Biocon: Biosimilar space puts up a strong Q2 show

Besides, steady performance by key segments to keep up momentum

Biocon’s September quarter (Q2) performance was strong, propelled by growth across its businesses such as biologic drugs (Biologics) and contract research. The Q2 numbers and outlook suggest that the Biocon stock, which has delivered strong gains in the past one year, should deliver healthy returns as well.

The Q2 was driven by the Biologics segment (comprising 27 per cent of Biocon's sales), which clocked a robust 136 per cent year- on-year (y- o-y) growth in sales, led by the US launch of the pegfilgrastim biosimilar (used in chemotherapy). Traction in biosimilars/insulins in emerging markets has also gained momentum. The research services business (32 per cent of sales), represented by Syngene, too grew 25 per cent y- o-y, buoyed by good growth in drug discovery services, and increased traction in the dedicated research and development centres.

A better product mix also helped the small molecules segment, which registered a 23 per cent y-o-y growth in the quarter.

Apart from top-line, strong improvement in operating performance with gross margin expanding 540 basis points (bps) yo-y was impressive. Operating profit margin expanded 690 bps y-o-y to 25.7 per cent in Q2. While yo-y margin expansion was helped by lower employee cost (down 120 bps), the sequential margin expansion of 450 bps was because of a strong performance of the Biologics segment.

Infact, Biologics has kept the Street sentiment firm on Biocon as progress in the developed markets remains steady. European drug regulators have already issued positive opinions recommending approvals of Pegfilgrastim and drug used in breast cancer treatment, Trastuzumab biosimilars, co- developed by Biocon and Mylan. Thus, expectations are running high towards approval and launch of these biosimilars by the end of the current quarter. Biocon has already launched Hulio, its biosimilar to Humira (for treatment of auto-immune diseases) in Europe a few days ago, while its insulin product Semglee (glargine) is likely to be launched soon. Thus, all four of the company's planned biosimilars for Europe are progressing well, and by mid-2019, Biocon should benefit from commercialisation of its advanced biosimilars pipeline in the European markets.

Analysts at Motilal Oswal Securities expect the biologics segment to perform strongly, led by improved traction for approved biosimilars in both regulated and emerging markets. They estimate recurring earnings growth of 87 per cent annually to ~21.5 per share over FY1820. The target price of Motilal Oswal, ICICI Securities and Morgan Stanley range between ~650 and ~785 for stock trading in the ~622 levels. For the next six to nine months, weak macros, domestic political environment and developments related to the US economy will create a lot of triggers for market volatility. While corporate profitability at the micro-level is improving, there are external headwinds that our economy is facing.

What could be the investment strategy in this market volatility?

Over the last three years, we have been strongly advocating a balanced advantage strategy. When the Sensex was down to 23,000levels in February 2016, the equity exposure of our balanced advantage fund was as high as 76 per cent. On the other hand, when the Sensex was trading at 38,000-levels in August 2018, the equity exposure in the same fund was at 30.13 per cent. Now, when the market has corrected, our equity allocation has gone up slightly. So, this strategy of managing risks on either side of market excess has helped our investors.

What could be the strategy on the fixed-income side?

Since interest rates have gone up, we have been advocating investing in debt funds, particularly credit risk funds. We are managing this category The mutual fund structure is a passthrough one. A lot of risks are already mitigated owing to regulatory caps set in place. The mechanisms put in place by the Securities

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