Biocon (Q2 FY11)

CMP Rs435, Target Rs460, Upside 5.7%

• Q2FY11 revenues were below our expectations.  17% yoy growth was witnessed in revenues, primarily driven by growth in all segments like Insulins, Immunosuppressants, Statins and Branded formulations (Diabetology, Oncotherapeutics, Nephrology and Cardiology). Biopharmaceuticals witnessed yoy growth of 8.5% whereas revenue growth from contract research services were not upto mark.
• Its german subsidiary ‘Axicorp’ witnessed yoy growth of 27% driven by products like Metformin, Simvastatin, Metoprolol, Amoxicillin and Fluconazol.
• OPMs witnessed an upside of 164 bps mainly on account of higher licensing income, yoy decline in other expenditure by 2.6%.
• Q2FY11 PAT witnessed a yoy growth of 23%. PAT margins saw a marginal improvement of 69 bps on yoy basis.

• We believe the Pfizer deal for Biocon’s bio-similar insulin and Insulin analog products as a key positive. This deal has enabled Biocon to benefit from Pfizer’s marketing network and capture value from upfront payments of US$350mn and milestone payments over next 4-5 years.
  

At CMP of 435, the stock currently trades at a PER of 16x at revised estimated FY12 EPS. Factors like a) Alliance with Pfizer for recombinant insulins and insulin analog products, b) its strong research pipeline like Biosimilar Insulin, Oral Insulin, and Monoclonal Antibody c) Expected out licensing of oral insulin globally, in H2FY11 augur well for its long term prospects. We believe that CMP has already factored in recent Pfizer deal and due consideration to stretched valuations, we assign a rating of Market Performer.