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Biocon: Biopharma benefits

Apr 22, 2008

Performance summary
  • Revenues for FY08 grow by 7% YoY largely driven by the strong performances of both the biopharmaceuticals and contract research businesses.
  • EBDITA margins contract by 30 basis points (0.3%) during the year on the back of a considerable rise in staff costs and other expenses (both as percentage of sales).

  • PAT grows by 13% YoY (excluding the extraordinary income) and is aided by a lower tax outgo and rise in other income despite higher depreciation charges.

  • Acquires 70% stake in a German pharma company AxiCorp to strengthen its focus on biosimilars.

  • Recommends a special dividend of Rs 2 per share (dividend yield of 0.4%) pursuant to the divestment of the enzymes business.

  • Board recommends a bonus issue in the ratio 1:1.

Financial performance: A snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 2,790 2,670 -4.3% 9,860 10,540 6.9%
Expenditure 1,920 1,840 -4.2% 7,030 7,550 7.4%
Operating profit (EBIDTA) 870 830 -4.6% 2,830 2,990 5.7%
Operating profit margin (%) 31.2% 31.1% 28.7% 28.4%
Other income 10 120 1100.0% 40 360 800.0%
Depreciation 200 250 25.0% 670 940 40.3%
Interest 40 20 -50.0% 90 100 11.1%
Profit before tax 640 680 6.3% 2,110 2,310 9.5%
Exceptional items - 2,390 - 2,390
Tax 60 60 0.0% 170 130 -23.5%
Minority interest 30 30 60 70 16.7%
Profit after tax/ (loss) 610 3,040 398.4% 2,000 4,640 132.0%
Net profit margin (%) 21.9% 113.9% 20.3% 44.0%
No. of shares (m) 100.0 100.0
Diluted earnings per share (Rs)* 22.5
P/E ratio (x) 23.3
* Excludes extraordinary income

What has driven performance in FY08?
  • Bioconís topline grew by 7% YoY during FY08. This was chiefly led by its biopharmaceutical (sales up 12% YoY) and contract research (sales up 29% YoY) businesses. Having said that, the overall performance for the full year was lukewarm as compared to that in 9mFY08. This was largely due to the subdued growth in revenues in the contract research business and sale of the enzymes business during the fourth quarter. The growth in the biopharmaceutical business, besides being driven by statins was also led by the strong performance of insulin (namely ĎInsugení), its branded products for nephrology and oncology (ĎBiomab EGFRí) in India and the licensing income of Rs 450 m for various products.

  • The enzymes business reported a 58% YoY decline in revenues for FY08, as Biocon completed the divestment of this business to Novozymes for a consideration of Rs 4.6 bn. While the contract research business grew at a healthy pace (29% YoY growth) during FY08, led by revenue generation from new contracts signed, it was nevertheless impacted by the sharp appreciation of the rupee against the US dollar. Growth in this business was all the more dismal in the fourth quarter with revenues growing by a mere 2% YoY.

    Business mix
    4QFY07 4QFY08 Change FY07 FY08 Change
    Biopharmaceutical 2,000 2,200 10.0% 7,410 8,320 12.3%
    (% of consolidated revenues) 71.7% 82.4% 75.2% 78.9%
    Enzymes 330 - 1,090 460 -57.8%
    (% of consolidated revenues) 11.8% 0.0% 11.1% 4.4%
    Contract research 460 470 2.2% 1,360 1,760 29.4%
    (% of consolidated revenues) 16.5% 17.6% 13.8% 16.7%
    Total 2,790 2,670 -4.3% 9,860 10,540 6.9%

  • Bioconís operating margins witnessed a 0.3% contraction during FY08. This was largely due to the rise in staff costs (attributed to the addition of personnel at the research facilities of Syngene, Bioconís clinical research subsidiary) and other expenses. Further, the operating margins of the contract research business remained flat as Biocon incurred expenses to ramp up capabilities at Syngene in anticipation of new contracts, particularly from Bristol Myers Squibb.

  • Bioconís net profits grew by 13% YoY during FY08 (excluding the extraordinary income received on the sale of the enzymes business) aided by a considerably higher other income and lower tax outgo. Other income was higher due to rise in treasury income and receipt of payment from Novozymes after the completion of certain milestones. With Biocon Park enjoying SEZ status, tax expenses fell by 24% YoY ensuring that the bottomline growth outpaced the topline growth for the year.

What to expect?
At the current price of Rs 524, the stock is trading at a multiple of 17.2 times our estimated FY10 earnings. Given the fact that statins is a commodity like business facing pricing pressure, Bioconís strategy to increasingly focus on insulin, immunosuppressants, branded formulations and monoclonal antibodies in a bid to reduce its dependence on statins will be critical to drive growth in the future. While these new segments will take some time to significantly contribute to revenues, products like Insugen and Biomab EGFR are performing strongly, which is a positive sign. The company has also been active in inking deals with innovator companies for developing biotech products, which will augur well from a long-term perspective.

Contract research will be a significant revenue driver in the future as is amply demonstrated by the rising contribution of this segment to overall revenues. The company has unveiled plans of listing its 100% subsidiary Syngene on the Indian bourses during FY09 given that this business has attained critical mass. The company is also gearing up for biosimilar launches in Europe beginning with insulin and is focusing on branding of products and getting closer to the markets. With this objective the company acquired 70% stake in AxiCorp, a Germany based pharma company with a strong distribution network, which will be leveraged by Biocon to launch biosimilars and strengthen its presence in Europe.

That said, pricing pressure on statins, higher depreciation charges and increased R&D spend are expected to pressurise the profitability of the company in the medium term. While the operating margins are in line with our estimates, the revenue growth has been below our expectations and, as such, we shall have to review our estimates on the company.

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