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Biocon: Higher R&D hits margins
Oct 31, 2012

Biocon has announced its 2QFY13 results. The company has reported 18% YoY growth in sales and marginal increase of 5% in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 18% YoY during the quarter led by growth in both its Biopharmaceuticals and Contract research businesses.
  • Operating margins decline by 3.1% largely due increase in R&D expenses by 40%.
  • Bottomline increases marginally by 5% YoY during 2QFY13, resulting in a fall in net margins by 1.9%.

Financial performance: A snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 5,032 5,924 17.7% 9,418 11,633 23.5%
Expenditure 3,885 4,759 22.5% 7,201 9,298 29.1%
Operating profit (EBDITA) 1,147 1,165 1.6% 2,217 2,335 5.3%
EBDITA margin (%) 22.8% 19.7%   23.5% 20.1%  
Other income 345 495 43.5% 594 712 19.9%
Interest (net) 18 14 -22.2% 67 48 -28.4%
Depreciation 429 446 4.0% 880 873 -0.8%
Profit before tax 1,045 1,200 14.8% 1,864 2,126 14.1%
Exceptional Item   -   1,316 -  
Tax 188 304 61.7% 307 441 43.6%
Profit after tax/(loss) 857 896 4.6% 1,557 1,685 8.2%
Net profit margin (%) 17.0% 15.1%   16.5% 14.5%  
No. of shares (m)         200.0  
Diluted earnings per share (Rs)         18.0  
Price to earnings ratio (x)*         14.6  
*based on trailing 12 months earnings

What has driven performance in 2QFY13?
  • Topline grows by 18% YoY during the quarter led by growth in both its Biopharmaceuticals and Contract research businesses.

  • In the Biopharmaceutical segment, growth was driven by branded formulations business in India which witnessed growth of 42% YoY. The remaining Biopharmaceuticals segment witnessed growth of 8% YoY. However, excluding licensing income of Rs 365 m in 2QFY12, this segment witnessed growth of 20%. In the US, both Tacrolimus and Fidaxomicin had good growth. Going forward, the company has already initiated supply of Fidaxomicin for the EU market and its partner will launch in 10 other countries. Biocon witnessed growth in Simvastatin supply, though the overall simvastatin market shrunk.

  • The contract research segment showed healthy growth of 39% YoY. Biocon also announced its proposed investment of Rs1,250 m for 7.69% equity share by GE capital in its Syngene business. For 1HFY13, contract manufacturing EBIT margins were at around 35%.

    Business Mix
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Biopharmaceuticals 3,455 3,720 7.7% 6,394 7,344 14.9%
    (% of consolidated revenues) 68.7% 62.8%   67.9% 63.1%  
    Branded Formulations 645 913 41.6% 1,224 1,773 44.9%
    (% of consolidated revenues) 12.8% 15.4%   13.0% 15.2%  
    Contract Manufacturing 932 1,291 38.5% 1,800 2,516 39.8%
    (% of consolidated revenues) 18.5% 21.8%   19.1% 21.6%  
    Total 5,032 5,924 17.7% 9,418 11,633 23.5%

  • On the R&D front, interim data from EU Ph-III trial for biosimilar rh-insulin achieved the primary and secondary end points for Type I diabetes. Further, the company has discontinued its partnership with Amylin on a diabetes drug (AC165198); company had exercised this option as Amylin got acquired by BMS.

  • Operating margins declined by 3.1% largely due increase in R&D expenses by 40%. Biocon incurred forex loss of Rs 190 m for the quarter against forex gain 2QFY12; large part of the forex loss was due to BMS contract.

  • Bottomline increased marginally by 5% YoY during 2QFY13, resulting in a fall in net margins by 1.9%. Profits were also impacted by higher tax for the quarter due to onetime income in the current quarter. For full year company's tax rate will be around 20%.

What to expect?
At the current price of Rs 263 the stock is trading at a price to earnings multiple of 12 times our estimated FY15 earnings. 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. The company is looking for investment of ~US$ 100 m in its Malaysian facility in FY14. This will help it increase revenues from Insulin products going forward. The proposed investment by GE capital, might act as positive going forward.

In light of the current valuations, we maintain our 'Buy' view on the stock. However, the main risks to our view include slower ramp up of revenues in the biopharma business, inability to find a new partner for the prospective insulin molecule and mounting R&D expenses.

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