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Biocon: All fall down - Views on News from Equitymaster
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Biocon: All fall down
Jul 17, 2008

Performance summary
  • Revenues for 1QFY09 fall by 3% YoY largely due to a poor show put up by the contract research business and absence of license fees and revenues from enzymes during the quarter.
  • EBDITA margins contract by a substantial 470 basis points (4.7%) during the quarter on the back of a considerable rise in raw material costs and R&D expenditure (both as percentage of sales).
  • PAT tumbles by 72% YoY owing to the fall in operating profits, higher depreciation and mark to market losses incurred. If we exclude the latter, then the fall in bottomline is relatively less steeper at 24% YoY.

Financial performance: A snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 2,708 2,639 -2.5%
Expenditure 1,922 1,999 4.0%
Operating profit (EBIDTA) 786 640 -18.6%
Operating profit margin (%) 29.0% 24.3%
Other income (8) 62
Depreciation 220 253 15.0%
Interest 27 37 37.0%
Profit before tax 531 412 -22.4%
Exceptional items - (255)
Tax 15 17 13.3%
Minority interest 14 10
Profit after tax/ (loss) 530 150 -71.7%
Net profit margin (%) 19.6% 5.7%
No. of shares (m) 100.0 100.0
Diluted earnings per share (Rs)* 18.5
P/E ratio (x)** 20.0
* Excludes extraordinary income ** on a trailing 12 months basis

What has driven performance in 1QFY09?
  • Bioconís topline fell by 2.5% YoY during 1QFY09. This was largely due to the subdued performance of the contract research business and the absence of revenues from the enzymes business, which was divested in the latter half of FY08. Besides this, the company had received licensing fees in 1QFY08, which were not present this quarter thereby contributing to the decline in topline. Licensing fees being a lumpy business, revenues do not accrue every quarter. Minus the licensing fess, revenues from the biopharmaceutical business grew by a robust 19% YoY. This could be attributed to the growth in statins and the strong performance of insulin (namely ĎInsugení), immunosuppressants and its branded products for nephrology and oncology (ĎBiomab EGFRí) in India. The performance of the contract research business left a lot to be desired with revenues falling by 2% during the quarter.

    Business mix
    1QFY08 1QFY09 Change
    Biopharmaceutical 1,866 2,212 18.5%
    (% of consolidated revenues) 68.9% 83.8%
    Licensing fees 168 -
    (% of consolidated revenues) 6.2% 0.0%
    Enzymes 240 -
    (% of consolidated revenues) 8.9% 0.0%
    Contract research 434 427 -1.6%
    (% of consolidated revenues) 16.0% 16.2%
    Total 2,708 2,639 -2.5%

  • Bioconís operating margins witnessed a considerable 4.7% contraction during 1QFY09. This was largely due to the rise in raw material costs and R&D expenditure. A difficult quarter faced by Syngene (Bioconís 100% contract research subsidiary) played a role in denting margins as the company was plagued by currency losses and operational delays. R&D expenditure increased as the company continued to make investments in its biotech programmes.

  • Bioconís net profits tumbled by 72% YoY during 1QFY09 due to the 19% YoY decline in operating profits and higher depreciation charges. A mark to market loss of Rs 255 m was largely responsible for the steep fall in the bottomline. Excluding this extraordinary expense, the bottomline fell by 24% YoY.

What to expect?
At the current price of Rs 370, the stock is trading at a multiple of 12.2 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.

Despite the tepid show this quarter, contract research will be a significant revenue driver in the future and the contribution of this segment has been rising 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. We remain positive on the growth prospects of the company from a long-term perspective.

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