Jefferies Downgrades Biocon; Sees Continued Challenges In 2024

Jefferies downgraded Indian biopharmaceutical company Biocon Ltd. to Underperform from Hold on continued challenges in 2024 and an unfavorable risk-reward.

The brokerage, however, kept its base case target price on the stock at 250 rupees per share. Biocon closed at 290.75 rupees on the BSE yesterday.

“We see too many moving parts and uncertainties for Biocon in 2024,” Jefferies said in an investor note. “We expect continued challenges across all three business segments of Biocon in 2024.”

The brokerage said the biosimilars business (about 60% of 9MFY24 revenue) may witness muted growth, as market share gains in existing products (assuming new players do not make an impact) may not be enough due to delays in new launches (bBevacizumab and bAspart) from ongoing U.S. Food and Drug Administration (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, it noted.

Jefferies said for Syngene International Ltd. (around 23% of 9MFY24 revenue), 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 lack of visibility on other contracts.

The API segment within generics is witnessing pricing pressure currently, but Biocon expects to achieve mid-teen revenue growth for generics in FY25, it added.

“Given muted revenue growth and margin pressure, we believe FCF (free cash flow) will remain weak for Biocon, as capex intensity for the next wave of biosimilars and generics will remain high,” Equity Analyst Alok Dalal and Equity Associate Dhawal Khut said in the note.

The brokerage said the key for Biocon will be timely resolution of the FDA compliance issues at Bangalore and Malaysia, which can pave the way for new launches.

“We are 17%-19% below consensus for FY25-FY26 and believe earnings downgrades will 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,” Jefferies said.

The brokerage noted that with weak FCF generation, high leverage will hurt Biocon unless it looks at fund raise options like stake sale in biosimilars and Syngene.

Jefferies has a target price of 230 rupees on Biocon, based on its downside scenario assumptions, and a target price of 290 rupees considering the upside scenario.

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