Biocon: Lower sales growth leads to PAT miss:: Kotak Securities

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Biocon (BIOS)
Pharmaceuticals
Lower sales growth leads to PAT miss. Sales excluding licensing grew 13% yoy, flat
qoq and was the main reason for disappointment. PAT adjusted for licensing/R&D at
Rs750 mn was 14% below our estimate due to lower sales and higher interest with
adjusted margin at 30% in line with our estimate. We reduce our FY2012-13E core EPS
by 6% due to lower sales growth assumptions. We expect (1) sales excluding licensing
to grow at 13% in FY2012-13E and (2) margin improvement by 100 bps in FY2013E
due to increasing share of high-margin (1) Fidaxomicin supplies and (2) contract
research services. At current levels (adjusted for NPV value), Biocon trades at 16X core
EPS of Rs20. Retain BUY; PT at Rs445 ( from Rs480).


Sales excluding licensing income was at Rs4.2 bn, up 13% yoy, 10% below our estimate
Sales excluding licensing income was up 13% yoy; however, flat qoq and therefore 10% below
our estimate. Contract research grew 21% yoy for second quarter in a row, although 6% below
our estimate. Biopharma grew 11% yoy; however, flat qoq, hence 11% below our estimate due
to lower sales from emerging markets, particularly Middle East. However, branded finished dosage
and immunosuppresants reported strong growth at 28% and 40%, respectively in 1QFY12.
PAT excluding licensing/R&D at Rs750 mn, was 14% below our estimate
With (1) lower-than-expected licensing income of Rs144 mn and (2) lower R&D expense versus our
estimate, we look at EBITDA excluding these two items which at 29.6% was largely in line with
our estimate of 29.8%. Adjusted PAT was Rs750 mn, 14% below our estimate due to (1) lower
adjusted EBITDA by 11% due to lower sales and (2) higher interest cost which is expected to come
down qoq due to debt repayment as of June 2011.
We reduce FY2012-13E core EPS by 6% and reported EPS down by 10% due to lower licensing
We reduce our FY2012-13E core estimate by 6% due to lower sales growth assumptions. We
estimate sales ex licensing income to grow at 13% in FY2012-13E (see Exhibits 3, 4), in line with
1QFY12 growth. We expect adjusted EBITDA margin (adding back R&D/licensing) at 30.5% in
FY2012E versus 1QFY12 margin of 29.6% due to (1) higher share of services business which
reported margin of 32% in 1QFY12 versus 31% margin in FY2011 and (2) pick-up in high-margin
Fidoximicin supplies in 9MFY12E. We estimate core EPS (see Exhibit 2) of Rs17.3 in FY2012E (Rs4
in 1QFY12) to increase by 18% to Rs20.4 in FY2013E. We reduce licensing income by US$10 mn
to US$45 mn in FY2012-13E which leads to reported EPS of Rs 19.4 (vs 21.6) and Rs21.4 (vs 24.2).
We maintain BUY with PT at Rs445 (18X core FY2013E EPS)
We expect sales momentum to pick up in 9MFY12E on account of higher Fidoximicin supplies and
supplies to Pfizer. We value stock at Rs445 at (1) 18X FY2013E core EPS and (2) cash/share of Rs21
and (3) Pfizer deal NPV/value of Rs57