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INTRODUCTION
Biocon is a biopharmaceutical company which manufactures generic Active Pharmaceutical Ingredients (APIs) sold across the globe. Along with it, the company also manufactures novel biologics as well as biosimilar insulins and antibodies which are sold in India as branded formulations. Biocon's biosimilar products are also sold in both bulk and formulation forms in several emerging markets. The company conducts its research services through Syngene International Limited (Syngene) which is a publicly listed subsidiary of Biocon. Through its products and research services, Biocon focusses to reduce therapy costs of chronic diseases like autoimmune, diabetes, and cancer through offering affordable healthcare. The company’s popular brands include INSUGEN (rh-insulin), BASALOG (Glargine), CANMAb (Trastuzumab), BIOMAb-EGFR (Nimotuzumab) and ALZUMAb (Itolizumab), an anti-CD6 monoclonal antibody.
INDUSTRY OVERVIEW
India is considered as one of the fastest growing economies in the world. The healthcare sector consists of healthcare delivery, pharmaceuticals, medical devices, clinical trials, and health insurance segments. This industry is expected to grow at 22 per cent annually by 2022. There are innumerable factors which results in the demand for pharmaceutical sector like increasing healthcare expenditure due to rising incomes, growing elderly population, increased disease awareness, diagnosis rates, increase in Non-Communicable Diseases (NCDs), diagnostic requirements and hospitalisation due to NCDs, expansion of healthcare services to Tier II and Tier III cities as well as the rise in luxury offerings and services by hospitals, etc.
Compared to global standards, the healthcare expenditure in India is low.The Indian pharmaceutical industry experienced a growth of 10.5 per cent to Rs 1,34,780 crore in FY19 compared to FY18. Domestic companies make up to 80 per cent of the domestic pharmaceutical market, registering a growth of 10.8 per cent in FY19 whereas; MNCs grew at 9.4 per cent in FY19. For FY19, Indian companies registered a volume growth of 3.4 per cent compared to 3.7 per cent in FY18. Stringent FDA regulatory approvals and slow economic environment resulted in the reduced volume growth. Surrounded by the newest technology,patients are becoming more engaged and willing to take control of their health and treatment choices.
From 2017–2024, oncology is expected to remain the dominant therapy segment with a growth of US$ 129 billion in worldwide sales to reach around US$ 233 billion by 2024. Accordingly, immunosuppressants are expected to have the highest CAGR gain during the same time period, at 15.7 per cent followed by dermatologicals at 13 per cent, oncology at 12.2 per cent and anti-anemic at 11 per cent.
BUSINESS SEGMENTS
Small Molecules API and Generic Formulations
Biocon’s Small Molecules business is backed by its strength in the fermentation technology and entrenched presence across chronic therapy areas. It has a differentiated portfolio comprising of complex molecules for cardiovascular and anti-obesity agents to immunosuppressants and narrow spectrum antibiotics. Even though Active Pharmaceutical Ingredients (APIs) have technical barriers related to entry such as complexity in manufacturing, potent compounds, etc., Biocon strives to invest and develop in the segment in order to diversify its portfolio. Small molecules is the company’s largest segment contributing nearly 31 per cent to the total consolidated revenue of FY19. The segment gained revenue of Rs 1,772.8 crore in FY19 increasing by 17.58 per cent compared to Rs 1,507.7 crore in FY18. The improved performance during FY19 can be attributed to better product mix and increased demand of its API sales globally supported by the growth in generic formulations business in the US. In the previous year, the segment had witnessed headwinds due to pricing pressure and channel consolidation faced by clients in the US post which the segment reported an upward trend in FY19. Robust sales were reported in the markets of Latin America, Europe and Middle East as well as among Indiabased clients. Biocon has been successfully launching new products in the US which has resulted into its growing market share. To strengthen its pipeline further, it has filed several Drug Master Files (DMFs) in developed markets and key emerging markets.
Biologics
The Biologics segment consists of Biosimilars and Novel Biologics.
The biosimilars pipeline consists of commercialised and under-development molecules that include human insulin or insulin analogues, monoclonal antibodies and other biologics. It basically includes asset which are aimed for addressing unmet medical needs associated with non-communicable diseases. The therapeutic focus has been in developing molecules in area of diabetes, oncology, and immunology. To make the products available across all markets, Biocon has partnered with major global companies such as Mylan and Sandoz. Biocon’s aim to provide access to high quality yet affordable biosimilars to global patients has engaged the company in developing technology, critical mass and also skill sets required for producing the complex molecules with the presence of very few credible global competitors. Thus the company’s R&D costs for developing biosimilars are significantly higher than those of other segments. Along with Mylan, Biocon has a co-development collaboration for developing 11 products. During FY19, Biocon received regulatory approvals for key biosimilars in global markets from USFDA thus, realising the growth potential of this segment.
Novel Molecules consists of early and advanced stage programs related to therapeutics which aim at treating diabetes, oncology, auto-immune and inflammatory diseases. Such therapeutics span across multiple modalities including recombinant proteins, novel fusion antibodies, monoclonal Antibodies (mAbs), and Small interfering RNA (SiRNA). In this segment, Biocon has been ahead of its peers when it comes to undertaking studies or developing products. Biocon’s CD6 antibody is out-licensed for the United States and Canada markets to Equillium which is a US based biotechnology company, planning to develop a molecule to treat severe autoimmune and inflammatory disorders having high unmet medical need. Such initiatives have resulted in Biocon being able to easily expand its market presence and product portfolio.
In FY19, the Biologics saw an improved performance with the start of commercialisation of the first wave of biosimilars in the developed and emerging markets. Owing to that, for FY19, it was the strongest performing segment for Biocon, with an increase of 97 per cent in revenues compared to last year’s Rs 1,516.9 crore. A strong revenue growth led to a significant improvement in the segment profit margins as biosimilars in general are high value products. This has helped overcome fixed costs and higher R&D spends that had impacted segment profit margins of the previous year.
Branded Formulations (India and UAE) Biocon’s
Branded Formulations business consists of products which are sold under the company’s brand name in regional markets, that is, currently in India and UAE. This business mainly has its focus on specialty brands in critical therapies offering affordable and differentiated medicines of good quality to patients in India and UAE. It includes biologics (biosimilars, novel molecules, etc), in-licensed products and branded generics for acute and chronic conditions. In FY19, the Branded Formulations segment registered a growth of 7 per cent to 656.4 crore from Rs 611.5 crore in FY18, owing to a growth in the Indian business, in terms of both sales as well as profitability. Despite this, the improved performance in India was offset by a subdued performance of the business in UAE caused by certain product recalls and delays in drug registrations with the local health authorities and also due to repricing of products by the Ministry of Health.
FINANCIALS
Looking at the quarterly trends on consolidated basis, for the second quarter of FY20, the company reported net sales of Rs 523.9 crore, an increase of 14.71 per cent as against net sales of Rs 456.70 crore for the same quarter of FY19. The PBDT also increased by 6.47 per cent for the second quarter of the current fiscal year to Rs 149.8 crore as compared to Rs 140.7 crore for the second quarter of the previous fiscal year. The company gained a net profit of Rs 189 crore in the second quarter of FY20, which is a slow growth of 3 per cent as compared to Rs 184 crore gained in the second quarter of FY19. The net profit for the quarter was impacted due to an increased R&D expenses which enabled the purpose of portfolio expansion. Additionally, higher employee costs were incurred in order to support independent management of Small Molecules, Biocon Biologics and Novel Molecules businesses under the company’s revised organisational structure.
During Q2FY20, Small Molecules segment increased by 23 per cent to Rs 530 crore as compared to Rs 432 crore in the second quarter of the previous fiscal year. Biologics segment contributed with the highest growth in Q2FY20 by 40 per cent to Rs 516 crore as against Rs 368 crore in Q2FY19. On the contrary, Branded Formulations segment reported degrowth by 11 per cent from Rs 164 crore to Rs 128 crore. On the annual front, net sales for FY19 were Rs 5,514.4 crore, which is an increase by 33.53 per cent when compared to Rs 4,129.7 crore for FY18. For FY19, the PBDT increased by 70.65 per cent to Rs 1,661.8 crore from Rs 973.8 crore of FY18. The net profit which increased significantly was reported at Rs 1,001.7 for FY19 as against Rs 431.80 crore gained in the previous financial year.
RESEARCH SERVICES
Developing products, research and innovation is essential to drive the growth of a pharmaceutical company. Syngene is a global Contract Research Organisation (CRO) engaged in providing integrated discovery, development and manufacturing services for small and large molecules, antibody-drug conjugates and oligonucleotides. During FY19, the business of Dedicated R&D Centres gained significant traction thus benefitting from the expansion and extension of the multi-year agreement with Baxter Healthcare Corporation and additional revenues from the extension of collaborations with Bristol-Myers Squibb (BMS) and Amgen achieved in FY18. Led by contract renewals, the Discovery Sciences segment reported an impressive growth through expansion of existing Full-Time Engagement (FTE) collaborations as well as an increase in the new client. Since the beginning of FY20, Biocon has increased its investments in R&D for portfolio expansion as well as for high quality talent acquisition. Revenue from this segment for Q2FY20 stood at Rs 465 crore registering a growth of 11 per cent, led by growth in the Discovery Services business and consistent performances in the Dedicated R&D Centres and Development Services business. Syngene also operationalised the first phase of new 50,000 sq. ft. research facility located in Hyderabad which will have a team of nearly 150 discovery research scientists.
CONCLUSION
Currently for Biocon, the API business is a growth driver pulling stable revenues and business opportunities. Going forward, the Small Molecule business will gain increasing focus building on the generic formulations opportunity. The company growth strategy involves building a robust pipeline of difficult-tomake, technology-intensive molecules which can be commercialised in several global markets including the United States. Biocon has always been able to gain the trust of its consumers and increase its market share on the basis of attractive and qualitative product offerings. Successful completion of audits at several of the company’s manufacturing facilities including APIs and Formulations reflects its strong commitment to quality and GMP compliance thus in-building consumer confidence.
The company’s products receive a demand boost due its strategy of catering to the needs of emerging nations first and then the developed markets. In the future, Biocon aspires to front-end the commercialisation of some of its biosimilar assets in global markets. For FY20, the company plans to have some facility expansions along with new greenfield constructions which will support the company’s future needs in biosimilars, small molecule APIs and formulations segments. Hence looking at the company’s growth potential, we recommend a BUY.