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Biocon: The power of niche - Views on News from Equitymaster
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Biocon: The power of niche
Jul 23, 2009

Performance summary
  • Revenues for 1QFY10 grow by a robust 88% YoY, led by the strong performance of the biopharmaceuticals (including the acquired company AxiCorp) and contract research businesses.
  • EBDITA margins contract by 4.4% during the quarter on the back of a considerable rise in raw material costs (as percentage of sales).
  • Bottomline during the quarter registers a 23% YoY growth on excluding the forex loss that was reported in 1QFY09, which was not present this quarter.


Financial performance: A snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 2,639 4,959 87.9%
Expenditure 1,999 3,974 98.8%
Operating profit (EBIDTA) 640 985 53.9%
Operating profit margin (%) 24.3% 19.9%  
Other income 126 122 -3.2%
Depreciation 253 324 28.1%
Interest 37 56 51.4%
Profit before tax 476 727 52.7%
Tax 17 137 705.9%
Extraordinary item (319) -  
Minority interest 10 (14)  
Profit after tax/ (loss) 150 576 284.0%
Net profit margin (%) 5.7% 11.6%  
No. of shares (m) 100 200  
Diluted earnings per share (Rs)*   12.9  
P/E ratio (x)   17.0  
* Excludes extraordinary item

What has driven performance in 1QFY10?
  • Biocon’s topline grew by a robust 88% YoY during 1QFY10. This was largely led by the strong performances of the biopharmaceuticals (up 94% YoY) and contract research (up 55% 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 growth of 16% YoY. As far as the biopharma business is concerned, excluding the AxiCorp revenues, sales grew by 9% YoY. This growth was led by insulin and the retail healthcare business, each of which grew above 50% YoY. Further, this quarter also included revenues from the immunosuppressant ‘MMF’ which was launched in the US market in May 2009. There are 6 players in the market for this drug and Biocon supplies to 3 of them. Revenues from the contract research business grew by a robust 55% YoY during the quarter as the contract with BMS became fully operational and investments made into the Syngene facility to cater to the BMS contract started bearing fruit. The BMS contract now accounts for 30% of Syngene’s revenues.

    Business mix
      1QFY09 1QFY10 Change
    Biopharmaceutical 2,212 4,296 94.2%
    (% of consolidated revenues) 83.8% 86.6%  
    Contract research 427 663 55.3%
    (% of consolidated revenues) 16.2% 13.4%  
    Total 2,639 4,959 87.9%

  • Biocon’s operating margins witnessed a 4.4% contraction during 1QFY10. This was largely due to the rise in raw material costs (as percentage of sales), which increased from 51.3% in 1QFY09 to 58.3% in 1QFY10. 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, which will be 18 to 24 months from now. Till such time, AxiCorp will continue to dampen Biocon’s operating profits. Thus, if one excludes the AxiCorp numbers, Biocon’s operating margins during quarter substantially improved by 5%.

  • While Biocon’s net profits soared during the quarter, the same was on account of the mark to market forex loss of Rs 319 m in 1QFY09. No such loss was reported this quarter. Thus, excluding this impact, the bottomline still registered an impressive 23% YoY growth.

What to expect?
At the current price of Rs 219, the stock is trading at a multiple of 15.1 times our estimated FY12 earnings. Biocon’s focus going forward will be on insulin, immunosuppressants, branded formulations and monoclonal antibodies, which will be critical in driving growth in the future. The company’s retail business in India has started gaining traction and is growing at 50% plus. 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 Biocon’s 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). Besides this, there are some biologics programs in the pipeline which will enhance revenues in the longer term and could translate into licensing opportunities.

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. Overall, we maintain our positive view on the stock from a long-term perspective.

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