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Biocon: Lower licensing income hits margin
Feb 1, 2012

Biocon has announced its third quarter results for 2011-2012 (3QFY12). The company has reported 1.5% YoY increase in sales and 13.8% YoY decrease in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow merely by 1.5% YoY, led by sharp decline in the licensing income and lower sales growth from Biopharma business
  • Operating margins (EBIDTA) decrease by 729 basis points (7.3%) on account of lower licensing income and higher employee costs. However if we exclude the licensing income, operating margins have increased by 0.3%.
  • Net profits, without considering AxiCorp, de-grow by 13.8% YoY on back of lower licensing income.

Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 5,097 5,172 1.5% 13,311 14,673 10.2%
Expenditure 3,472 3,898 12.3% 9,291 10,861 16.9%
Operating profit (EBIDTA) 1,625 1,274 -21.6% 4,020 3,812 -5.2%
EBDITA margin (%) 31.9% 24.6%   30.2% 26.0%  
Other income 86 150 74.4% 242 433 78.9%
Depreciation 392 434 10.7% 1,135 1,313 15.7%
Interest 63 29 -54.0% 190 105 -44.7%
Profit before tax 1,256 961 -23.5% 2,937 2,827 -3.7%
Tax 272 113 -58.5% 482 421 -12.7%
Profit from Axicorp (discontinued) 23 -   212 -  
Profit after tax/(loss) 1,007 848 -15.8% 2,667 2,406 -9.8%
Net profit margin (%) 19.8% 16.4%   20.0% 16.4%  
No. of shares (m) 200 200   200 200  
Profit after tax without Axicorp 984 848 -13.8% 2455 2406 -2.0%
Diluted earnings per share (Rs)*   14.9        
Price to earnings ratio (x)*   17.2        
* On a trailing 12-months basis

What has driven performance in 3QFY12?
  • Biocon's net sales growth was lowered to 1.5% YoY during the quarter due to 62% YoY fall in licensing income from Pfizer and Mylan. The licensing income is highly variable in nature due to its dependency on project milestones and regulatory approvals in various countries. For the same reason, licensing income should be seen on a yearly basis.

  • Revenues from the Biopharma segment (nearly 60% of total revenue) fell by 0.4% YoY. The muted performance of biopharma and licensing income was countered by achieving good growth in the Branded Biopharma (48.8% YoY growth) and Contract research (42.1% YoY growth) segments. Adjusted for forex gains, contract research would have grown by 32% YoY. The contract research has shown a steady improvement for the past few quarters after Biocon changed its focus to deliver value-added Integrated Drug Development (IDD) services instead of existing low margin FTE based services.

    Revenue break-up
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Biopharma 3,070 3,059 -0.4% 8,452 8,616 1.9%
    Biopharma (Branded) 471 701 48.8% 1,364 1,915 40.4%
    Licencing Income 768 292 -62.0% 1,205 1,220 1.2%
    Contract research 788 1,120 42.1% 2,290 2,922 27.6%
    Total Sales 5,097 5,172 1.5% 13,311 14,673 10.2%

  • Biocon reported 729 bps (7.3%) YoY decline in operating margins to 24.6% mainly due to the increase in raw material cost and staff expenses. The raw material cost went up by 470 bps YoY due to lower licensing income and the staff costs went up by 300 bps YoY on account of increase in employees (currently 6,000+). The management has guided that the head count will increase substantially over the next 12 months. There was also a huge increase in the other expenditure; however, lower R&D expenses cushioned further erosion in margins. The company's net profit (excluding Axicorp) fell by 13.8% YoY due to poor performance at the operating level although higher other income and lower tax expenses eased the pressure to some extent.

  • On the capex front, the company would be spending US$ 160 m in Malaysia over the next 2 to 3 years to establish a biosimilar manufacturing and R&D facility. There should be significant amount of capex for this facility besides its regular capex of US$ 130 m to US$ 150 m per year for Indian facilities.

What to expect?
At the current price of Rs 257, the stock is trading at a multiple of 11.7 times our estimated FY14 earnings. Biocon tied up with Pfizer in 2010-2011 to market its biosimilar products in the emerging and developed markets. This will prove to be a huge positive in the long run; however, the revenue will start flowing in after 2-3 years. The contract research business after the restructuring continues to post good growth. This along with the strong numbers from its Branded biopharma business should be able to sustain its growth momentum at least for a couple of years.

Biocon is also looking to out-license its IN-105 oral insulin molecule to one of the global pharma company. This molecule has completed its phase-3 trial in India and Biocon is looking out to fetch a favorable deal out of it.

In light of the attractive valuations and good future prospects, we maintain our positive view on the stock from a long term perspective. However, the main risks to our view includes slower ramp-up of revenues from the global partnerships and setback on the prospective insulin out-licensing deal.

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