Strong sales growth in higher margin businesses (biologics) led to gross and Ebitda margin beat. Biocon guided for strong year-on-year (gradual quarter-on-quarter) growth in biosimilar sales - skewed towards H2FY20. Despite strong sales growth momentum, core Ebitda margin (ex-R&D, licensing, forex) to remain steady in FY20 due to higher operating costs and improve from FY21. Q1 gross R&D of 10.5% vs guidance of 15% of FY20 sales (ex-Syngene) implying higher R&D expense in remaining quarters. While we factor in recent 483 by USFDA on Malaysia insulin plant and increasing competition in biosimilars, we upgrade to 'buy' from 'add', given - (1) monetisation of trastuzumab & glargine from H2FY20 in US, (2) further scale-up in peg-filgrastim in US going ahead, (3) potential listing of biosimilar entity - and price correction (22% in last 3 M). We set revised target price at Rs 300 (30x FY21E EPS) vs Rs 340 (33x) earlier.
Biologics (96% y-o-y/9% q-o-q), largely driven by expansion in new markets and increased penetration in key developed/emerging markets - Pegfilgrastim biosimilar in US (20% share in May 2019 vs 13-19% in Jan-March 2019, as per Bloomberg) & biosimilars Trastuzumab, Insulin Glargine and rh-Insulin in key markets of LatAm, Africa and West Asia. Small molecules business (20% y-o-y) led by multifold growth in generic formulations and steady API sales. Research services - Syngene (4% y-o-y) due to impact from project phasing in development & manufacturing services; adjusted for one-time pass-through of Rs 400 million in Q1FY19 revenue/cost of materials, it grew 15% y-o-y. Branded formulations (-9% y-o-y) fell due to pricing headwinds in the UAE; India registered moderate growth due to discounts and restructuring in the metabolics team.
Gross margin at 71% was up 965 bps/296 bps q-o-q on improved sales mix and higher profit share from Mylan. Other expenses (net of cost recovery from co-development partners) and staff expenses grew 26% y-o-y/30% y-o-y, respectively. While gross R&D was up 25% y-o-y at Rs 1.7 billion, net R&D expense grew 78% y-o-y to Rs 787 million. Ebitda grew 84% y-o-y to Rs 4.4 billion (28% above our estimate) with margin of 29.8% (+868 bps y-o-y/+348 bps q-o-q).