Biocon Ltd shares came under pressure on February 20, after rising in the preceding five sessions, as Jefferies downgraded the stock to 'Underperform' from 'Hold' with a target price of Rs 250. The Jefferies downgrade came as the foreign brokerage sees Biocon delivering earnings that could be 17-19 per cent below consensus for FY25-26. Jefferies expects earnings downgrades to continue due to lack of new launches in the biosimilars segment and a weak FY25 outlook for Syngene due to lack of major manufacturing contract wins.
Besides, Jefferies felt that weak free cash flow (FCF generation), high leverage will hurt Biocon unless it looks at fund raise options, like stake sale in biosimilars and Syngene.
Earnings downgrade
"We expect continued challenges across all three business segments of Biocon in 2024. Biosimilars (60 per cent of 9MFY24 revenue) may witness muted growth, as market share gains in existing products may not be enough due to delays in new launches (bBevacizumab and bAspart) from ongoing US FDA compliance issues at Bangalore/Malaysia plants. Also, the upcoming launches stellar (Ustekinumab, filed recently) and bProlia (Denosumab) are highly competitive already with four-five players ahead of Biocon," Jefferies said.
For Syngene, which accounted for 23 per cent of 9MFY24 revenues, funding revival for biotech companies in the next two quarters is crucial for achieving overall mid-teen growth, as Zoetis manufacturing contract is in the base and there is a lack of visibility on other contracts, Jefferies said. In the API segment, therevis a pricing pressure within generics but
Biocon expects to achieve mid-teen revenue growth for generics in FY25.
High leverage
Jefferies said leverage may remain a concern for Biocon, given muted revenue growth and margin pressure. It expects FCF to 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 the December quarter, with weak operating matrix, we estimate net debt to Ebitda to be in 2-3x range over FY24-26E," it said.
Key triggers for Biocon
Jefferies said the key for Biocon will be timely resolution of US FDA compliance issues at 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, it said.
"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," it said.
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