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Biocon: On course

Apr 20, 2005

Introduction to results
Biocon, a leading biopharmaceutical company, has reported over 20% revenue growth for the March quarter. However, the company has ended the quarter with a flat bottomline growth, indicating pressure on operating margins. However, for the full year FY05, the company has managed to clock a 32% topline and over 42% bottomline growth.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 YoY Change
Net sales 1,450 1,750 20.7% 5,410 7,130 31.8%
Expenditure 960 1,260 31.3% 3,620 4,890 35.1%
Operating profit (EBDITA) 490 490 0.0% 1,790 2,240 25.1%
Operating profit margin (%) 33.8% 28.0%   33.1% 31.4%  
Other income 0 30 - 10 150 1400.0%
Interest 0 0 - 20 20 0.0%
Depreciation 40 60 50.0% 160 220 37.5%
Profit before tax 450 460 2.2% 1,620 2,150 32.7%
Tax 10 30 200.0% 230 180 -21.7%
Add: Minority interest 0 10 - - 10 -
Profit after tax/(loss) 440 440 0.0% 1,390 1,980 42.4%
Net profit margin (%) 30.3% 25.1%   25.7% 27.8%  
No. of shares (m) 100.0 100.0   100.0 100.0  
Diluted earnings per share (Rs)* 17.6 17.6   13.9 19.8  
P/E ratio (x)         20.6  
(* annualised)            

Leading bio-pharmaceutical company
Biocon started as an enzymes (organic chemicals used in fermentation process) manufacturer and leveraged its expertise in fermentation to evolve into an integrated bio-pharmaceutical company with expertise across the value chain, with strengths in microbial techniques, manufacturing and marketing. The company has two subsidiaries: Syngene and Clinigene, which are involved in custom research and clinical research respectively. Syngene contributes over 9% to the total consolidated revenues of the company, while its bottomline contribution stands higher at 14% (FY05).

What has driven performance in FY05?
Custom research, enzymes outpace biopharma: While all 3 key business segments of the company grew in double digits, enzymes (12.6% of FY05 revenues) and custom research (9.3%) clearly outpaced biopharmaceuticals. Infact, biopharma growth showed signs of slowing in the March quarter. This may be partly attributable to the VAT concerns at the dealer level in the domestic market. Consequently, the contribution of this revenue segment has gone down to about 78% of consolidated revenues.

In biopharmaceuticals, the company launched proprietary human insulin product ‘Insugen’ in mid of November. While the exact sales number from the product is unknown, the response for the product in the market has been encouraging. The product is competitively priced and Biocon is hoping to garner a good size in the Rs 2.5 bn market. On statins front, the company continues to witness strong volume growth, but pressure on pricing front has dampened margins.

On the custom research side, Biocon entered into long-term research agreement with Novartis and Merck in the December quarter. This business grew by 69% during the year. However, the real show stealer was enzymes business, which despite being commodity in nature witnessed a growth rate of 34% during the year. The basic growth in the enzymes business came from US and Europe where the company witnessed strong growth in food, beverages and alcohol industry. With increasing focus on bio-fuels, Biocon believes that it is likely to see robust growth in this segment.

Business Mix
4QFY04 4QFY05 Change FY04 FY05 Change
BioPharmaceutical 1,140 1,310 14.9% 4,350 5,570 28.0%
(% of consolidated revenues) 78.6% 74.9%   80.4% 78.1%  
Custom Research 120 190 58.3% 390 660 69.2%
(% of consolidated revenues) 8.3% 10.9%   7.2% 9.3%  
Enzymes 190 250 31.6% 670 900 34.3%
(% of consolidated revenues) 13.1% 14.3%   12.4% 12.6%  
Total 1,450 1,750 20.7% 5,410 7,130 31.8%

Margins pressure evident: The company saw its margins dip by over 5% during the March quarter. Consequently, the full year margins too weakened YoY. With new capacities coming up and increasing competition in statins business, the margins are likely to be under pressure going forward. However, the management is confident of retaining margins at current levels in FY06.

What to expect?
At Rs 408 the stock is trading 21x FY05 earnings and 16.1x estimated FY06 earnings. The growth in the topline of the company will continue to be robust. Revenues will be driven by statins in the short term. Statins opportunity in the form of Pravastatin (came off patent in Europe recently) and Simvastatin and Pravastatin (both will come off-patent in mid of CY06 in US) will help the company drive its revenues.

Though management has stated that it will be able to maintain margins in FY06, it has also warned of higher depreciation charge attributable to its new facilities, which will cater to large US market opportunities for Simvastatin and Pravastatin emerging in 2006. Moreover, Biocon plans to significantly increase R&D investments to support a discovery led research strategy. Backed by this, profit growth in FY06 will not grow as fast as sales.

With the company investing in creating capacity for statins, we believe Biocon will be the biggest beneficiary of this opportunity. Apart from that, the company's successes in R&D such as human insulin and monoclonal anti bodies and other biological products will help it to grow in long term. The company’s clear strategy of using statins and other generic products as short term cash-flow generator and investment in proprietary technology augurs well for investors who can remain invested for the long-term.

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