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Biocon: Research services fuel topline
Oct 25, 2013

Biocon has announced its 2QFY14 results. The company has reported 23.9% YoY growth in sales and 14.2% growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 23.9% YoY during the quarter led by the strong performance of the research services segment.
  • Core operating margins improve by 3.3% to 23% in 2QFY14 leading to EBITDA growth of 45% YoY. This is largely due to improvement in gross margins.
  • Bottomline increases by 14.2% YoY during 2QFY14. PAT growth is impacted by considerable reduction in other income.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 5,924  7,339 23.9% 11,633 14,287 22.8%
Expenditure 4,759  5,650 18.7% 9,299 11,136 19.8%
Operating profit (EBDITA) 1,165  1,689 45.0% 2,334 3,151 35.0%
EBDITA margin (%) 19.7% 23.0%   20.1% 22.1%  
Other income 495  187 -62.2% 712 471 -33.8%
Interest (net) 11 3 -72.7% 43  7 -84.2%
Depreciation 446  501 12.3% 873 984 12.7%
Profit before tax 1,203  1,372 14.1% 2,130 2,631 23.5%
Exceptional Item  1 1        
Tax 304  319 4.9% 441 616 39.7%
Profit after tax/(loss) 899  1,054 17.3% 1,689 2,015 19.3%
Minority Interest  3 31    5 58  
Net profit after minority int 896  1,023 14.2% 1,684 1,957 16.2%
Net profit margin (%) 15.1% 13.9%   14.5% 13.7%  
No. of shares (m)         200.0  
Diluted earnings per share (Rs)         27.2  
Price to earnings ratio (x)*         12.5  
*based on trailing 12 months earnings
What has driven performance in 2QFY14?
  • Topline grew by 23.9% YoY during the quarter due to the strong performance of the contract manufacturing segment.

    Business mix
      2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
               
    Biopharmaceuticals 3,720 4,469 20.1% 7,345 8,864 20.7%
    (% of consolidated revenues) 63% 61%   63% 62%  
    Branded Formulations 913 989 8.3% 1,773 1,996 12.6%
    (% of consolidated revenues) 15% 13%   15% 14%  
    Contract Manufacturing 1,291 1,881 45.7% 2,515 3,427 36.3%
    (% of consolidated revenues) 22% 26%   22% 24%  
    Total 5,924 7,339 23.9% 11,633 14,287 22.8%

  • Total Biopharmaceuticals segment sales increased by 20.7% YoY for 2QFY14 largely on the back of growth from global biopharmaceuticals. The global biopharmaceutical segment grew by 20.1% YoY and domestic branded segment grew by 8.3% YoY. The domestic sales were impacted due to disruptions in the trade channels on the back of the new pricing policy. The new pricing policy will not impact the company's revenues. In constant currency terms, total Biopharmaceuticals sales grew by 20% YoY for the said period.

  • Biocon has 15% market share in the domestic Insulin market. Company's Insugen brand is also ramping up. During the quarter, the company launched a new biologic drug Aluzumab (generic name Itolizumbad) in the Indian market. Aluzumab is indicated for treatment of psoriasis. This is a second biosimilar launch by the company. Biocon is also developing Herceptin in India for the treatment of breast cancer. Breast cancer accounts for approx. 8-10% of the drugs in India. Currently, Biocon has 15% market share in the Insulin space.

  • The company has increased the capacity at its insulin facility. This too had helped growth in the global pharmaceuticals segment. Growth in emerging markets was driven by small molecules. However, statins witnessed flat growth. Having said that, one should note that the company is operating at near 100% capacity. As per the management, the company is working on several ways to maximize the current capacity at the optimum level. On the positive side, the company will start supply of Sirolimus (Brand name Rapamune) to its partners from this quarter (3QFY14) onwards. The branded sales of Rapamune are around US$ 350 m worldwide.

  • The quarter witnessed robust growth in the contract research segment. This segment grew by 45.7% YoY for the quarter. The growth in constant currency terms stood at 25% YoY. The revenues from this segment are expected to go up from 2HFY14 onwards. This is because earlier the company had hedged its contracts at a lower rupee-dollar exchange rate. As these contracts will expire, the revenue in rupee terms will witness better growth.

  • Operating margins improved marginally by 3.3% to 23% for the quarter. This was largely due to better gross margins. The improvement in the gross margins was attributable to better growth in the contract research segment. As contract research segment requires lower raw material as compared to Biopharmaceuticals, the margins of this segment are better. The company's R&D expenses for the quarter were also at lower levels. The operating margins will improve on the back of better realizations from contract research.

  • Bottomline increased by 14.2% YoY during 2QFY14. PAT was impacted by reduction in other income in 2QFY14. Other income reduced this quarter because the company had received onetime payment in 2QFY13. Taxes also went up as the company has lost SEZ benefit on its manufacturing facility.

    Key takeaways from conference call

  • R&D expenses: In the beginning of the year, the company had pegged R&D expenses at Rs 2 bn on the back of advanced stage trials. However, recently, the government has put some restrictions on the trials conducted in India. In our view this can result in an increase in R&D expenses going forward as Biocon will have to conduct its trials abroad.

  • Listing of Syngene: Owing to weak financial scenario currently, the company does not intend to list Syngene atleast before the 2014 elections.

  • Acquisition of Optimer by Cubist: Biocon has a supply contract for Fidaxocimin with Optimer. This company was recently acquired by Cubist. So far the contract for Fidaxocimin has not been impacted. However, as per the management, once the acquisition procedure gets completed between Cubist and Optimer, Biocon will have better clarity on the status of Fidaxocimin.

What to expect?
At the current price of Rs 339, the stock is trading at a price to earnings multiple of 12.9 times our estimated FY16 earnings. The branded formulations business will be the key growth driver for the company. With the set up of the Malaysian facility, Biocon will ramp up sales of insulin and other segments. Launch of new products in the Indian Branded formulations space will also help in the company's growth in the long run. We have revised our estimates on back of margin improvement in the near future.

However, the main risks to our view include failure in its R&D programs where the company is incurring huge costs. Again increase in these expenses can be expected as the company will have to incur trials outside India, which will be expensive. The upcoming quarters might see some slowdown in its Biopharmaceuticals sales as the company's capacity is running at optimum levels. This might result in lower growth from this segment. We thus maintain a Hold rating on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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