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Biocon: Margins improve, but negative outlook persists
Biocon reported significant improvement in margins in
Q3FY11; however, adverse pricing conditions in Germany
pressurizing the margins of Axicorp the absence of major
growth triggers in the near term force us to maintain our SELL
rating on the stock.
Margin Improvement unsustainable: The 32% YoY growth in
domestic branded formulations and significant traction in sales
of Tacrolimus (launched recently in the US), along with Rs770mn
of licensing income from Pfizer (upfront payment from
Biosimilar insulin deal) helped the overall EBITDA margin to
improve by 340bps YoY to 23.3%. However, the increase in
licensing income is one-off in nature and after adjusting for this,
the effective margin works out to ~21%.
Axicorp margins to get worse: The introduction of a flat 16%
rebate in Germany is bound to affect Axicorp margins adversely.
This, in turn, is a big negative for Biocon’s overall margins as
Axicorp still accounts for ~35-40% of Biocon’s sales.
IN-105 partnership deal likely to be delayed: Biocon’s novel
oral Insulin (IN-105) failed to meet key primary end-points in
preliminary Phase III clinical trials. Though it is too early to raise
a red flag on the prospects of it being picked up by a global
partner, in the near term this seems unlikely. And due to
Biocon’s strategic resolve of launching the product
simultaneously in regulated and semi-regulated markets, we do
not expect it to act as a major growth trigger anytime soon.
High valuations, negative growth outlook - maintain SELL:
At current valuations the stock is still trading at 21.7x FY12E and
18.8x FY13E earnings. We maintain SELL rating on the stock with
a Target Price of Rs372 primarily due to the negative growth
overhang on some critical aspects of the business.
Topline in-line with estimates
Biocon’s net sales grew by 15% YoY to Rs7.3bn, more or less in line with our estimate of Rs7.2bn.
Growth was mainly driven by a fantastic 32% spurt in the six verticals of domestic branded
formulations (due to its presence in key therapeutic segments of Diabetology, Cardiology,
Dermatology and Oncotherapeutics) and significant traction in the sales of Tacrolimus and
Pimecrolimus which were recently launched in the US. It got licensing income worth Rs770mn from
Pfizer as upfront payment over its Bio-similar Insulin deal. Overall, the Bio-pharma segment (net of
licensing income) grew by 22% YoY. Contract research business also grew by a credible 15% YoY.
Improved margin unsustainable, Axicorp acts spoilsport
EBITDA margins improved by 340bps YoY to 23.3%. However, that was mainly driven by the
licensing deal payments from Pfizer which is one-off in nature and is not sustainable. Adjusted for
this, operational margins come down to ~21%.
The margins are expected to be further affected by Axicorp following the 16% rebate introduced in
Germany. Axicorp still accounts for ~35-40% of Biocon’s current sales, and the pricing pressure is
expected to bring down Biocon’s overall margin significantly. No improvement in this regard can be
expected till the approval and launch of Biocon’s Insulin portfolio in the EU, for which Axicorp is
supposed to act as a strategic distribution centre.
IN105 (Oral Insulin) deal likely to be delayed
IN105 failed to meet some primary efficacy targets in its preliminary Phase III trials due to Placebo
effects. While this does not cause much concern regarding the eventual regulatory approval of the
drug, the partnership deal with an MNC (which is critical for realization of the true market potential
of the drug on a global scale) will surely take some more time.
Maintain Sell
At current valuations the stock is still trading at 21.7x FY12E and 18.8x FY13E earnings. We maintain
SELL rating on the stock with a Target Price of Rs372 primarily on account of the negative growth
overhang on some critical aspects of the business.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Biocon: Margins improve, but negative outlook persists
Biocon reported significant improvement in margins in
Q3FY11; however, adverse pricing conditions in Germany
pressurizing the margins of Axicorp the absence of major
growth triggers in the near term force us to maintain our SELL
rating on the stock.
Margin Improvement unsustainable: The 32% YoY growth in
domestic branded formulations and significant traction in sales
of Tacrolimus (launched recently in the US), along with Rs770mn
of licensing income from Pfizer (upfront payment from
Biosimilar insulin deal) helped the overall EBITDA margin to
improve by 340bps YoY to 23.3%. However, the increase in
licensing income is one-off in nature and after adjusting for this,
the effective margin works out to ~21%.
Axicorp margins to get worse: The introduction of a flat 16%
rebate in Germany is bound to affect Axicorp margins adversely.
This, in turn, is a big negative for Biocon’s overall margins as
Axicorp still accounts for ~35-40% of Biocon’s sales.
IN-105 partnership deal likely to be delayed: Biocon’s novel
oral Insulin (IN-105) failed to meet key primary end-points in
preliminary Phase III clinical trials. Though it is too early to raise
a red flag on the prospects of it being picked up by a global
partner, in the near term this seems unlikely. And due to
Biocon’s strategic resolve of launching the product
simultaneously in regulated and semi-regulated markets, we do
not expect it to act as a major growth trigger anytime soon.
High valuations, negative growth outlook - maintain SELL:
At current valuations the stock is still trading at 21.7x FY12E and
18.8x FY13E earnings. We maintain SELL rating on the stock with
a Target Price of Rs372 primarily due to the negative growth
overhang on some critical aspects of the business.
Topline in-line with estimates
Biocon’s net sales grew by 15% YoY to Rs7.3bn, more or less in line with our estimate of Rs7.2bn.
Growth was mainly driven by a fantastic 32% spurt in the six verticals of domestic branded
formulations (due to its presence in key therapeutic segments of Diabetology, Cardiology,
Dermatology and Oncotherapeutics) and significant traction in the sales of Tacrolimus and
Pimecrolimus which were recently launched in the US. It got licensing income worth Rs770mn from
Pfizer as upfront payment over its Bio-similar Insulin deal. Overall, the Bio-pharma segment (net of
licensing income) grew by 22% YoY. Contract research business also grew by a credible 15% YoY.
Improved margin unsustainable, Axicorp acts spoilsport
EBITDA margins improved by 340bps YoY to 23.3%. However, that was mainly driven by the
licensing deal payments from Pfizer which is one-off in nature and is not sustainable. Adjusted for
this, operational margins come down to ~21%.
The margins are expected to be further affected by Axicorp following the 16% rebate introduced in
Germany. Axicorp still accounts for ~35-40% of Biocon’s current sales, and the pricing pressure is
expected to bring down Biocon’s overall margin significantly. No improvement in this regard can be
expected till the approval and launch of Biocon’s Insulin portfolio in the EU, for which Axicorp is
supposed to act as a strategic distribution centre.
IN105 (Oral Insulin) deal likely to be delayed
IN105 failed to meet some primary efficacy targets in its preliminary Phase III trials due to Placebo
effects. While this does not cause much concern regarding the eventual regulatory approval of the
drug, the partnership deal with an MNC (which is critical for realization of the true market potential
of the drug on a global scale) will surely take some more time.
Maintain Sell
At current valuations the stock is still trading at 21.7x FY12E and 18.8x FY13E earnings. We maintain
SELL rating on the stock with a Target Price of Rs372 primarily on account of the negative growth
overhang on some critical aspects of the business.
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