Biocon- Licensing-income boost, target achieved; upgrade to Hold:: Anand Rathi

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Biocon
Licensing-income boost, target achieved; upgrade to Hold
3QFY11 results beat our estimates mainly due to boost from
licensing income. We revise our estimates, factoring in
recognition of licensing income from Pfizer and associated R&D
expenditure. We raise our price target to `408 and upgrade the
stock to Hold from Sell as our earlier target has been achieved.

 3QFY11 results. Biocon’s adjusted net profit grew 24.4% yoy,
driven by 14.6% revenue growth and a 320bps better EBITDA
margin. Margin expansion was largely owing to higher licensing
income of `768m on account of the Pfizer deal.
 Revenue growth led by bio-pharmaceuticals. The 14.6% yoy
revenue growth was primarily fuelled by 22.4% growth in the biopharma
segment (ex AxiCorp and licensing fees) and 13.5%
growth in research services. AxiCorp’s revenue declined 15.6%
yoy due to a higher rebate allowance in Germany.
 Tweak estimates. We raise our revenue estimate for FY11-13 by
1-5%, factoring in the higher licensing income and lower AxiCorp
sales. But we lower our PAT estimate for FY12-13 by 5-10%,
considering higher R&D spend and the higher effective tax rate.
 Valuation and risks. The stock has already corrected below our
target price of `377. We believe that recognizing licensing income
from Pfizer would continue for 4-5 years; hence, we assign target
PE of 16x to FY12e EPS, including the licensing income. We raise
our target price to `408 and upgrade the stock to Hold.
Risk: Delay/failure in launching bio-similars.