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Biocon: Contract research takes the cake
Jan 24, 2014

Biocon announced third quarter results of financial year 2013-2014 (3QFY14). The company reported a 10% YoY and 14% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues for 3QFY14 grow by 10% YoY led by the strong performance of the contract research business.
  • EBDITA margins improve by 1.6% during the quarter on account of the fall in R&D costs (as percentage of sales).
  • Net profit growth (14% YoY) is lower than the 18% YoY growth in operating profits due to the reduction in other income and higher depreciation charges.

Financial performance: A snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 6,350 7,000 10.2% 17,970 21,290 18.5%
Expenditure 4,930 5,320 7.9% 14,170 16,370 15.5%
Operating profit (EBIDTA) 1,420 1,680 18.3% 3,800 4,920 29.5%
Operating profit margin (%) 22.4% 24.0%   21.1% 23.1%  
Other income 250 190 -24.0% 920 580 -37.0%
Depreciation 460 510 10.9% 1,340 1,490 11.2%
Interest 30 -   70 10 -85.7%
Profit before tax 1,180 1,360 15.3% 3,310 4,000 20.8%
Tax 250 260 4.0% 690 880 27.5%
Minority interest  (10) (50)   (20) (110)  
Profit after tax/ (loss) 920 1,050 14.1% 2,600 3,010 15.8%
Net profit margin (%) 14.5% 15.0%   14.5% 14.1%  
No. of shares (m)       200 200  
Diluted earnings per share (Rs)*         17.4  
P/E ratio (x)         26.2  
* on a trailing 12 months basis

What has driven performance in 3QFY14?
  • Biocon's topline grew by 10% YoY during 3QFY14 largely led by the strong performance of the contract research business. While the biopharmaceutical business grew by a tepid 2% YoY during the quarter, performance of branded formulations was better at 15% YoY. The impasse between the trade and pharma companies has largely been resolved and this was instrumental in bolstering sales of the company's branded division, which was higher than industry growth of 5% YoY. The lukewarm 2% YoY growth in the biopharmaceutical segment could largely be attributed to the pressure in its statins portfolio. There was also the absence of large global tenders from the emerging markets. Revenues from contract research grew at a healthy pace of 31% YoY during the quarter led by widespread growth across the company's service platforms and sustained business momentum. Rupee depreciation also played a role in bolstering revenues across segments.

    Business mix
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Biopharmaceutical 4,090 4,180 2.2% 11,430 13,040 14.1%
    (% of consolidated revenues) 64.4% 59.7%   63.6% 61.2%  
    Branded formulations 860 990 15.1% 2,630 2,990 13.7%
    (% of consolidated revenues) 13.5% 14.1%   14.6% 14.0%  
    Total biopharmaceuticals 4,950 5,170 4.4% 14,060 16,030 14.0%
    (% of consolidated revenues) 78.0% 73.9%   78.2% 75.3%  
    Contract research 1,400 1,830 30.7% 3,910 5,260 34.5%
    (% of consolidated revenues) 22.0% 26.1%   21.8% 24.7%  
    Total 6,350 7,000 10.2% 17,970 21,290 18.5%

  • Biocon's operating margins improved by 1.6% during 3QFY14. This was largely due to a significant fall in R&D costs (as percentage of sales) from 6.8% in 3QFY13 to 2.9% in 3QFY14. The reason for this was attributed to the fact that there has been a clamp down on clinical trials in India. As a result of which, the company had chosen to defer some spends. Raw material costs remained stable at 48.3% of sales.

  • Net profit growth (14% YoY) was lower than the 18% YoY growth in operating profits due to the reduction in other income and higher depreciation charges.
What to expect?
At the current price of Rs 454, the stock is trading at a price to earnings multiple of 17.5 times our estimated FY16 earnings. The branded formulations business will be the key growth driver for the company going forward. In this regard, the Malaysian facility, which is largely for insulin, is expected to become operational by FY15. Launch of new products in the Indian Branded formulations space will also help in the company's growth in the long run. Further, the company has been developing a pipeline of ANDAs for the US market. Filings for the same will begin in CY14. However, any significant revenue opportunity from these products is not expected atleast for the next three years.

However, the main risks to our view include failure in its R&D programs where the company is incurring huge costs. While this quarter witnessed a fall in R&D expenses, these are expected to increase going forward as the company will have to incur trials outside India, which will be expensive. While growth in the biopharma space was tepid this quarter, subsequent quarters are expected to see some ramp up on the back of a stronger order book. Although the fundamentals of the company are good, our view is that the stock is fairly valued at the current price and hence investors should only consider buying it at lower levels.

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