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Biocon: Year starts on a weak note - Views on News from Equitymaster
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Biocon: Year starts on a weak note
Jul 31, 2014

Biocon has announced its 1QFY15 results. The company has reported 3.5% YoY and 9.3% YoY growth in sales and net profit respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by 3.5% YoY during the quarter. Growth is impacted due to volatility in the MENA region and discontinuation in supply of Fidaxomicin
  • Operating margins improve by 2.2%, leading to EBITDA growth of 14.2% YoY. This is helped by decline in R&D expenses.
  • Bottomline increases by 9.3% YoY during 1QFY15. PAT is impacted by decline in other income.

Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 6,946 7,186 3.5%
Expenditure 5,481 5,513 0.6%
Operating profit (EBDITA) 1,465 1,673 14.2%
EBDITA margin (%) 21.1% 23.3%  
Other income 288 234 -18.8%
Interest (net)  4  6 50.0%
Depreciation 493 519 5.3%
Profit before tax 1,256 1,382 10.0%
Tax 287 309 7.7%
Profit after tax/(loss) 969 1,073 10.7%
Minority Interest 27 43 59.3%
Net profit after minority int 942 1,030 9.3%
Net profit margin (%) 13.6% 14.3%  
No. of shares (m)   200.0  
Diluted earnings per share (Rs)   21.6  
Price to earnings ratio (x)*   21.7  
*based on trailing 12 months earnings

What has driven performance in 1QFY15?
  • Topline grows by 3.5% YoY during the quarter. Biopharmaceutical growth was impacted during the quarter, while contract manufacturing witnessed modest growth for the quarter.

    Business Mix
      1QFY14 1QFY15 Change
    Biopharmaceuticals 4,397 4,357 -0.9%
    (% of consolidated revenues) 63% 61%  
    Branded Formulations 1,007 1,106 9.8%
    (% of consolidated revenues) 14% 15%  
    Contract Manufacturing 1,542 1,723 11.7%
    (% of consolidated revenues) 22% 24%  
    Total 6,946 7,186 3.5%

  • The growth in Biopharmaceutical segment was impacted by turmoil in Middle East and North Africa (MENA) region and discontinuation of API supply of Fidaxomicin to its supplier. While the disruptions in MENA region are temporary and expected to normalize in next couple of months, Biocon will be able to resume the API supply of Fidaxomicin once its partner launches the drug again. Biocon had a supply contract with Optimer (now Cubist, as the latter had acquired Optimer some time back), for supply of API of the drug. Recently, Cubist discontinued the supply of Fidaxomicin. The time line of exact re-launch of the drug is not known. One should note, Fidaxomicin is a high margin drug and an important revenue contributor to Biocon. We have assumed this product contributed around Rs 1.5 bn of sales and Rs 560 of net profits, thus impacting EPS by around Rs 2.8 per annum.

  • The contract manufacturing space witnessed modest growth of 12% YoY for the quarter. On the positive side, the BMS contract has been renewed and is now extended till 2020. This contract was scheduled to expire in 2016. While the company continues to evaluate options for delisting Syngene, it has not stated the exact time line for the same.

  • Despite the poor performance on the topline front, the company witnessed expansion in EBITDA margins by 2.2% YoY. This was largely attributable to sharp decline in the net R&D expenses in the P&L account. The gross R&D expenses for the quarter stood at Rs 376 m. This is still lower as compared to 1QFY14. One should note that the company has changed its R&D policy since the last quarter and since then it has also been capitalizing its R&D expenses. This quarter, the company had capitalized Rs 160 m of R&D expenses. When we include this capitalized R&D expenses, the total R&D is up by 15.3% YoY for the quarter.

    R&D break up
      1QFY14 1QFY15 Change
    Net R&D in P&L ac* 431 311 -27.8%
    Gross R&D (excl. capitalized) 465 376 -19.1%
    R&D capitalized - 160  
    Total R&D spent for the quarter 465 536 15.3%
    R&D expenses after excluding capitalized part
    and expenses recovered from its partners.

  • Though at the net level, these expenses remain quite volatile as some contribution comes from partners, which is not fixed, and some is capitalized. The gross R&D expenses have continued to rise though.

  • Bottomline increased by 9.3% YoY during 1QFY15. The tepid growth was partly due to decline in other income. Surge in share of minority interest, depreciation and interest also played a role in impacting bottomline growth.
What to expect?
At the current price of Rs 459 the stock is trading at a price to earnings multiple of 13.6 times our estimated FY17 earnings.

The Indian branded formulations and contract research segments remain the key driver for the company. However, growth in the global biopharmaceutical segment remains a concern. Further, capacity constraint is one issue atleast till the Malaysian facility becomes operational. The recent impact of discontinuation of Fidaxoimicin sales is also negative for the company. Another risk in our view is lack of success in its R&D programs where the company is incurring huge costs.

The commencement of production at its Malaysian facility will be an important growth driver for the company. However, the current valuations do not offer sufficient margin of safety and thus we recommend investors to Sell the stock.

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