The Biocon stock, after touching a high of Rs 464.60 in October 2010, post its deal with Pfizer for bio-similars, has been an underperformer. Since then, it has corrected around 27 per cent, compared to the 14.5 and 5.4 per cent decline in the Sensex and the BSE Healthcare index, respectively. Though the Pfizer deal has been a positive development, the surrounding hype fizzled out as the value unlocking from it will be over a period of time.
Further, the market had great expectations from the oral insulin product being developed by Biocon. Though the product is under development, a Espirito Santo Securities report says the phase III data has been poor. The base business performance, on the other hand, has remained modest.
Biocon announced the commencement of a new project in Malaysia, which will be crucial for increasing supplies to Pfizer and will help Biocon realise more milestone payments that are subject to progress in the deal. The active pharma ingredients' revenues are to get a boost with the launch of the anti-biotic fidaxomicin by Optimer in the US. Biocon is the sole global supplier of the drug ingredient to Optimer.
| MARGINS BOOST | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Revenues | 2,771 | 2,171 | 2,547 |
| Y-o-Y chg (%) | 17.0 | -21.6 | 17.3 |
| Ebitda | 587 | 614 | 737 |
| Ebitda (%) | 21.2 | 28.3 | 28.9 |
| Net profit | 375 | 378 | 461 |
| Y-o-Y chg (%) | 25.4 | 0.1 | 21.9 |
| EPS (Rs ) | 18.8 | 18.8 | 23.2 |
| P/E (x) | 18.0 | 17.9 | 14.6 |
| E: Estimates Source: Analysts reports | |||
Further, insulin supplies to Pfizer for launch in India are to commence in the September quarter and Biocon will launch insulin pens soon. More, analysts see the clinical research business also growing steadily. With all these triggers, 67 per cent of the analysts, according to the Bloomberg data, have a buy rating on the stock.
MALAYSIAN EXPANSION
The Biocon project is to set up a bio-pharma manufacturing plant and an R&D centre in Bio-Xcell (biotech park) in Malaysia. According to the Biocon-Pfizer agreement, Pfizer gets exclusive rights to commercialise Biocon's four insulin and insulin-analogue products in both emerging as well as developed markets. With this, Biocon is due for milestone payments of $350 million. Though it received the first tranche of $100 million as upfront payment, it has been able to recognise just $15 million as income, says a Systematix research report.
The next tranche of $100 million has also been put into an escrow account and is linked to the capacity creation by Biocon. Hence, it has planned the capacities in Malaysia at an investment of $161 million (around Rs 760 crore) over FY12-14. The investments will get covered by the milestone payments. Post the utilisation of $200 million, the remaining $150 million will keep coming in parts, along with further development. MSFL reports observe, while revenues from the insulin sales will start coming from the September quarter, with Pfizer launching insulin in India followed by the other emerging markets, the majority revenues will start flowing 2015 onwards, when products such as Glargine, Apart and Lispro go off-patent in USA and Europe.
OUTLOOK
The first quarter revenues of Biocon saw a slower growth of just 10.1 per cent. This slightly muted growth was in the backdrop of Biocon divesting stake in the German subsidiary, Axicorp. The crisis in West Asia also affected the sales from the region. The divestment of AxiCorp (a low-margin subsidiary), however, is positive for Biocon. For marketing insulin products in Europe, it has a tie-up with Pfizer.
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Analysts feel with Optimer launching fidaxomicin in the US, benefits will accrue to Biocon, which will be supplying active pharma ingredients for the product. The peak sales for fidaxomicin are being estimated at $300-600 million. Besides, Biocon also plans the launch of insulin pens. Surya Narain Patra at Systematix institutional research adds that research services are likely to see a growth of more than 25 per cent, as compared to less than 20 percent growth earlier. Margins in the segment are to expand 30 per cent.
Overall, there are a number of positive triggers that can push up its revenues and earnings. Analysts at IIFL, in their reports, had observed that a steady improvement in its valuations will come about as its business mix improves. The stock, at current levels, trades 17.6 times FY12 earnings estimates.