Biocon
In the pink of health
Having scaled up its infrastructure, the company is making a series of strategic moves to capitalise on the growing opportunities in biopharmaceuticals, custom research and clinical research
| Buy | Biocon |
| BSE Code | 532523 |
| NSE Code | BIOCON |
| Bloomberg | BIOS@IN |
| Reuter | BION.BO |
| 52-week High/Low | Rs 532 / Rs 324 |
| Current Price | Rs 474 (as on 20th July 2007) |
Biocon is one of India's premier biotechnology companies. Biocon and its two subsidiary companies, Syngene International Ltd and Clinigene International Ltd form a fully integrated biotechnology enterprise, specializing in biopharmaceuticals, custom research, clinical research and enzymes. With successful initiatives in clinical development, bio-processing and global marketing, Biocon delivers products and solutions to partners and customers across the globe.
Many of these products have USFDA and EMEA acceptance. Biocon launched the world's first recombinant human insulin, INSUGEN® in November 2004 using Pichia expression and India's first indigenously produced monoclonal antibody BIOMAb-EGFRTM.
June 2007 quarter results are very impressive-sales up 28% and PAT up 36%
Sales for the quarter ended June 07 grew by a solid 28% to Rs 271 crore. Biopharmaceuticals and contract research sales increased by 28% to Rs 206 crore and 52% to Rs 44 crore respectively. However, Enzymes sales declined by 5% to Rs 21 crore. Operating margin expanded by a healthy 250 bps to 28% catapulting operating profit to increase by 41% to Rs 76 crore.
Other income remains unchanged at Rs 1 crore. However, as interest cost and depreciation increased by 50% to Rs 3 crore and 91% to Rs 21 crore respectively, the growth in PBT got restricted to Rs 53 crore, an increase of 26% only. However, as tax fell by 75% to Rs 1 crore, PAT increased by 37% to Rs 52 crore. After accounting for minority interest of Rs 1 crore, net profit increased by 36% to Rs 53 crore.
The highlight of the quarter was the sharp improvement in gross margins driven by licensing income (USD 3.5 million), higher contribution from insulin and 52% growth in the high margin Syngene/Clinigene operations.
The enzyme business accounted for roughly 10% of the overall business. The contract research or the research services business accounted for approximately 20%, while the balance 80% came from the bio-pharmaceutical business.
Statins account for about a third of the business. The company has been reducing its dependency on statins on a q-o-q basis.
Management optimistic about future
Commenting on the results, Kiran Mazumdar-Shaw, Chairman & Managing Director, Biocon, said: "I am pleased that we have delivered robust and growing profits at a time when we are challenged with increased R&D investments, strengthening currency and rising operating costs. This has been possible due to expanded markets for our bio-therapeutics as well as significant licensing income from our R&D programs. We see licensing as a strong affirmation of our innovation led business strategy and expect to realize even greater licensing revenues in the future.
The year ahead will be exciting but demanding. Whilst we will address the challenges posed by a depreciating dollar as well as increased operating costs through a series of measures that improve operating efficiency, we remain optimistic about the future thanks to our business verticals that are balanced between products and services."
To focus on high-growth biopharmaceuticals, divesting enzymes for $ 115 million (Rs 460 crore)
Biocon is divesting its Enzymes business vertical to Novozymes A/S for USD 115 million (Rs 460 crore approx.), at 4.8x sales. This will enable Biocon to strategically focus on its core bio-pharmaceuticals business. The enzyme business includes a broad range of industrial enzymes, food additives and process aids. This transaction, subject to shareholder and regulatory approvals, is expected to be completed by the end of the 3rd quarter of CY 2007.
This divestment will enable the company to concentrate on bio-pharma business verticals that include APIs, biologicals and proprietary molecules both commercialized and under development.
Announcing the new development, Ms. Kiran Mazumdar-Shaw, CMD, Biocon Limited said: "Over the past decade we have clearly recognized the high growth trajectory of our bio-pharma business verticals and have progressively invested to build proprietary know-how and global scale. We believe that this is the right time to divest our enzymes business and focus on unleashing the full potential of our Bio-pharma businesses.
Novozymes as the recognized world leader in enzymes will be in a strong position to leverage our existing enzymes portfolio built over a span of nearly 3 decades. "
Production and formulation will continue at the Biocon site under lease and service agreements with Novozymes.
This deal is a very favourable for the company as it releases huge funds from a business which was not growing as expected and at the same time the facilities will continue to be utilised on behalf of the acquirer.
Cash flow will be used for acquiring innovation-led businesses
The company expects to use these proceeds for innovation-led businesses acquisitions in biopharma/custom research services and also products. However, till the time the company finalises its acquisitions, it will earn significant profits by way of interest income or will save interest on its debt.
Enters into an exclusive licensing agreement for G-CSF
Biocon entered into an exclusive licensing agreement with a global biopharmaceutical company to develop and market a bio-similar version of G-CSF (granulocyte-
Under the terms of the agreement, Biocon will receive an upfront licensing fee and following approval in the licensed territories, royalties from sales.
G-CSF is an haematopoietic growth factor that works by encouraging the bone marrow to produce more white blood cells. Therapeutic G-CSF is primarily used for the treatment of neutropenia, the lowering of the white blood cells that fight infections.Biocon has received regulatory approval from the Indian DCGI for the treatment of neutropenia in cancer patients and intends to launch the product in India through its Oncotherapeutics division.
The biological activity of Biocon's G-CSF used in clinical trials was evaluated by NIBSC (National Institute of Biological Standards and Control), UK, which provides independent testing of biological medicines. The NIBSC found that the potency of Biocon’s drug met the necessary requirements of a biosimilar G-CSF.
Signs exclusive agreement with Invitrogen Corporation to market Insulin for cell culture
The company has also signed an exclusive agreement with Invitrogen Corporation, a provider of essential life science technologies for disease research and drug discovery, to market pharmaceutical grade insulin to the global cell culture market. The cell culture market is a large opportunity for Biocon’s Insulin.
Files IMPD for IN 105 to conduct Phase I Clinical Trials in Europe
Biocon has filed an Investigational Medical Product Dossier (IMPD) for IN105 to conduct a Phase I Clinical Trial in Sweden. The trial will be conducted at Karolinska University Hospital., Stockholm. This marks the first step in the international development plan for IN105.
Future to reflect good strategic and financial progress
Over the past couple of years the company has invested over Rs 550 crore for expansion of its fermentation and chemical synthesis infrastructure, the full benefits of this expansion will continue to accrue in future
The company is also spending heavily on R&D. Biocon’s Oral Insulin program has successfully completed Phase I Human clinical trials and will soon enter the Phase II Human Clinical Trials. The company has been investing aggressively in R&D cost. With insulin entering the Phase 2 clinical trial production, R&D cost will rise further. This in turn will create new growth avenues for the long term.
Entering the neighbouring markets
Biocon has signed MOU to enter into JV with NMC group in Abu Dhabi for strategic marketing and manufacturing cooperation for the GCC region. The Biocon products will include the cardiovascular, diabetes and oncology segments. The products will be part of the fastest growing class of drugs in the $5 billion GCC pharmaceutical market. The JV could be a milestone for the company’s marketing foray in the GCC region.
Biocon has granted an exclusive license to Ferozsons Laboratories Limited for marketing BIOMAb EGFR in Pakistan. As per Globocon, more than 25000 new cases of Head and Neck cancer were reported per year in Pakistan. Monoclonal antibodies is the fastest growing category of therapeutics. The Pakistan oncology market is valued at approximately $70 Million. Monoclonal Antibodies represent the fastest growing category of therapeutics with a CAGR of 30%.
Also eyeing the North American and European markets
The US patent for Simvastatin and Pravastatin expired during fiscal 2007 and the company has commenced exports to USA in the second half of fiscal 2007. The company has also during the year received US FDA certification for its new facilities at Biocon Park thereby substantially increasing the production capacity to address the growing demand for statins globally.
The company is in the final stages of establishing a London office. The European Union has set framework for biosimilars. Thus London office will cater to the significant European emerging market in insulin and other biosimilars. Also it will serve as a center for research partnerships with companies and research institutions in the region.
Valuation
In FY 2008, we expect the company to register sales and net profit of Rs 1167.66 crore and Rs 245.06 crore respectively. On equity of Rs 50 crore and face value of Rs 10 per share, EPS works out to Rs 23.9. At current price of Rs 474, P/E works out to 19.8.
| | 0503(12) | 0603(12) | 0703 (12) | 0803 (12P) |
| Total Operating income | 713.00 | 788.00 | 986.00 | 1167.66 |
| OPM (%) | 31.4 | 29.1 | 28.7 | 29.2 |
| OP | 224.00 | 229.00 | 283.00 | 340.96 |
| Other income | 15.00 | 5.00 | 4.00 | 19.00 |
| PBIDT | 239.00 | 234.00 | 287.00 | 359.96 |
| Interest | 2.00 | 2.00 | 10.00 | 12.00 |
| PBDT | 237.00 | 232.00 | 277.00 | 347.96 |
| Depreciation | 22.00 | 29.00 | 67.00 | 90.00 |
| PBT | 215.00 | 203.00 | 210.00 | 257.96 |
| Tax | 18.00 | 31.00 | 17.00 | 12.90 |
| PAT | 197.00 | 172.00 | 193.00 | 245.06 |
| Minority interest | 1.00 | 2.00 | 6.00 | 6.0 |
| Net profit | 198.00 | 174.00 | 199.00 | 239.06 |
| EPS (Rs)* | 19.7 | 17.2 | 19.9 | 23.9 |
| * Annualised on current equity of Rs 50 crore. Face Value: Rs 5 each | ||||
| Biocon: Consolidated Results |
| | 0706 (03) | 0606 (03) | Var. (%) | 0703 (12) | 0603(12) | Var (%) |
| Sales | 271.00 | 212.00 | 28 | 986.00 | 788.00 | 25 |
| OPM (%) | 28 | 25.5 | | 28.7 | 29.1 | |
| OP | 76.00 | 54.00 | 41 | 283.00 | 229.00 | 24 |
| Other income | 1.00 | 1.00 | 0 | 4.00 | 5.00 | -20 |
| PBIDT | 77.00 | 55.00 | 40 | 287.00 | 234.00 | 23 |
| Interest | 3.00 | 2.00 | 50 | 10.00 | 2.00 | 400 |
| PBDT | 74.00 | 53.00 | 40 | 277.00 | 232.00 | 19 |
| Depreciation | 21.00 | 11.00 | 91 | 67.00 | 29.00 | 131 |
| PBT | 53.00 | 42.00 | 26 | 210.00 | 203.00 | 3 |
| Tax | 1.00 | 4.00 | -75 | 17.00 | 31.00 | -45 |
| PAT | 52.00 | 38.00 | 37 | 193.00 | 172.00 | 12 |
| Minority Interest | 1.00 | 1.00 | 0 | 6.00 | 2.00 | 200 |
| Net profit | 53.00 | 39.00 | 36 | 199.00 | 174.00 | 14 |
| EPS (Rs)* | 21.2 | 15.6 | | 19.9 | 17.4 | |
| * Annualised on current equity of Rs 50 crore. Face Value: Rs 5 each | ||||||
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Though all care is taken in arriving at recommendations, the equity shares may rise or fall in a manner not foreseen.
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