After run-up, Biocon stock may catch its breath

Immense long-term potential; but caution sets in as potential regulatory hurdles loom

Optimism around Biocon’s success with biosimilars remains strong as the stock saw new high of ~1,013 on Friday, following strong September quarter results. Net profit at ~146.7 crore was five per cent ahead of Bloomberg consensus estimate of ~139.6 crore. Biosimilars are drugs with active properties similar to an original biological product.

At revenue level, strong growth in biologics and small molecules businesses, higher licensing income, and steady growth at its subsidiary Syngene were among key drivers. The small molecules business and Syngene, 40 and 30 per cent of total sales, grew 15 and 14 per cent yearon-year, respectively.

Biologics grew 26 per cent. With licensing income increasing ~30 crore, it led to a strong growth in revenues. Biologics growth is again being attributed to ramp up of biosimilar Glargine (insulin), anti-cancer drug Trastuzumab and the insulin franchise in emerging markets.

Branded formulations’ growth at 15 per cent was lower than estimates. Biocon has seen discontinuation of in-licensing agreement to market cancer drug Abraxane (~70-75 crore annual sales). This, along with some delays in West Asia tenders, restricted revenue at ~940 crore (up 20 per cent yearon-year), lower than

Bloomberg estimate of ~991 crore. Price controls had some bearing on operating profit, which at ~225 crore was lower than estimate of ~240 crore. This was compensated by higher other income, enabling net profit to come ahead of estimates.

The Street’s enthusiasm comes more from Biocon’s four biosimilars targeted at European and US markets in partnership with Mylan, including drugs for cancer treatment such as Pegfilgrastim, Trastuzumab, Adalimumab and Glargine. During September quarter, European Medicines Agency (EMA) accepted for review the marketing plea for Trastuzumab. Earlier, EMA had also accepted to review Pegfilgrastim. Morgan Stanley has given a target price of ~1,156.

Other analysts are looking at challenges the drug approvals face. Motilal Oswal Securities says biosimilar progress is impressive but there are still uncertainties that cap upside. IDFC Securities says drug approvals could be fraught with regulatory hurdles, bringing in a fair degree of uncertainty.

Given the sharp run-up in the stock, consensus target price, going by analysts polled on Bloomberg after results, stands at ~888. The stock, now at ~971, could take a breather.