German market troubles Biocon’s 4QFY11 :: CLSA

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German market troubles
Biocon’s 4QFY11 numbers were impacted by pricing deterioration in German
market. While biopharmaceutical sales (11% YoY) grew at steady pace and
contract research picked up (20% YoY), Ebitda (incld licensing income) growth
was muted at 6.7% due to margin pressures in subsidiary Axicorp. A lower tax rate
and higher other income helped net profit grow 25% YoY. While valuation at 18x
FY12 is not demanding, largely commodity nature of business could result in
volatile growth. Sale of German subsidiary will be positive for the stock.
Pick up in contract research growth, biopharma grew at steady pace

􀁸 Biopharmaceuticals revenues grew 11% YoY to Rs3.5bn helped by key API
(tacrolimus) supplies. Domestic branded formulations (c. 12% of
Biopharmaceutical revenues) continue to grow strongly (36% YoY through FY11).
􀁸 Traction in Insulin glargine in domestic market and API supplies on Mycophenolate
mofetil should help maintain growth rate in coming quarters.
􀁸 Axicorp revenues declined due to deterioration in pricing in German market over
recent quarters. However, the positive news is that the management intends to
divest it at a valuation slightly higher than that it was acquired for.
􀁸 Contract research picked up in 4QFY11 after muted growth over last five quarters.
Most CRAMs companies have been facing difficulties obtaining in new orders.
Ex-Axicorp operating margins continue to weaken
􀁸 Ebitda margins including licensing income were flattish at 20.5%. However,
excluding licensing income (flexibility of booking varying amounts from Pfizer
kitty) were down 125 bps at 16.7% for 4QFY11.
􀁸 4QFY11 ebitda at Rs1.44bn was substantially lower than our expectations of
Rs1.65bn, however due to higher other income this quarter and a substantially
lower tax rate (10%), profit growth was higher at 25% YoY.
􀁸 Margins in Syngene have been coming down over the last 4-5 years. Syngene
used to enjoy operating margins of 50%+ that are now down to c. 25%.
Underperformance to pharma pack; reasonable valuations
􀁸 We believe that the stock is likely to underperform the pharma pack considering
lack of near term triggers and largely commodity nature of business.
􀁸 We prefer generic companies like Cadila and Lupin because of strong pipeline
unfolding over the coming years and Torrent because of valuations.
􀁸 We have revised our target price to Rs398/share based on 16x FY13 earnings.