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Biocon: Higher tax impacts profits
Jan 25, 2013

Biocon has announced its 3QFY13 results. The company has reported 23% YoY growth in sales and 8% growth in net profit. Here is our analysis of the results.

Performance summary
  • Topline grows by 23% YoY during the quarter led by growth in both its Biopharmaceuticals and Contract research businesses.
  • Operating margins decline by 1.5% largely due to increase in material costs and R&D expenditure. On the other hand, other expenses grow by just 1%.
  • Bottomline growth is lower at 8% YoY during 3QFY13 on account of an increase in tax expenses.

Financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 5,169 6,342 22.7% 14,607 17,975 23.1%
Expenditure 3,935 4,925 25.2% 11,138 14,173 27.2%
Operating profit (EBDITA) 1,234 1,417 14.8% 3,469 3,802 9.6%
EBDITA margin (%) 23.9% 22.3%   23.7% 21.2%  
Other income 186 253 36.0% 762 915 20.1%
Interest (net) 25 29 16.0% 92 72 -21.7%
Depreciation 434 461 6.2% 1,313 1,334 1.6%
Profit before tax 961 1,180 22.8% 2,826 3,311 17.2%
Tax 113 253 123.9% 420 694 65.2%
Minority Interest - 10   - 15  
Profit after tax/(loss) 848 917 8.1% 2,406 2,602 8.1%
Net profit margin (%) 16.4% 14.5%   16.5% 14.5%  
No. of shares (m)         195.0  
Diluted earnings per share (Rs)         17.9  
Price to earnings ratio (x)*         14.7  
*based on trailing 12 months earnings

What has driven performance in 3QFY13?
  • Topline grows by 23% YoY during the quarter led by growth in both its Biopharmaceuticals and Contract research businesses.

    Business Mix
    Business Mix 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Biopharmaceuticals 3,347 4,090 22.2% 9,741 11,434 17.4%
    (% of consolidated revenues) 65% 64%   67% 64%  
    Branded Formulations 720 855 18.8% 1,944 2,628 35.2%
    (% of consolidated revenues) 14% 13%   13% 15%  
    Contract Manufacturing 1,102 1,397 26.8% 2,922 3,913 33.9%
    (% of consolidated revenues) 21% 22%   20% 22%  
    Total 5,169 6,342 22.7% 14,607 17,975 23.1%

  • In the Biopharmaceutical segment, growth was driven by ramp up in API supply of Fidaxomicin, Tacrolimus and Indian Branded Formulations. As per the company, Simvastatin dominates the statin market and Biocon too has witnessed better growth in Simvastatin. Over a period of time company will also focus on the Atorvastatin market where it still generates very little sales. The Atorvastatin market has occupied around 30% market share in the statin market. Importantly, it is pertinent to note that the company has witnessed growth of 12% in constant currency terms for first 9mFY13, against 17% as reported.

  • Biocon's partner for Fidaxomicin has launched its drug in 10 new countries; this has helped in delivering better growth. However, we believe Biocon may witness some decrease in the Tacrolimus supply going forward. This is because Biocon's partner Dr. Reddy's has witnessed increase in market share of Tacrolimus generics from 20% to 40%, as its competitor Mylan has temporarily stopped supplying its generics. Once Mylan re-starts selling Tacrolimus generics, this might impact Dr Reddy's market share and in turn Biocon's. It is pertinent to note that whether Biocon too supplied the API to Mylan remains unclear. And thus we remain cautious on that front.

  • The contract research segment too showed healthy growth of 27%. As on date the EBIT margins for this segment is above 30%. For 9mFY13, growth from this segment in constant currency terms was at 25% against reported growth of 34%.

  • Operating margins declined by 1.5% largely due to increases in material costs and R&D expenditure. On the other hand, other expenses have grown by just 1%. The company has incurred insignificant forex gain during the quarter. The management expects R&D expenses to continue increasing, though a definite run rate was not mentioned. In last 9 months, Biocon has also written off part of Pfizer's deferred income towards its R&D expenses to the extent of ~Rs 280 m. However, going forward, the company has guided for improvement in the EBITDA margins on back of new contracts and better product mix. It expects EBITDA margins to increase to 24%-25% in next 2-3 years.

  • Bottomline increased by 8% YoY during 3QFY13, resulting in a 1.9% fall in net margins. Profits were also impacted due to higher tax rate. The company has lost SEZ benefit for many of its manufacturing plants. Going forward, it has guided for a tax rate of 20% for the upcoming period as other SEZ units and its Malaysian facility will become operational. However, we remain cautious on the fall in tax rate from the current level at least for the short term. The Malaysian facility will become operational by FY15.

    Biocon's guidance on various segments

    • Small molecule business to ramp up going forward: Biocon expects this business to generate revenues of US$ 1 bn by FY18. Branded Formulations will contribute ~20% to its overall revenues. Revenues from the small molecule business will be US$ 300 m.

    • BMS contract: Biocon had signed an agreement with BMS for global clinical development of oral insulin IN-105. As per the deal, the trials expenses will be funded by BMS, however this will not reduce the overall R&D expenses of Biocon. Further, the company expects these trials to get completed in the next two years. If BMS gets satisfied by the outcome of these trials, then it will have the global rights of the molecule, for which Biocon will receive a predetermined amount which is undisclosed.

    • Launch of Alizumab: Biocon had recently received approval for the Psoriasis drug Alizumab. This is the company's anti-CD6 molecule which is also undergoing trials in various geographies. Biocon is looking to launch this drug during July-Sept FY14. Biocon expects peak revenues of Rs 1 bn within 4 years of this drug's launch in India.

    • On its Malaysian facility: Biocon expects its Insulin facility to become operational by FY15. This will help in ramping up Insulin supply in various geographies and also in reducing taxes going forward.

    • R&D programs: Biocon is looking for out-licensing its molecules in all the four programs. It is also into talks with two potential buyers.

What to expect?
At the current price of Rs 267 the stock is trading at a price to earnings multiple of 12 times our estimated FY15 earnings. The branded formulations business will be the key growth driver for the company and products such as Fidaxomicin, insulins and immunosuppressants are expected to contribute to this. Indian Branded formulations will also help in the company's growth in long run.

Opportunities in the medium term also exist in the form of Atorvastatin wherein the company is still witnessing very little revenues. Biocon is looking for investment of US$ 100 m in its Malaysian facility in FY14. This will help company to increase revenues from Insulin products. As per the management, going forward Insulin products are likely to contribute approx. 10% to Biopharmaceuticals.

However, the main risks to our view include slower ramp up of revenues in the biopharma business and mounting R&D expenses. Further, some part of the company's current growth has also been aided by favorable forex which is temporary in nature. Overall, valuations still look attractive and we continue to maintain our 'Buy' rating on the stock.

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