Stock Review: Biocon

 

BIOCON, the . 2,725-crore pharma company, reported modest performance during its third quarter. The average growth in its key business segments and the conservative treatment given for recognising the licensing income received from Pfizer resulted in disappointing numbers. The company's stock closed 2% lower for the day, despite the benchmark indices closing higher than Wednesday's close.

   Growth in sales of branded formulations was the high point of the quarter's performance. The pick-up in branded sales and new product launch in the US and Europe helped the company post good performance in its branded formulations. This enabled it to record a 300 bps jump in its operating profit margins to 23.3%.

   The company's revenue from its biopharma segment, however, increased only by a modest 15% over the last quarter. This segment had earlier grown by 37% during the first quarter and 18% during the second quarter. Its contract manufacturing business – constituting Syngene and Clinigene – posted 14% growth in revenues. Syngene's business has posted improvement, leading to 21% growth in revenues for the quarter. Increased traction in research services is likely to be its growth driver in future.

   Axicorp, the company's German subisidiary, suffered a setback in performance as the German government has mandated drug makers in the country to sell drugs at a rebate of 16%. While the company is revamping its product portfolio in view of the regulatory mandate, the immediate growth prospects for the subsidiary appear grim.

   In October 2010, Biocon received payment of $200 million (around . 900 crore) from Pfizer towards out-licensing the marketing rights of its biosimilar insulin products. For the quarter ended December, the company recognised only a part of this income. Though the company has not disclosed the licensing income recognised during the quarter, it has reported licensing income of . 112 crore for the nine months ended December. The company is likely to recognise the licensing income in a staggered manner as it proceeds with trials on the products covered under the agreement with Pfizer.

   Since the company has written back the R&D cost incurred on its licensed products during the earlier quarters of the fiscal year, the company's R&D expenditure jumped by 200% during the quarter. This is a one-time recharge of cost, and an increase of this magnitude may not be reported in the coming quarters.

   Assuming the company's branded formulations business continues its growth momentum, Biocon's performance in the coming quarters remain dependent on the amount of licensing income recognised by the company, the performance of its German subsidiary and its contract manufacturing business.