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Biocon (BION.BO)
2Q Inline
2Q Inline — There were no major surprises in 2Q, with growth rates improving after a
relatively weak 1QFY12. We expect base biz growth momentum to remain steady and
profitability to improve going forward, on receipt of higher licensing income. We remain
positive on BION, given that it is one of the better positioned Indian companies vis-à-vis
the biosimilars opportunity in developed markets.
Branded Formulations, Research Services Remain Strong — Topline (+21%YoY,
+15%QoQ) recovered after a weak 1QFY12, as Biopharma sales saw a pickup in
growth (+18% YoY vs. +10% in 1QFY12) & research services continued to do well.
Biopharma was led by growth in branded formulations (+35%YoY) & recovery in base
API biz (+10% YoY). Higher licensing income (Rs365m vs. Rs206m) helped topline –
w/o licensing income, topline grew 18% YoY.
Recurring PAT Inline — EBITDA margin (ex-licensing) improved 48bps QoQ.
Reported EBITDA margin declined (-130bps QoQ) on higher R&D costs (tracks
licensing income) & other expenditure despite improvement in gross margin. EBITDA
margin decline YoY (-462 bps, -115 bps ex-licensing) was led by higher R&D cost, staff
costs (work force expansion) & lower gross margins. Lower interest & higher other
income (including one-time component) led to a recurring PAT (ex-licensing) growth of
30%YoY (+23% QoQ) – higher tax rate subdued growth.
Key Earnings Call Takeaways — a) Fidaxomicin API supplies to Optimer commenced
in 1QFY12 – ramp-up better than expected; b) On the lookout for partners for Oral
Insulin & Itolizumab molecules; c) Pfizer launched Insulin & Glargine in India during
2QFY12; d) Atorva API: Expects to be a key player in Europe with an early entry
strategy, also tied up with 2 players for the US.
Potential Catalysts — 1) Progress on biosimilars legislation in developed markets; 2)
New launches by its partners in Europe & US, triggering off API supplies from BION; 3)
Launch of products in emerging markets by Pfizer; 4) Monetization of oral insulin or
other novel R&D programs through out-licensing.
Biocon
Company description
Biocon is an integrated biotechnology company in India that encompasses all
critical stages of drug development - drug discovery, development, and
manufacturing and commercialization of biopharmaceuticals and enzymes. With
more than 25 years of expertise in fermentation technology, the company has built
strong capabilities in high-growth segments like statins, immunosuppressants and
anti-diabetes. While statins form the major part of its current business, Biocon is
aggressively pursuing the biosimilars opportunity in regulated markets and is also
investing in drug discovery research to build a future pipeline.
Investment strategy
We rate Biocon a Buy (1) with a TP of Rs450. We believe that Biocon's partnerships
with Pfizer (insulins) & Mylan (mainly MABs) validate its capabilities & establish it as
a leading play on biosimilars in developed markets. While many are targeting this
space, Biocon has tied up funding and front end support for a large part of its
pipeline. We expect these factors to reflect favorably on valuations. Thus, while its
base business continues to face challenges in the form of limited new launches (in
APIs) & competition (in research services), it has ensured that it is in a position to
aggressively pursue its biosimilars plans without putting undue pressure on its
profitability or balance sheet. Valuations are now attractive as well, with the stock
trading at a discount to our fair value for its base business.
Valuation
We have a target price of Rs450 for Biocon, based on an SOTP valuation. We value
Biocon's base business at Rs360/share - based on 18x Sep‘12E EPS, at a 10%
discount to our target range for leading generic pharma companies in our coverage
universe, such as Dr.Reddy's and Lupin. We believe the discount is warranted given
Biocon's relatively narrow product basket in APIs & lower growth. Since pharma is a
growth sector, we prefer to use P/E v/s EPS CAGR as our primary valuation
methodology for the base business of pharma companies. We also ascribe a value
of Rs90/share to the insulins deal with Pfizer - based on an NPV of expected cash
flows (upfront & milestone payments, capex & development cost as well as
payments linked to Pfizer's sales). We build in explicit forecasts till FY20, following
which we use a terminal growth rate of -2%. We assume gradual increase in market
share for Pfizer and that Biocon makes c15% on Pfizer's sales. Given the backended
nature of cash inflows and uncertainty over timelines & assumptions, we use
a relatively higher discounting rate (18%) in our analysis.
Risks
The main downside risks to our target price include: 1) slower-than-expected rampup
in the insulins deal with Pfizer; 2) Setback on the oral insulin project could hurt
sentiment; 3) Sustained appreciation in the rupee could hurt revenues & profitability,
especially in the research services biz.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Biocon (BION.BO)
2Q Inline
2Q Inline — There were no major surprises in 2Q, with growth rates improving after a
relatively weak 1QFY12. We expect base biz growth momentum to remain steady and
profitability to improve going forward, on receipt of higher licensing income. We remain
positive on BION, given that it is one of the better positioned Indian companies vis-à-vis
the biosimilars opportunity in developed markets.
Branded Formulations, Research Services Remain Strong — Topline (+21%YoY,
+15%QoQ) recovered after a weak 1QFY12, as Biopharma sales saw a pickup in
growth (+18% YoY vs. +10% in 1QFY12) & research services continued to do well.
Biopharma was led by growth in branded formulations (+35%YoY) & recovery in base
API biz (+10% YoY). Higher licensing income (Rs365m vs. Rs206m) helped topline –
w/o licensing income, topline grew 18% YoY.
Recurring PAT Inline — EBITDA margin (ex-licensing) improved 48bps QoQ.
Reported EBITDA margin declined (-130bps QoQ) on higher R&D costs (tracks
licensing income) & other expenditure despite improvement in gross margin. EBITDA
margin decline YoY (-462 bps, -115 bps ex-licensing) was led by higher R&D cost, staff
costs (work force expansion) & lower gross margins. Lower interest & higher other
income (including one-time component) led to a recurring PAT (ex-licensing) growth of
30%YoY (+23% QoQ) – higher tax rate subdued growth.
Key Earnings Call Takeaways — a) Fidaxomicin API supplies to Optimer commenced
in 1QFY12 – ramp-up better than expected; b) On the lookout for partners for Oral
Insulin & Itolizumab molecules; c) Pfizer launched Insulin & Glargine in India during
2QFY12; d) Atorva API: Expects to be a key player in Europe with an early entry
strategy, also tied up with 2 players for the US.
Potential Catalysts — 1) Progress on biosimilars legislation in developed markets; 2)
New launches by its partners in Europe & US, triggering off API supplies from BION; 3)
Launch of products in emerging markets by Pfizer; 4) Monetization of oral insulin or
other novel R&D programs through out-licensing.
Biocon
Company description
Biocon is an integrated biotechnology company in India that encompasses all
critical stages of drug development - drug discovery, development, and
manufacturing and commercialization of biopharmaceuticals and enzymes. With
more than 25 years of expertise in fermentation technology, the company has built
strong capabilities in high-growth segments like statins, immunosuppressants and
anti-diabetes. While statins form the major part of its current business, Biocon is
aggressively pursuing the biosimilars opportunity in regulated markets and is also
investing in drug discovery research to build a future pipeline.
Investment strategy
We rate Biocon a Buy (1) with a TP of Rs450. We believe that Biocon's partnerships
with Pfizer (insulins) & Mylan (mainly MABs) validate its capabilities & establish it as
a leading play on biosimilars in developed markets. While many are targeting this
space, Biocon has tied up funding and front end support for a large part of its
pipeline. We expect these factors to reflect favorably on valuations. Thus, while its
base business continues to face challenges in the form of limited new launches (in
APIs) & competition (in research services), it has ensured that it is in a position to
aggressively pursue its biosimilars plans without putting undue pressure on its
profitability or balance sheet. Valuations are now attractive as well, with the stock
trading at a discount to our fair value for its base business.
Valuation
We have a target price of Rs450 for Biocon, based on an SOTP valuation. We value
Biocon's base business at Rs360/share - based on 18x Sep‘12E EPS, at a 10%
discount to our target range for leading generic pharma companies in our coverage
universe, such as Dr.Reddy's and Lupin. We believe the discount is warranted given
Biocon's relatively narrow product basket in APIs & lower growth. Since pharma is a
growth sector, we prefer to use P/E v/s EPS CAGR as our primary valuation
methodology for the base business of pharma companies. We also ascribe a value
of Rs90/share to the insulins deal with Pfizer - based on an NPV of expected cash
flows (upfront & milestone payments, capex & development cost as well as
payments linked to Pfizer's sales). We build in explicit forecasts till FY20, following
which we use a terminal growth rate of -2%. We assume gradual increase in market
share for Pfizer and that Biocon makes c15% on Pfizer's sales. Given the backended
nature of cash inflows and uncertainty over timelines & assumptions, we use
a relatively higher discounting rate (18%) in our analysis.
Risks
The main downside risks to our target price include: 1) slower-than-expected rampup
in the insulins deal with Pfizer; 2) Setback on the oral insulin project could hurt
sentiment; 3) Sustained appreciation in the rupee could hurt revenues & profitability,
especially in the research services biz.
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