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Biocon: Muted Biopharma growth - Views on News from Equitymaster
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Biocon: Muted Biopharma growth
Jul 25, 2011

Biocon has announced its first quarter results for FY12 (1QFY12). The company has reported 10.1% YoY and 7.2% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net Sales grow by 10.1% YoY, led by the strong performance of contract research services whereas the performance of biopharma was dull.
  • Operating margins (EBIDTA) remain stable due to lower licensing income. Without considering licensing income, operating margins increase due to decrease in R&D expenditure.
  • Net profits, without considering AxiCorp, grow by a mere 7.2% YoY due to higher depreciation charges.


Financial performance: A snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 4,011 4,417 10.1%
Expenditure 2,910 3,213 10.4%
Operating profit (EBIDTA) 1,101 1,204 9.4%
Operating profit margin (%) 27.4% 27.3%  
Other income 81 123 51.9%
Depreciation 363 451 24.2%
Interest 66 57 -13.6%
Profit before tax 753 819 8.8%
Tax 100 119  
Profit after tax/ (loss) without Axicorp 653 700 7.2%
Profits from Axicorp (discontinued) 115 0  
Profit after tax/ (loss) 768 700 -8.9%
Net profit margin (%) 16.3% 15.8%  
No. of shares (m)   200  
Diluted earnings per share (Rs)*   18.7  
P/E ratio (x)   19.3  

What has driven performance in 1QFY12?
  • Biocon's net sales grew by 10.1% YoY during the quarter. This was largely led by the 21.4% YoY growth in contract research business. Growth was delivered through a number of drivers like expansion by existing clients, the addition of new clients, and an evolution of business mix towards higher value business. However this was offset by muted growth in the biopharmaceutical segment. It just grew by 7.7% YoY due to political upheaval in the Middle East especially in Egypt and Syria.

    Business mix 1QFY11 1QFY12 Change
    Biopharma 3,290 3,543 7.7%
    (% of consolidated revenues) 82.0% 80.2%  
    Contract Research 720 874 21.4%
    (% of consolidated revenues) 18.0% 19.8%  
    Total 4,010 4,417 10.1%
    *AxiCorp divested

  • Biocon's 78% stake in AxiCorp, a German pharmaceutical marketing and distribution firm, has now been divested to the minority shareholders. This event was an outcome of the tie-up with Pfizer for Insulin.

  • Though the operating margins (EBIDTA) look to be flattish, it is not the case. If we deduct the licensing income, it is evident that the operating margins expanded by around 1.5% (as a % of sales). This was led by the reduction in the R&D expenses and other expenses. However, a part of this was offset by the drastic increase in staff cost. The management also indicated that, going ahead, it should be able to maintain the operating margins at around 25% levels as AxiCorp, which was allow margin contributor, has been divested.

  • On the capex front, the company would be spending US$ 160 m in Malaysia over the next 3 years to establish a biosimilar manufacturing and R&D facility. Besides this, the regular capex required for Indian facilities would be in the range of US$ 130 m to US$ 150 m per year.

  • Net profit, without considering AxiCorp, grew by a mere 7.2% YoY as the depreciation charges grew by a little over 24% YoY.

What to expect?
Biocon tied up with Pfizer in 2010-2011 to market its biosimilar products in the emerging and developed markets. As this tie-up will now take care of the marketing in Europe, Biocon has divested its stake in Axicorp. This coupled with visible turnaround in the contract research business, significant capital expenditure and further recruitment of employees should help Biocon to grow for the next few years. At the current price of Rs 361, the stock is trading at a price to earnings multiple of 15.3 times our estimated FY14 earnings. Investors should note that we have had to downgrade our estimates in light of the fact that AxiCorp will no longer be part of the company. That said, we advise investors to hold on to the stock from a 2-3 year perspective.

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