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Biocon: US Pricing Pressure Takes Toll - Views on News from Equitymaster

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Biocon: US Pricing Pressure Takes Toll
Feb 2, 2018

Biocon announced its results for the third quarter and nine months ended December 2017 (3QFY18). While revenues grew by 1% YoY, net profits fell 41% YoY.

Performance summary
  • Revenues for 3QFY18 grew by a mere 1% YoY during the quarter on account of the 9% YoY and 15% YoY fall in the small molecules and biologics segments respectively.
  • The poor performance of the small molecules business was attributed to pricing pressure and channel consolidation in the US, which impacted its statins business. The dip in the biologics business was due to lower licensing income, this quarter. That said, this business is expected to pick up in the coming months. Adjusted for licensing income, product sales were up 16% YoY.
  • The research services and branded formulations segments did well to grow by 17% YoY and 27% YoY respectively. Growth in branded formulations was led by the UAE market. Research services was driven by the chemical development vertical at Syngene and good traction in discovery services.
  • Operating profits fell by 20% YoY during the quarter as margins shrunk by 5.4% to 21%. Higher raw material and staff costs (as percentage of sales) were responsible for this. This was largely because the costs of the Malaysian facility are now being charged to the P&L account. Barring branded formulations, where margins rose slightly, there was a drop in those of the other business segments. The biologics segment, in particular, witnessed a significant decline in margins.
  • Led by the poor performance at the operating level and surge in interest costs and depreciation charges, net profits plunged 41% YoY during the quarter. Reduction in tax expenses could not do much in arresting this fall.

    Financial performance: A snapshot
    (Rs m) 3QFY17 3QFY18 Change 9mFY17 9mFY18 Change
    Net sales 10,444 10,579 1.3% 29,905 29,602 -1.0%
    Expenditure 7,683 8,362 8.8% 22,113 23,641 6.9%
    Operating profit (EBDITA) 2,761 2,217 -19.7% 7,792 5,961 -23.5%
    EBDITA margin (%) 26.4% 21.0%   26.1% 20.1%  
    Other income 474 339 -28.5% 1,267 1,387 9.5%
    Interest (net) 88 147 67.0% 210 446 112.4%
    Depreciation 703 974 38.5% 2,047 2,898 41.6%
    Profit before tax 2,444 1,435 -41.3% 6,802 4,004 -41.1%
    Tax 544 361 -33.6% 1,513 1,162 -23.2%
    Sare of JV/associate 8 62 675.0% 108 162 50.0%
    Profit after tax/(loss) 1,908 1,136 -40.5% 5,397 3,004 -44.3%
    Net profit margin (%) 18.3% 10.7%   18.0% 10.1%  
    No. of shares (m)       200.0 600.0  
    Diluted earnings per share (Rs)*         7.1  
    Price to earnings ratio (x)*         85.1  

    (* On a trailing 12-month basis, adjusted for extraordinary items)


    Business Mix
    (Rs m) 3QFY17 3QFY18 Change 9mFY17 9mFY18 Change
    Small molecules 4,069 3,688 -9.4% 12,457 10,822 -13.1%
    (% of sales) 37.5% 33.5%   41.7% 36.6%  
    PBIT margin (%) 23.8% 22.2%   24.7% 18.4%  
    Biologics 2,224 1,898 -14.7% 5,385 5,294 -1.7%
    (% of sales) 20.5% 17.2%   18.0% 17.9%  
    PBIT margin (%) 28.0% -2.5%   24.8% 25.3%  
    Branded formulations 1,233 1,561 26.6% 4,179 4,624 10.6%
    (% of sales) 11.4% 14.2%   14.0% 15.6%  
    PBIT margin (%) 4.2% 5.1%   8.7% 7.9%  
    Research services 3,322 3,877 16.7% 9,097 10,140 11.5%
    (% of sales) 30.6% 35.2%   30.4% 34.3%  
    PBIT margin (%) 27.7% 25.2%   28.2% 25.3%  
    Total 10,848 11,024 1.6% 31,118 30,880 -0.8%
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