Biocon, a leading biopharma company has been underperforming and generating negative returns of around 22.2% in the last 1 year. The company can be named among one of the worst-performing pharma stocks. Why company stock is on a downward trend and what are the reasons behind the stock price fall? Let’s discuss this all in this article as we move ahead.
Biocon Stock Price Chart:
- The stock of Biocon is one of the worst-performing stocks in the pharma industry with mere returns of around 2% in the last 3 years and negative returns of 22.2% in the last 1 year.
Reasons behind the fall in the Stock Price of Biocon:
1) The Viatris Deal in February 2021:
- Biocon Biologics Limited (BBL), a subsidiary of Biocon Limited announced the agreement with Viatris Incorporation for $3.3 Billion or around Rs. 24,750 Cr
- The deal between the BBL and Viatris is of a value of around $3.3 billion, where Viatris will be paid in the terms of cash and shares. Viatris will receive $2.33 Billion (~Rs. 17,480 Cr.) in cash and Compulsorily Convertible Preference Shares (PPCS) of the value of around $1 billion or Rs. 7,500 Cr. which will be equivalent to an equity stake of least 12.9% stake in the company, on a fully diluted basis.
- Of the upfront cash payment, $1.2 billion will be funded by debt, according to the company. The remaining $800 million will come as an equity infusion from parent Biocon
- BBL executive chairperson Kiran Mazumdar Shaw said that after acquiring Viatris, the company is looking to go for an Initial Public Offering (IPO) of BBL in the next 18-24 months
- Biocon Biologics had a debt of $300 million before the deal. This will surge to $1.5 billion, Kiran said. That’s a fivefold jump.
- Shares of Biocon fell over 12% post this announcement
i) Revenue Growth Not Adding Up Into Profits:
- Revenue growth has been consistent, but the gap has widened heavily between topline growth & the conversion into profits
- Growth in EBITDA has still been decent but net profit growths have tumbled heavily.
ii) Leveraged Balance Sheet:
- Post-2015, the company has raised heavy debt to fund its CAPEX operations & acquisitions
- To worsen the case, the company has not repaid its principal & interest aggressively, due to which debt has been rising on its balance sheet
- Although the company is optimistic about the returns from the deal, Viatris deal shall further leverage the balance sheet of the company
iii) Rising Interest Cost (Rs. Crores):
- The rise in Debt has been reflected in the interest cost of the company which is at a much higher level compared to the 2017 levels.
- This interest cost is expected to rise further
iv) Fixed Assets, Capex & Capital Work in Progress (Rs. Crores):
- Fixed Assets have been rising at a rapid pace for the company. The fixed assets of the company have quadrupled in 2022 compared to 2014 levels
- The company has also been incurring extremely rapid Capex, Capex levels have been rising rapidly, but the conversion of capital work in progress into fixed assets has not been at a rapid pace.
- Capital Work in Progress has also been rising at a phenomenal pace, but the conversion has been at a steady pace.
v) DEPRECIATION EXPENSES(Rs. Crores)
- The rise in fixed assets has also led to a rise in depreciation expense for the company which has further led to a huge hole in the net margins of the company
- Depreciation has also quadrupled in line with the rise in fixed assets
- With the acquisition of Viatris Biosimilar business, further addition of fixed assets shall further hurt the margins of the company if the fixed asset does not generate a topline for the company.
vi) Asset Turnover and Return on Capital Employed (ROCE) (Rs. Crores):
- Asset Turnover has still been decent due to consistent growth in the topline for the company, along with the rise in fixed assets. But due to fluctuations in profit generations, the return on capital employed has dented heavily.
- Capex at a rapid pace along with faster acquisitions, despite raising debt have not generated a bottom line for the company
- Poor Capital Allocation has been a plaguing issue for the company. Even at its highest levels, it is much lower compared to its industry peers
2) Offloading stake in Syngene & Offloading Stake in Biocon Biologics:
- Biocon sold 5.1 percent or 21.8 million shares in Syngene in September. It carried out this transaction to fund the equity component of the $3.3 billion acquisition of Viatris‘ biologics business. Post the stake sale, Biocon now holds a 64.56% stake in Syngene from 69.99% earlier.
- Biocon Ltd said late on Thursday it’s biologics unit Biocon Biologics will sell a 15% stake to a Serum Institute of India (SII) subsidiary for access to 100 million doses of vaccines annually for 15 years, including COVID-19 shots.
- SII, which makes AstraZeneca’s COVID-19 shot, branded as Covishield in India, is the world’s largest vaccine maker. The deal with Serum Institute Life Sciences values Biocon Biologics at about $4.9 billion and will solely focus on COVID-19 vaccines in the initial year
3) Regulatory Issues:
- Biocon Ltd in September said the US health regulator has issued Form 483 with 11 observations each for two sites in Bengaluru and six observations for a plant in Malaysia, following the inspection of seven manufacturing facilities of its arm Biocon Biologics.
- The USFDA conducted three on-site inspections of Biocon Biologics’ seven manufacturing facilities spanning two sites in Bengaluru, India, and one at Johor, Malaysia, Biocon said in a regulatory filing.
- Biocon announced on July 21 that the US Food and Drug Administration (USFDA) had issued three observations following an inspection of its production facility in Telangana. In a regulatory filing, Biocon Ltd. stated that the US health authorities had completed a pre-approval examination for Site 3 in Hyderabad on July 20.
What Should Investors Do?
Biocon is a leading pharma player with a strong focus on biological space. Among the other pharma company, Biocon is one of the companies which have taken an aggressive call on this space. Its subsidiary Syngene is also a prominent player in the CRAMS space. From a business perspective, the company is taking a sound decision and progressing in the right direction but the financials of the company is not in line with the expectations of the investors. The investment is not yielding results as expected and hence the stock is witnessing a downward trend. Investors need to keep a close eye on the overall development of this company as there are certain risks involved here. Do follow due diligence before making any investment decisions.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.