Biocon -Subdued biopharma performance continues… :: ICICI Securities, report

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Subdued biopharma performance continues… • Revenues grew 8.8% YoY to | 769.2 crore, marginally above I-direct estimate of | 749.5 crore. Capacity constraint and slow growth in API continued to impact the bio-pharma business, which grew just 4% to | 436 crore • EBITDA margins contracted 406 bps YoY to 20.8%, lower than Idirect estimate of 23% due to higher-than-expected R&D expenses. The EBITDA declined 9% to | 160 crore, lower than I-direct expectation of | 172.3 crore • Net profit declined 13.5% to | 90.9 crore, lower than I-direct estimate of | 107.2 crore Well placed to exploit opportunities in biotech space Biotechnology remains the mainstay for Biocon. The space (biologics + biosimilars) is still evolving as many global regulators including the USFDA are yet to frame final guidelines for biosimilars. Globally, six out of the top 15 drug brands are biologics. Insulin, stains, immunosuppressants and oncology are some of the preferred spaces for the company. The journey, so far, has not been a smooth one though pricing pressure and regulatory hurdles have time and again affected the performance in the last few years. With a recalibrated approach, portfolio reshuffling and sustainable tie-ups with global innovators (BMS) as well as generic players (Mylan), the future augurs well for the company. Biopharmaceuticals segment facing structural issues The biopharma segment accounts for ~75% of the turnover and comprises diverse sub-segments such as small molecules (APIs), branded formulations, biosimilars, etc. Some of the components such as small molecules are facing pricing pressure as well as capacity constraints and, hence, bringing down growth of the entire segment. To address this issue, the company is reshuffling the biopharma portfolio by focusing more on biosimilars and branded formulations. We expect the biopharma segment to grow at a CAGR of 2.1% in FY14-17E. Research services to maintain growth momentum This segment, which comprises ~25% of the turnover, is riding on Biocon’s domain expertise in the biotech CRAMs segment and proven capabilities. The company caters to 16 out of global top 20 global players. This segment has consistently been growing at 20%+ rate and has recently been the major growth driver for the company when the biopharma segment was slowing down. Investments by GE Capital, Silver Leaf Oak have also paved way for a possible value unlocking in this segment. We expect sales to grow at 16.2% CAGR in FY14-17E. Valuing stock on SOTP basis; maintain HOLD While the biopharma segment continues to struggle for one reason or the other, the only thing that is saving the stock is contract research segment and possible listing of the same. Branded formulations are also going through portfolio restructuring to improve profitability. We do not see any major trigger in the biopharma space till FY17. Even the Malaysian facility, which will go on stream for a pilot run, is expected to see commercial launches at the end of FY17. Given the different fortunes for different segments, we have adopted the SOTP methodology. Accordingly, we have valued the three segments i.e. biopharma, branded formulations and research services separately. Our revised target price is | 410.

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  http://content.icicidirect.com/mailimages/IDirect_Biocon_Q3FY15.pdf