Biocon Ltd : BUY

Q4 In-Line; Margins to Improve Post AXICORP

Biocon’s Q4FY11 result was largely in-line with expectations. Sales grew 7% YoY to Rs 7.0 bn and net profit was up 25% YoY to Rs 1.0 bn. Biocon has announced that it would be divesting its 78% stake in its German subsidiary, AxiCorp for ~EUR 40 mn. 

The company had acquired AxiCorp stake in 2008 with a view to monetize its insulin portfolio in Germany/ Europe. Post the deal with Pfizer in Oct’10, it plans to use Pfizer’s platform and is hence exiting the low-margin AxiCorp business. We believe this will lead to margin expansion.  

Key Highlights

• Sales – Up 7% YoY to Rs 7.0 bn. Biopharma grew 14% to Rs 3.8 bn led by robust growth in domestic branded formulations, immunosuppressants, insulin (steady growth in ROW) and statins (Atorvastatin and Rosuvastatin). Licensing income at Rs 320 mn was up 56% YoY from Rs 205 mn in Q4FY10, largely driven by income under Pfizer deal. Ex-licensing income, Biopharma sales rose 11% to Rs 3.5 bn during the qtr. CRAMS grew 20% to Rs 887 mn. However, AxiCorp continued to decline– fell 6% to Rs 2.3 bn.   
• EBITDA  – Margin rose slightly by 61 bps YoY to 20.5% led by: (a) higher licensing income; (b) drop in other expenses (as some expenses are reimbursed by co-developers); and (c) lower contribution from low-margin AxiCorp, despite 27% rise in staff cost.
• PAT – Up 25% YoY to Rs 1.0 bn owing to higher EBITDA and other income and lower tax (9.8% vs. 14.5% in Q4FY10).
• Margins to improve post Axicorp divestiture – Axicorp reported 6% YoY decline in revenues to Rs 2.3 bn led by 16% rebate imposed by German Government. Margins continued to be under pressure with EBITDA margin of 6% and net margin of 3%. We thus believe that divestment of AxiCorp would significantly improve Biocon’s margins going ahead. However, field force expansion in domestic market (to hire 1,000 MRs over FY12) and higher R&D cost (to go up by 20-25% in FY12E) will continue to put pressure on EBITDA margin.
• Expects Pfizer sales to begin in Q2FY12 – Biocon expects that Pfizer would begin comarketing insulin in India from Q2FY12. Further, it expects to complete the clinical trials of Recombinant Human Insulin (RHI) in Europe by 2011 and file by mid-2012. 
• Tax rate – The Company has guided for +20% tax rate for FY12E (vs. 16.1% in FY11).

Lower EPS estimates; Maintain BUY

We reduce our FY12E EPS by 21% to Rs 16.0 to factor in divestment of AxiCorp and higher staff and R&D costs. Further, we introduce FY13E EPS at Rs 21.0. We maintain BUY rating on the stock with a lower TP of Rs 413, valuing the base biz at Rs 378/share (18xFY13E EPS, to capture the upside potential from the Pfizer deal), and ~Rs 35/share for the USD 200 mn payment received from Pfizer.