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Biocon: R&D costs hit profits - Views on News from Equitymaster
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Biocon: R&D costs hit profits
Aug 14, 2012

Biocon announced first quarter results of financial year 2012-2013 (1QFY13). The company reported a 30% YoY growth in sales, while net profits grew by 12% YoY. Here is our analysis of the results.

Performance summary
  • Revenues for 1QFY13 grow by 30% YoY, led by the strong performance of the biopharmaceuticals as well as the contract research businesses.
  • EBDITA margins contract by 4% during the quarter due to a substantial increase in R&D costs and other expenses (as percentage of sales).
  • Net profit growth (12% YoY) is better than the growth in operating profits due to a fall in depreciation charges and interest costs.

Financial performance: A snapshot
(Rs m) 1QFY12 1QFY13 Change
Net sales 4,435 5,767 30.0%
Expenditure 3,315 4,540 37.0%
Operating profit (EBIDTA) 1,120 1,227 9.6%
Operating profit margin (%) 25.3% 21.3%  
Other income 200 159 -20.5%
Depreciation 451 427 -5.3%
Interest 49 32 -34.7%
Profit before tax 820 927 13.0%
Tax 119 137 15.1%
Minority interest - (2)  
Profit after tax/ (loss) 701 788 12.4%
Net profit margin (%) 15.8% 13.7%  
No. of shares (m) 200 200  
Diluted earnings per share (Rs)*   17.4  
P/E ratio (x)   13.9  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • Biocon's topline grew by 30% YoY during 1QFY13. This was largely led by the strong performance of the biopharmaceuticals as well as the contract research businesses. That said, the depreciation of the rupee also played a part in bolstering overall revenues. The overall biopharmaceutical revenues grew by 28% YoY during the quarter led by healthy performance of domestic branded formulations which saw an increase of 52% YoY. Revenues from contract research grew by an impressive 40% YoY during the quarter le by both Syngene and Clinigene.

    Business mix
      1QFY12 1QFY13 Change
    Biopharmaceutical 2,994 3,683 23.0%
    (% of consolidated revenues) 67.5% 63.9%  
    Branded formulations 567 860 51.7%
    (% of consolidated revenues) 12.8% 14.9%  
    Total biopharmaceuticals 3,561 4,543 27.6%
    (% of consolidated revenues) 80.3% 78.8%  
    Contract research 874 1,224 40.0%
    (% of consolidated revenues) 19.7% 21.2%  
    Total 4,435 5,767 30.0%

  • Biocon's operating margins contracted by 4% during 1QFY13. This was largely due to a significant rise in raw material costs and other expenses (as percentage of sales). R&D costs increased from 4.6% of sales in 1QFY12 to 6.2% in 1QFY13. This was on account of clinical spends on a number of global trials. Other expenditure increased on account of the forex loss of Rs 50 m that the company incurred on its BMS (Bristol Myers Squib) contract. Thus, growth in operating profits was restricted to 10% YoY during the quarter.

  • However, growth in the bottomline was better at 12% YoY on account a reduction in interest costs and depreciation charges.

What to expect?
At the current price of Rs 241, the stock is trading at a price to earnings multiple of 13.1 times our estimated FY14 earnings. Biocon's stock price was at the receiving end after it announced the cancellation of its tie-up with Pfizer. However, the company is looking to launch this product in the developed markets by tying up with multiple partners. All in all, we think that the concerns on the partnership breakup are now overdone as it does not really impact the company's ability to build a global insulin franchise. The branded formulations business will be the key growth driver for the company and products such as Fidaxomicin, insulins and immunosuppressants are expected to contribute to this. Opportunities in the medium term also exist in the form of Atorvastatin wherein the company is waiting for its partners in the US to get approvals post which sales should ramp up.

In light of the current valuations, we maintain our positive view on the stock from a long term perspective. However, the main risks to our view include slower ramp up of revenues in the biopharma business and inability to find a new partner for the prospective insulin molecule.

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