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Biocon: Bearing the 'AxiCorp' burden

May 4, 2009

Performance summary
  • Revenues for FY09 grow by a robust 53% YoY, led by the strong performance of the biopharmaceuticals (including the acquired company AxiCorp) and contract research businesses.
  • EBDITA margins contract by 8.1% during the year on the back of a considerable rise in raw material and staff costs (both as percentage of sales).
  • Bottomline during the year tumbles by 80% YoY. However, if we exclude the extraordinary items during both FY08 and FY09, then the bottomline registers a 7% YoY growth.

Financial performance: A snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 2,684 4,681 74.4% 10,576 16,165 52.8%
Expenditure 1,841 3,765 104.5% 7,552 12,853 70.2%
Operating profit (EBIDTA) 843 916 8.6% 3,024 3,312 9.5%
Operating profit margin (%) 31.4% 19.6%   28.6% 20.5%  
Other income 108 185 71.5% 326 567 73.9%
Depreciation 242 306 26.7% 939 1,103 17.4%
Interest 28 61 119.7% 102 177 73.5%
Profit before tax 681 733 7.6% 2,309 2,600 12.6%
Tax 60 (16) -126.5% 129 118 -8.2%
Extraordinary item 9 (414)   2,394 (1,472)  
Minority interest 22 (83)   65 (71)  
Share of losses in associates - (3)   - (7)  
Profit after tax/ (loss) 653 249 -61.9% 4,639 931 -79.9%
Net profit margin (%) 24.3% 5.3%   43.9% 5.8%  
No. of shares (m)       100 200  
Diluted earnings per share (Rs)*         12.0  
P/E ratio (x)         9.5  
* Excludes extraordinary item  ** on a trailing 12 months basis

What has driven performance in FY09?
  • Biocon's topline grew by a robust 53% YoY during FY09. This was largely led by the strong performances of the biopharmaceuticals (up 74% YoY) and contract research (up 28% YoY) businesses. However, it must be noted that the biopharmaceutical revenues include the sales of AxiCorp in which Biocon has bought a 71% stake and therefore on a like-to like basis overall sales recorded a much tapered down growth of 8.5% YoY. As far as the biopharma business is concerned, excluding the AxiCorp revenues, sales grew by 15% YoY. This growth was led by insulin and the retail healthcare business, each of which grew above 40% YoY. The licensing income in FY09 was considerably lower than that in FY08, due to the overall global economic slowdown as a result of which innovators are vary of making huge payments upfront and prefer to go in for collaboration agreements instead. Revenues from the contract research business grew by a robust 28% YoY during the year as the contract with BMS became fully operational.

    Business mix
      4QFY08 4QFY09 Change FY08 FY09 Change
    Biopharmaceutical 2,102 3,920 86.5% 7,875 13,718 74.2%
    (% of consolidated revenues) 78.8% 84.1%   74.7% 85.3%  
    Licensing fees 103 64 -37.9% 448 123 -72.5%
    (% of consolidated revenues) 3.9% 1.4%   4.3% 0.8%  
    Enzymes 3 -   460 -  
    (% of consolidated revenues) 0.1% 0.0%   4.4% 0.0%  
    Contract research 461 679 47.3% 1,755 2,246 28.0%
    (% of consolidated revenues) 17.3% 14.6%   16.7% 14.0%  
    Total 2,669 4,663 74.7% 10,538 16,087 52.7%

  • Biocon's operating margins witnessed a considerable 8.1% contraction during FY09. This was largely due to the rise in raw material costs (as percentage of sales), which increased from 48.4% in FY08 to 56.2% in FY09. However, a large part of this rise has been attributed to the inclusion of AxiCorp results in Biocon's numbers. AxiCorp at present is a topline driven company and margins are expected to improve only after Biocon launches insulin in the European markets, a process which is likely to take 2 years. Till such time, AxiCorp will continue to dampen Biocon's operating profits. Having said that, if one excludes the AxiCorp numbers, Bioconís operating margins during the full year declined marginally by 0.8% to 27.8%.

  • Biocon's net profits tumbled by 80% YoY during FY09 due to higher interest costs and forex losses. While the mark to market forex loss stood at Rs 1.5 bn during FY09, the extraordinary gain of Rs 2.4 bn during FY08 was due to the divestment of the enzymes business to Novozymes. Excluding this extraordinary item during both the periods, the bottomline grew by 7% YoY.

What to expect?
At the current price of Rs 146, the stock is trading at a multiple of 11.8 times our estimated FY11 earnings. Biocon has been reducing its dependence on statins and is increasingly focusing on insulin, immunosuppressants, branded formulations and monoclonal antibodies, which will be critical in driving 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. Opportunities in FY10 that will enhance Bioconís performance will be 'Glargine' (insulin - generic version of Aventis' 'Lantus') sales in India and registration of this product globally (which will translate into in-licensing income), and the immunosuppressant MMF, whose patent will expire in May 2009.

Contract research will be a significant revenue driver in the future and the contribution of this segment to overall revenues has been rising. 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 and hence the rationale for acquiring 71% stake in AxiCorp, a Germany based pharma company. However, AxiCorp at present is a low margin business and since the biosimilar opportunity in the developed markets will start taking shape two years from now, till such time AxiCorp's low margins will be a drag on Biocon's overall profitability.

The company's performance for the full year has been slightly higher than our estimates. Overall, we maintain our positive view on the stock from a long-term perspective.

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