Biocon Ltd - Subdued Performance; Result Update Q2FY15 :: Edelweiss report

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Biocon’s topline of INR 757.6 cr was 4.4% below estimate of INR 792.8 cr, as the company witnessed muted growth across segments majorly owing to external factors. Still, the company was able to maintain its margins at 23% (historical range 23-24%) on the back of lower other expenditures and reduced spending on Research & Development (R&D). A subdued top line growth resulted in a lower-than-expected PAT of INR 102.1 cr. The management re-iterated its guidance that the factors that led to modest growth this quarter are temporary in nature, and expects the same to subside over the next few quarters. Further, the company stated that it continues to file for ANDAs in the US market and also expects its Malaysian facility to be commissioned by the second half of FY15. But a subdued performance during the first half of FY15 has prompted us to scale down our earnings estimate for FY15E/16E by 5.9%/5.3%, respectively, to factor in lower sales from the Small Molecule business. We continue to believe that the impending opening up of the biosimilar market (especially in the US), approximately USD 71bn market of biologics going off-patent and high entry barriers for new players places Biocon at the forefront to monetize the lucrative opportunity and support growth over the long run.

Temporary overhangs impact revenue growth

Biocon’s revenue during the quarter grew by only 2.2% YoY, impacted by the political turmoil in the MENA region, absence of fidaxomycin and capacity constraints in the biosimilar business. The company though clarified that the issues in MENA region are self-imposed to protect itself from credit risk and not due to any demand slowdown for its products. Biocon was also impacted this quarter with the lower off-take of fidaxomicin supply, as Cubist Pharma re-positioned the portfolio of drugs it acquired from Optimer Pharma. Cubist Pharma has already re-launched the product and it is also expected to launch the same in some European countries. This might result in normalizing of revenues for Biocon, although the company expects the supply for fidaxomicin to remain muted for the rest of FY15. Further, the research services business, which has been a savior for the company over the last few quarters, has seen high single digit growth against a historical 25-30% growth on account of the cyclical nature of the business. The company expects this business to bounce back in the second half of FY15 and report a growth in high teens for the entire fiscal.

The domestic business recovered from the slow growth it witnessed over the last few quarters and the company expects that it would continue to grow ahead of the industry growth rate.

Work on long term value creation continues

The company indicated that it continues to file for ANDA’s in the US market, which is a key initiative to move up the value chain in its small molecule business. Further, the company remains confident of its biosimilar and novel product portfolio, and believes to be progressing well in the clinics. On the commissioning of its Malaysian facility, it continues to guide for the same in the second half of FY15. We believe that with much of the work on all its important long-term projects on track, there is enough visibility for the company to deliver sustainable, long-term growth.

LINK
https://www.edelweiss.in/research/Biocon-Ltd--Subdued-Performance;-Result-Update-Q2FY15/10005120.html