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Biocon Ltd.
Lack of near-term triggers;
lowering to Neutral
„Downgrade to Neutral with a lower PO of Rs395
We downgrade Biocon’s rating from Buy to Neutral and also cut our PO to Rs395
(from Rs435). This is due to (a) 1-6% cut in our earnings estimate over FY12-13E
and (b) lack of near-term catalysts. Our PO of Rs395 is based on lower 16x (vs
18x earlier) multiple to factor roll-forward to FY13E EPS (from Sep-12E earlier).
The target P/E multiple is in line with mid-cap peers as well as its historic average.
Valuations reasonable; lack of triggers limit upside
The stock trades at 16.8x FY12E and 14.8x FY13E EPS, which is at a ~10%
discount to mid-cap peers. With relatively slower earnings growth of 16% (vs 21%
for peers), we do not expect re-rating in near term. Further, we believe the upside
from Pfizer deal (biosimilar insulin) already been factored in the stock price and
lack of near-term triggers leave little room for upside.
Upside from Pfizer biosimilar deal still sometime away
We expect regulated market launch of biosimilar insulin only from 2014, subject to
R&D success. Moreover, emerging market supplies from 1QFY12 are unlikely to
yield material upside. We believe earnings boost over FY12E-13E from milestone
income (US$50-70mn pa) from Pfizer has already been factored in the stock price.
Cut earnings to factor in higher capex outlay
We lower our earnings forecasts by 1-6% over FY12-13, largely to factor in (a)
increased capex outlay for biosimilar capacity expansion in Malaysia (Rs2.5bn
annually) and (b) lower investment income on reduced cash surplus. We now
forecast 16% CAGR in EPS over FY11-13, aided by licensing income while
revenue growth (excluding Axicorp) remains unexciting at 15%.
Downgrade to Neutral; PO of Rs395
We downgrade Biocon to Neutral from Buy rating, as we believe that near term
upside catalysts are missing. We believe current valuations factor the positives
from Pfizer biosimilar deal fairly even as valuations provide downside support.
While the milestone income from Pfizer deal (US$50-70mn annually) are already
known and factored in the price, upside from product supplies is likely to accrue
from regulated market launches, expected only after 2014.
We also cut our earnings estimate over FY12-13 by 1-6% to factor increased
capex spend for biosimilar capacity (in Malaysia) and resultantly, lower
investment income estimates.
Our PO is lowered to Rs395/sh, compared to Rs435/sh earlier which accounts for
earnings cut as well as lower multiple of 16x (vs 18x earlier) as we roll forward to
FY13E EPS (from Sep-12E earlier).
What would turn us positive
„ Higher than expected upside in biopharma (statins) from upcoming
atorvastatin (Lipitor) patent expiry. We factor Biocon’s share to be less than
5% of overall API supplies post patent generic launches in Nov’10.
„ Any potential positive development from its NCE pipeline (T1h, anti-CD6
target). However, we do not expect any trial data to be released over next
12-18 months.
Risks on the downside are
„ Slower recovery in Custom research business (Syngene/Clinigene) post
recent restructuring. We have factored 20% growth in this segment
compared to 13% growth registered in FY11.
„ Any regulatory delay or unfavorable outcome on biosimilar development
could dampen expectations for Pfizer/Mylan deals
„ Biocon derives ~60% of its revenues from exports, largely denominated in
US dollars. Sharp rupee appreciation can thus adversely affect its operating
results.
Business split and growth outlook
Post divestment of Axicorp business in 4QFY11, we expect Biocon’s revenues to
grow at 15% CAGR over FY11-13E. This includes milestone receipts from Pfizer
deal which would be amortised based on achievement of regulatory progress,
partly funding increased R&D costs as well. Key drivers for revenues would be:
1. Custom Research (Syngene/Clinigene) business, where we expect a growth
of 18-20% over medium term driven by new order wins.
2. Biopharma (others) to register 17-18% growth on back of strength in
domestic formulation business (25%+ CAGR) as well as new product
launches thanks to upcoming patent expiries.
Valuations reasonable
Biocon’s stock price performance has historically been more dependant on
events and positive developments (like Mylan biosimilar deal, Pfizer insulin deal)
rather than earnings alone. We believe that lack of near term catalysts will limit
upside move on the stock and hence we would not recommend buying at current
levels.
Biocon currently trades at 16.7x FY12E and 14.8x FY13E EPS, which is largely in
line with mid-cap peers average (Table 3). However, on relative growth Biocon’s
outlook is weaker at 16% earnings CAGR vs 21% for the sector. Hence, we find
near term re-rating unlikely even as valuations appear reasonable. Our target
multiple is pegged at 16x FY13E, which is in line with mid-cap pharma stock
averages. Our target multiple is also in line with the stocks 2 year historic average
(Chart 2).
We recommend our preferred plays in the mid-cap space like Cadila and Divis
Labs which offer better upside from risk reward perspective, both from earnings
surprise (positive) and news flow perspective.
Amongst our large cap coverage, we remain bullish on prospects of Dr Reddys
and Lupin which we believe would benefit from rich product related news flow as
well as solid earnings growth of 24-28%
Price objective basis & risk
BIOCON LTD (BCLTF)
Given Biocon's modest growth prospects and limited potential catalysts, we
believe the stock should trade in line with mid-cap peers average multiples. Our
PO of Rs395 is based on 16x FY13E EPS, in line with the mid-cap peers
average. Our target multiple implies a PEG of 1x, at higher end of sector average.
We find our target multiple of 16x justified, noting limited triggers and modest
earnings growth outlook.
Downside risks: (1) Higher-than-expected pricing pressure in statins, (2) Lowerthan-expected pick-up in insulin and immunosuppressant sales to nonregulated/regulated markets, (3) Failure in research, (4) Severance of custom
manufacturing tie-ups, and (5) Regulatory delays.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Biocon Ltd.
Lack of near-term triggers;
lowering to Neutral
„Downgrade to Neutral with a lower PO of Rs395
We downgrade Biocon’s rating from Buy to Neutral and also cut our PO to Rs395
(from Rs435). This is due to (a) 1-6% cut in our earnings estimate over FY12-13E
and (b) lack of near-term catalysts. Our PO of Rs395 is based on lower 16x (vs
18x earlier) multiple to factor roll-forward to FY13E EPS (from Sep-12E earlier).
The target P/E multiple is in line with mid-cap peers as well as its historic average.
Valuations reasonable; lack of triggers limit upside
The stock trades at 16.8x FY12E and 14.8x FY13E EPS, which is at a ~10%
discount to mid-cap peers. With relatively slower earnings growth of 16% (vs 21%
for peers), we do not expect re-rating in near term. Further, we believe the upside
from Pfizer deal (biosimilar insulin) already been factored in the stock price and
lack of near-term triggers leave little room for upside.
Upside from Pfizer biosimilar deal still sometime away
We expect regulated market launch of biosimilar insulin only from 2014, subject to
R&D success. Moreover, emerging market supplies from 1QFY12 are unlikely to
yield material upside. We believe earnings boost over FY12E-13E from milestone
income (US$50-70mn pa) from Pfizer has already been factored in the stock price.
Cut earnings to factor in higher capex outlay
We lower our earnings forecasts by 1-6% over FY12-13, largely to factor in (a)
increased capex outlay for biosimilar capacity expansion in Malaysia (Rs2.5bn
annually) and (b) lower investment income on reduced cash surplus. We now
forecast 16% CAGR in EPS over FY11-13, aided by licensing income while
revenue growth (excluding Axicorp) remains unexciting at 15%.
Downgrade to Neutral; PO of Rs395
We downgrade Biocon to Neutral from Buy rating, as we believe that near term
upside catalysts are missing. We believe current valuations factor the positives
from Pfizer biosimilar deal fairly even as valuations provide downside support.
While the milestone income from Pfizer deal (US$50-70mn annually) are already
known and factored in the price, upside from product supplies is likely to accrue
from regulated market launches, expected only after 2014.
We also cut our earnings estimate over FY12-13 by 1-6% to factor increased
capex spend for biosimilar capacity (in Malaysia) and resultantly, lower
investment income estimates.
Our PO is lowered to Rs395/sh, compared to Rs435/sh earlier which accounts for
earnings cut as well as lower multiple of 16x (vs 18x earlier) as we roll forward to
FY13E EPS (from Sep-12E earlier).
What would turn us positive
„ Higher than expected upside in biopharma (statins) from upcoming
atorvastatin (Lipitor) patent expiry. We factor Biocon’s share to be less than
5% of overall API supplies post patent generic launches in Nov’10.
„ Any potential positive development from its NCE pipeline (T1h, anti-CD6
target). However, we do not expect any trial data to be released over next
12-18 months.
Risks on the downside are
„ Slower recovery in Custom research business (Syngene/Clinigene) post
recent restructuring. We have factored 20% growth in this segment
compared to 13% growth registered in FY11.
„ Any regulatory delay or unfavorable outcome on biosimilar development
could dampen expectations for Pfizer/Mylan deals
„ Biocon derives ~60% of its revenues from exports, largely denominated in
US dollars. Sharp rupee appreciation can thus adversely affect its operating
results.
Business split and growth outlook
Post divestment of Axicorp business in 4QFY11, we expect Biocon’s revenues to
grow at 15% CAGR over FY11-13E. This includes milestone receipts from Pfizer
deal which would be amortised based on achievement of regulatory progress,
partly funding increased R&D costs as well. Key drivers for revenues would be:
1. Custom Research (Syngene/Clinigene) business, where we expect a growth
of 18-20% over medium term driven by new order wins.
2. Biopharma (others) to register 17-18% growth on back of strength in
domestic formulation business (25%+ CAGR) as well as new product
launches thanks to upcoming patent expiries.
Valuations reasonable
Biocon’s stock price performance has historically been more dependant on
events and positive developments (like Mylan biosimilar deal, Pfizer insulin deal)
rather than earnings alone. We believe that lack of near term catalysts will limit
upside move on the stock and hence we would not recommend buying at current
levels.
Biocon currently trades at 16.7x FY12E and 14.8x FY13E EPS, which is largely in
line with mid-cap peers average (Table 3). However, on relative growth Biocon’s
outlook is weaker at 16% earnings CAGR vs 21% for the sector. Hence, we find
near term re-rating unlikely even as valuations appear reasonable. Our target
multiple is pegged at 16x FY13E, which is in line with mid-cap pharma stock
averages. Our target multiple is also in line with the stocks 2 year historic average
(Chart 2).
We recommend our preferred plays in the mid-cap space like Cadila and Divis
Labs which offer better upside from risk reward perspective, both from earnings
surprise (positive) and news flow perspective.
Amongst our large cap coverage, we remain bullish on prospects of Dr Reddys
and Lupin which we believe would benefit from rich product related news flow as
well as solid earnings growth of 24-28%
Price objective basis & risk
BIOCON LTD (BCLTF)
Given Biocon's modest growth prospects and limited potential catalysts, we
believe the stock should trade in line with mid-cap peers average multiples. Our
PO of Rs395 is based on 16x FY13E EPS, in line with the mid-cap peers
average. Our target multiple implies a PEG of 1x, at higher end of sector average.
We find our target multiple of 16x justified, noting limited triggers and modest
earnings growth outlook.
Downside risks: (1) Higher-than-expected pricing pressure in statins, (2) Lowerthan-expected pick-up in insulin and immunosuppressant sales to nonregulated/regulated markets, (3) Failure in research, (4) Severance of custom
manufacturing tie-ups, and (5) Regulatory delays.
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