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Biocon: R&D costs hurt margins
Apr 30, 2012

Biocon has announced its fourth quarter results for 2011-2012 (4QFY12). The company has reported 29.6% YoY increase in sales and 3.8% YoY increase in net profits. Here is our analysis of the results.

Performance Summary
  • Net sales grow by 29.6% YoY led by sharp increase in sales from the Biopharma business
  • Operating margins (EBIDTA) decrease by 250 basis points (2.5%) on account of lower licensing income and higher R&D costs.
  • Net profits grow only by 3.8% YoY due to fall in operating margins and huge decrease in other income

Financial performance: A snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 4,710 6,102 29.6% 18,063 20,865 15.5%
Expenditure 3,402 4,556 33.9% 12,846 15,691 22.1%
Operating profit (EBIDTA) 1,308 1,546 18.2% 5,217 5,174 -0.8%
EBDITA margin (%) 27.8% 25.3%   28.9% 24.8%  
Other income 169 13 -92.3% 516 618 19.8%
Depreciation 382 431 12.9% 1,516 1,744 15.0%
Interest 50 30 -39.6% 230 123 -46.5%
Profit before tax 1,045 1,098 5.1% 3,987 3,925 -1.6%
Tax 103 121 16.7% 588 541 -8.0%
Profit from Axicorp (discontinued) - -   276 -  
Profit after tax/(loss)† 942 978 3.8% 3,675 3,384 -7.9%
Net profit margin (%) 20.0% 16.0%   20.3% 16.2%  
No. of shares (m) 200 200   200 200  
Profit after tax without Axicorp 0 0     3384 -0.4%
Diluted earnings per share (Rs)*   16.9        
Price to earnings ratio (x)*   14.0        
*On trailing 12 month basis

What has driven performance in 4QFY12?
  • Biocon's net sales grew by 29.6% YoY during the quarter due to the 48% YoY increase in Biopharma sales. The branded Biopharma business also showed substantial growth of 34% YoY. However, after the cancellation of the insulin deal with Pfizer, licensing income saw a decrease of 40% YoY.

  • Revenues growth from the Biopharma segment (nearly 65% of total revenue) was spectacular due to steady growth of the existing products and introduction of Fidaxomicin supplies to Optimer Pharma in the current supplies. Biocon will gain materially with this as it is the sole supplier of Fidaxomicin to Optimer. The Biosimilar MAbs portfolio partnered with Mylan also continues to make steady progress according to the management.

  • The Indian pharmaceutical market grew nearly 15% YoY (MAT, Feb 2012) and reflecting the accelerated growth and growing clout of chronic therapies in the market, Bioconís branded formulations division also did very well. Biocon has also shown a spectacular growth in contract research with the division growing its revenues by 33% YoY.

    Revenue break-up
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Biopharma 2,569 3,809 48.3% 11,498 12,904 12.2%
    Biopharma (Branded) 485 650 34.0% 1,863 2,594 39.2%
    Licencing Income 768 463 -39.7% 1,525 1,266 -17.0%
    Contract research 888 1,180 32.9% 3,177 4,101 29.1%
    Total Sales 4,710 6,102 29.6% 18,063 20,865 15.5%

  • Biocon reported 250 bps (2.5%) YoY decline in operating margins to 25.3% mainly due to the increase in R&D costs by 720 bps (7.2%). The management expects a similar R&D expense trend even further. However, this was offset largely by decrease in raw material cost (370 bps) and other expenditure (110 bps).

  • Biocon and Pfizer terminated their alliance to commercialize Bioconís biosimilar Insulin products. The break-up of partnership with Pfizer is surely negative for the longer run, but Biocon has received a US$150 m to US$170 m of licensing income from Pfizer for the same. This will help company to fund its global clinical development for its Insulin and related products. The company also indicated that they are now looking at a new licensing partnership with global players for marketing across different regions. However, according to us, this can take a long time. In case the molecule progresses, Biocon will be able to garner even higher licensing income from the global partnership. The company also has plans to give thrust to the bulk human insulin sales in RoW markets through its partners.

What to expect?
At the current price of Rs 236, the stock is trading at a multiple of 12.4 times our estimated FY14 earnings. After the announcement of cancellation of tie-up with Pfizer, the stock price has correctly quite sharply. However, according to us, Biocon has the ability and strong balance sheet to continue its Insulin program without the need of significant funding. The company is also trying to get a new marketing partner for developed markets. All in all, we think that the concerns on the partnership breakup are now overdone as it does not really impact the companyís ability to build a global insulin franchise.

In light of the current attractive valuations, we maintain our positive view on the stock from a long term perspective. However, the main risks to our view include slower ramp-up of revenues in the Biopharma business and inability to find a new partner for the prospective insulin molecule.

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