rs320 earlier) based on SoTP valuation. Key risk to our call Bloomberg Code : BIOS IN
would be delay in ramp-up of key biologics products, higher-than-expected Reuters Code : BION NS
competition in the biologics products, delay in the approval/launch of biosimilars BSE Code : 532523
NSE Code : BIOCON
and unfavorable regulatory outcomes.

Key Highlights
Robust 30% revenue growth aided by biologics and small molecule segment; Growth momentum to continue in FY20…
Biocon (BIOS) exhibited stellar performance with revenue growth of 30% YoY to Rs1,456Cr led by strong growth in biologic segment
(up 96% YoY) followed by small molecule (up 20% YoY). The biologic segment (~32% of revenue) grew by 96% YoY (up 9% QoQ),
led by biosimilar Pegfilgrastim market share gain in the US market coupled with robust sales of biosimilar Trastuzumab, Insulin
Glargine and rh-Insulin in key emerging markets in AFMET and LATAM regions. Small molecule revenue stood at Rs480Cr growth
of 20%YoY, largely driven by ramp-up in key APIs and a robust performance of generic formulations business. Branded formulation
business saw decline of 9% to Rs133Cr, on account of uncertainty in the UAE market. Research services posted muted revenue
growth 4%. Biocon expects overall revenue growth momentum in biologics segment to continue in FY20 largely driven by new
launches and increase in the market share of existing products. Biocon expects higher growth in H2FY20, as few launches are
scheduled in H2. Key launches are Trastuzumab (bHerceptin) and Glargine in the US market.

FINANCIAL SUMMARY (Consolidated)

Y/E Sales EBITDA PAT EPS Change P/E RoE RoCE DPS
March (Rs Cr) (Rs Cr) (Rs Cr) (Rs) (YoY %) (x) (%) (%) (Rs)
FY18 4,130 829 372 3.1 - - 6.9 6.5 1.0
FY19 5,514 1,361 711 5.9 90.8 - 12.7 13.1 1.0
FY20E 6,788 1,729 874 7.3 23.0 32.1 13.5 14.2 1.0
FY21E 8,475 2,268 1,197 10.0 36.8 23.4 16.7 17.5 1.0
Source: Company, Axis Securities
PRICE PERFORMANCE
140
120
100
80
60
Vishal Advani Jul-18 Oct-18 Jan-19 Apr-19 Jul-19
vishal.advani@axissecurities.in
Sensex Biocon

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PHARMACEUTICALS

Biologics segment drives margin expansion by ~868bps YoY…

Overall EBITDA margins expanded by ~868bps YoY to 29.8%, mainly due to higher contribution from biologics
business, decline in overhead cost and raw material cost. Biologics EBIT margin have improved from 21% in Q1FY19 to
32% in Q1FY20. Management guided to maintain current margin levels in FY20, despite of upsurge in the employee
cost and increase in R&D spending. We believe increase in the contribution from biologics business will shore up the
overall margins going ahead.

Quarterly segmental revenue breakdown…

in INR Cr Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 YoY (%) QoQ (%)
(a) Small molecules 400 432 469 472 480 20% 2%
(b) Biologics 250 368 449 451 490 96% 9%
(c) Branded formulations 147 164 212 133 133 -9% 0%
(d) Research services 406 419 467 534 421 4% -21%
Total Sales 1,203 1,382 1,597 1,590 1,524 27% -4%
Less: Inter-segment revenue 79 61 56 61 58 -27% -6%
Net Sales 1,124 1,321 1,541 1,529 1,466 30% -4%
Source: Company, Axis Securities

Contribution from biologics segment has inched up…

% of total revenue Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

(a) Small molecules 33% 31% 29% 30% 31%
(b) Biologics 21% 27% 28% 28% 32%
(c) Branded formulations 12% 12% 13% 8% 9%
(d) Research services 34% 30% 29% 34% 28%
Source: Company, Axis Securities

…leading to expansion in EBIT margins

EBIT Margin Profile Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

(a) Small molecules 18% 20% 21% 14% 22%
(b) Biologics 11% 25% 30% 33% 38%
(c) Branded formulations 12% 7% 13% 4% -2%
(d) Research services 20% 23% 23% 24% 21%
Overall margin 12% 17% 17% 19% 21%
Source: Company, Axis Securities

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Biocon biologics product portfolio…

Biocon Approval/Launch/Trials Patent Expiry
Molecule (Brand name) Brand Comments
name US EU US EU
Mylan/Biocon holds ~20-21% volume
Pegfilgrastim (Neulasta) Fulphila Launched Approved Expired Expired share of the Pegfilgrastim syringes
market in the US
Received approval in Canada and first
biosimilar Transtuzumab approval;
Trastuzumab (Herceptin) Ogivri Approved Launched 2019-20 Expired
Launch timeline for the US market -
H2FY20
In USFDA pre-approval inspection,
Under Biocon Malaysia's facility has received
Glargine (Lantus) Semglee Launched 2024/27 Expired
review 12 observations. However, the
commercial plans are on the track.
Adalimumab (Humira) - Phase III Launched Dec'16 Dec'18 Launched in Europe
Ongoing clinical trials; Expected to
Bevacizumab (Avastin) - Phase III Jul'19 Jan'22 submit application by the end of this
fiscal in EU and US market.
Etanercept (Enbrel) - Preclinicals Aug'19 Expired
Lispro (Humalog) - Preclinicals Expired Expired
EMA submission is planned in H2FY20
Insulin Aspart (Novolog) - Global Phase III Expired Expired and USFDA submission expected by
Mid-CY20.
Source: Company, Axis Securities
Overall revenue grew by 30% YoY led by strong growth in EBITDA Margin expanded by ~348bps QoQ led by superior
biologics segment… product mix…

2,000 75%
500 40%
1,600 70% 400 30%
1,200 300
(In INR Cr)

65%
(In INR Cr)

20%
800 200
400 60% 10%
100
-00 55% -00 0%
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

Revenue (LHS) Gross margin (RHS) EBITDA (LHS) EBITDA margin (RHS)

Source: Company, Axis Securities

EBIT margins inched up from 11% to 38% in Q1FY20… Scaling-up small molecule revenues…

600 40% 500 34%

500 480 33%
30% 460 32%
400
440 31%
(In INR Cr)
(In INR Cr)

300 20%
420 30%
200 400 29%
10%
100 380 28%
-00 0% 360 27%
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

Biologics (LHS) EBIT Margin (RHS) Small molecules (LHS) EBIT Margin (RHS)

Source: Company, Axis Securities

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Key takeaways from concall

 Business segments
o Expect continued market share gain for Pegfilgrastim (currently ~20-21%) in the US market going ahead.
o Bevacizumab and Insulin Aspart programs are on track.
o BIOS expects to file Insulin Aspart by Q3/Q4CY19 in Europe and mid-CY20 in US. Bevacizumab will be
filed in CY19 in US and Q1/Q2CY20 in Europe.
o Biocon has initiated a Greenfield project at Vishakhapatnam, with an investment of Rs600Cr to secure its
anticipated growth in fermentation-derived APIs, including its strong portfolio of immunosuppresants.
o Received the certificate of GMP compliance from EMA for manufacturing Biologics drug product.
o In USFDA pre-approval inspection, Biocon Malaysia's facility has received 12 observations. However, the
commercial plans are on the track.
o Ogivri, co-developed by Biocon and Mylan, was approved by Health Canada as the first biosimilar
Trastuzumab.

 Guidance
o Expect core EBITDA margins to sustain in FY20 despite of high investment phase.
o BIOS expects revenue growth momentum to continue in FY20, led by strong traction in biologics segment
and small molecule segment.
o BIOS has guided for gross R&D expenditure ~15% of revenue (ex-Syngene) in FY20, which will be spend
on biosimilars, new ANDA products and novel projects.
o Company is planning to add incremental drug substance and drug product capacities across biosimilars.

Key Catalysts
 Ramp-up in market share of Pegfilgrastim in the US markets.
 Launch of Ogivri in the US market and rapid ramp-up in the market share.
 Steady revenue growth in other business segments

Key Risks
 Higher-than-expected competition in the biologics products
 Delay in the approval/launch of biologics
 Unfavorable regulatory outcomes
 Higher-than-expected pricing pressure in the small molecule business

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Valuation
We like Biocon for its long term earnings visibility, strong traction in biologics segment, healthy launch pipeline of
biosimilar coupled with increasing market penetration of the existing products. In our view, Biocon is well placed to play
the first mover advantage in evolving biosimilar market. Maintain BUY. We have revised our target price to Rs300 (Rs320
earlier) based on SoTP valuation. We expect robust earnings growth of ~30% EPS CAGR over FY19-21E. At CMP, the
stock is trading at a PE of 32x/23x on FY20/FY21 earnings.

SoTP valuation

Business Segment EV/EBITDA as % of overall EV

Small Molecules 6,486 18%

Branded formulation 3,368 9%
Research services 7,370 20%

Biologics segment (DCF) 18,893 52%

Total EV 36,117

Less: Minorities Interest -127

Less: Net Debt 230
Equity Value 36,014
No. of outstanding shares 120
Target Price 300
Source: Company, Axis Securities

One year forward P/E chart One year forward P/E Band with standard deviation

450 70
400 60
350 50
300
40
250
30
200
150 20
100 10
50 0
Sep-16

Dec-16

Sep-17

Dec-17

Sep-18

Dec-18

Jun-19
Jun-16

Jun-17

Jun-18
Mar-16

Mar-17

Mar-18

Mar-19

0
Sep-16

Dec-16

Jun-17
Sep-17

Dec-17

Sep-18

Dec-18
Jun-16

Jun-18

Jun-19
Mar-16

Mar-17

Mar-18

Mar-19

PE Mean Mean+1Stdev
Price 20x 30x 40x 50x Mean-1Stdev Mean+2Stdev Mean-2Stdev

Source: Company, Axis Securities

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Financial snapshot

Quarterly Performance Yearly Estimates

%
% Change
(Rs.Cr.) Q1FY20 Q4FY19 Change Q1FY19 FY19 FY20E FY21E
(YoY)
(QoQ)
Net Sales 1,466 1,529 -4% 1,124 30% 5,514 6,788 8,475
Cost of sales 425 488 -13% 434 -2% 1,897 2,154 2,712
As % of net sales 29.0% 31.9% (296) 38.6% (965) 34.4% 31.7% 32.0%
Gross Profit 1,041 1,041 0% 690 51% 3,618 4,634 5,763
Margin 71.0% 68.1% 296 61.4% 965 65.6% 68.3% 68.0%
Employee Cost 341 321 6% 261 30% 1,165 1,439 1,756
As % of net sales 23.3% 21.0% 23.3% 21.1% 21.2% 20.7%
Other expenditure 184 225 -18% 147 26% 802 1,007 1,188
As % of net sales 12.6% 14.7% 13.1% 14.5% 14.8% 14.0%
R&D Expenses 79 92 -14% 44 79% 290 459 551
As % of net sales 5.4% 6.0% 3.9% 5.3% 6.8% 6.5%
Total Operating expenses 604 638 -5% 452 34% 2,257 2,905 3,495
As % of net sales 41.2% 41.7% 40.2% 40.9% 42.8% 41.2%
EBITDA 438 403 9% 238 84% 1,361 1,729 2,268
Margin 29.8% 26.4% 348 21.2% 868 24.7% 25.5% 26.8%
Depreciation 124 120 4% 99 25% 448 543 670
EBIT 313 283 11% 139 126% 913 1,186 1,598
Interest Expense 17 16 18 71 66 68
Other Income 24.1 28.2 68.8 177 144 168
PBT 321 296 9% 190 69% 1,019 1,264 1,698
Margin 21.9% 19.3% 256 16.9% 499 18.5% 18.6% 20.0%
Tax Expenses 85 41 108% 52 64% 212 293 373
Tax rate 26.6% 13.8% 27.4% 20.8% 23.2% 22.0%
PAT before Minority interest and
236 255 -7% 138 71% 807 971 1,324
share of profit/loss from associate
Minority interest and share of
-29 -41 -18 -96 -97 -127
profit/loss from associate
Net Income 206 214 -3% 120 72% 711 874 1,197

Reported EPS (Rs.) 1.7 1.8 1.0 5.9 7.3 10.0

Source: Company, Axis Securities

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Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the
Regulations).

1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as
defined in the Regulations, is engaged in the business of providing Stock broking services, Portfolio Management Services, Depository
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PHARMACEUTICALS

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12-18 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%
NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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08