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Biocon: Profits at the receiving end - Views on News from Equitymaster

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Biocon: Profits at the receiving end
Oct 16, 2008

Performance summary
  • Revenues for 2QFY09 grow by a robust 59% YoY, led by the strong performance of the biopharmaceuticals (including the acquired company AxiCorp) and contract research businesses.
  • EBDITA margins contract substantially by 9% during the quarter on the back of a considerable rise in raw material costs and other expenditure (both as percentage of sales).
  • The company reports a loss at the net level of Rs 5 m. However, if we exclude the extraordinary expense (market to market losses), then the bottomline registers an 11% YoY growth backed by higher other income.


Financial performance: A snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 2,790 4,423 58.5% 5,498 7,062 28.4%
Expenditure 1,998 3,565 78.4% 3,920 5,564 41.9%
Operating profit (EBIDTA) 792 858 8.3% 1,578 1,498 -5.1%
Operating profit margin (%) 28.4% 19.4%   28.7% 21.2%  
Other income 30 122 306.7% 22 184 736.4%
Depreciation 234 290 23.9% 454 543 19.6%
Interest 27 42 55.6% 54 79 46.3%
Profit before tax 561 648 15.5% 1,092 1,060 -2.9%
Tax 37 59 59.5% 52 76 46.2%
Extraordinary item - (600)   - (600)  
Minority interest 14 6 -57.1% 28 16 -42.9%
Profit after tax/ (loss) 538 (5)   1,068 400 -62.5%
Net profit margin (%) 19.3% -0.1%   19.4% 5.7%  
No. of shares (m)       100 200  
Diluted earnings per share (Rs)*         10.8  
P/E ratio (x)**         11.7  
* Excludes extraordinary item ** on a trailing 12 months basis

What has driven performance in 1HFY09?
  • Bioconís topline grew by a robust 28% YoY during 1HFY09. This was largely led by the strong performances of the biopharmaceuticals (up 58% YoY) and contract research (up 11% YoY) businesses. 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 much tapered down growth of 8% YoY. As far as the biopharma business is concerned, excluding the AxiCorp revenues, sales grew by 19% YoY. This growth was led by insulin and the retail healthcare business (up 36% YoY). While the licensing income in 1HFY09 was considerably lower than that in 1HFY08, the same is expected to considerably pick up in the second half of the year. After a dismal show put up by the contract research business during 1QFY09, which saw sales from this segment decline by 2% YoY, revenue growth recovered strongly in 2QFY09 (up 24% YoY) to enable Biocon post a respectable 11% YoY growth in this business during 1HFY09.

    Business mix
      2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Biopharmaceutical 1,991 3,861 93.9% 3,857 6,073 57.5%
    (% of consolidated revenues) 71.4% 87.3%   70.2% 86.0%  
    Licensing fees 154 30 -80.5% 322 30 -90.7%
    (% of consolidated revenues) 5.5% 0.7%   5.9% 0.4%  
    Enzymes 217 -   457 -  
    (% of consolidated revenues) 7.8% 0.0%   8.3% 0.0%  
    Contract research 428 532 24.3% 862 959 11.3%
    (% of consolidated revenues) 15.3% 12.0%   15.7% 13.6%  
    Total 2,790 4,423 58.5% 5,498 7,062 28.4%

  • Bioconís operating margins witnessed a considerable 7.5% contraction during 1HFY09. This was largely due to the rise in raw material costs and other expenditure. Raw material costs (as percentage of sales) increased from 48.1% in 1HFY08 to 55.6% in 1HFY09. However, a large part of this rise has been attributed to the inclusion of AxiCorp results in Bioconís numbers. Thus, excluding the same, raw material costs stood at 49% of sales during the half-year period and this increase was due to inflationary pressures. Overall, excluding AxiCorp expenses, the reduction in operating margins was a much lower 2.9%.

  • Bioconís net profits tumbled by 63% YoY during 1HFY09 due to the 5% YoY decline in operating profits and higher interest costs. A mark to market loss of Rs 600 m was largely responsible for the steep fall in the bottomline. Excluding this extraordinary expense, the bottomline fell by 6% YoY.

What to expect?
At the current price of Rs 126, the stock is trading at a multiple of 9.2 times our estimated FY11 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.

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 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 70% stake in AxiCorp, a Germany based pharma company.

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

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