1QFY11 Results Update

SECTOR: PHARMACEUTICALS

Biocon
STOCK INFO. BLOOMBERG
23 July 2010
BSE Sensex: 18,131 BIOS IN Buy
REUTERS CODE
S&P CNX: 5,449 BION.BO Previous Recommendation: Buy Rs321
Equity Shares (m) 200.0
52-Week Range 335/203
1,6,12 Rel. Perf. (%) -3/6/27
M.Cap. (Rs b) 64.0
M.Cap. (US$ b) 1.4

Biocon’s 1QFY11 performance was above our estimates. Key highlights:

„ Net sales grew by 33.6% YoY to Rs6.6b (against our estimate of Rs5.9b) and PAT grew 34% YoY (on a low base) to
Rs767m (against our estimate of Rs698m).
„ Topline growth was led by 38% YoY growth in Biopharma revenue to Rs3.3b and 37% YoY growth in Axicorp to
Rs2.6b. Contract research revenues grew 8.6% to Rs720m.
„ EBITDA grew 30% YoY to Rs1.3b (against our estimate of Rs1.1b) mainly due to better-than-expected revenue and
a ramp-up in licensing income (contributes directly to EBITDA) and EBITDA margins declined by 60bp YoY to 19.8%
(in line with our estimate).
„ PAT grew by 34% YoY to Rs767m (on a low base of 1QFY10), and was higher than our estimate of Rs698m due to
higher-than-expected revenue and licensing income.

Key growth drivers for FY11 will be: 1) traction in the company’s insulin initiative, 2) ramp-up in contract research
business, and 3) incremental contribution from immuno-suppressants API supplies. However, higher R&D costs, increased
depreciation and higher expenses linked to the scale-up of the domestic formulations business will continue to temper
earnings growth. Option values for the future include the separate listing of Syngene and a potential out-licensing of the
oral insulin NCE. Despite the better than expected 1QFY11 performance, our EPS estimates are unchanged as the
increase in revenue forecast will be offset by higher R&D expenses and lower other income. We estimate EPS of Rs17
for FY11 (up 15.7%) and Rs20.3 for FY12 (up 19.5%) leading to 17% earnings CAGR over FY10-12. The stock is valued
at 18.9x FY11E and 15.8x FY12E earnings. Maintain Buy with a target price of Rs345 (17x FY12E EPS).

Nimish Desai (NimishDesai@MotilalOswal.com); Tel: +91 22 3982 5406

Amit Shah (Amit.Shah@MotilalOswal.com) + 91 22 3982 5423
 Biocon

Revenue growth led by Biopharma, Axicorp segments

Biocon’s 1QFY11 revenue grew 33.6% YoY to Rs6.6b (against our estimate of Rs5.9b)
and PAT grew 34% YoY (on a low base) to Rs767m (against our estimate of Rs698m).

Topline growth was led by 38% YoY growth in Biopharma revenue to Rs3.3b due to
strong growth in statins, insulin, immunosuppressants and licensing income. Licensing income
of Rs210m grew 10x YoY on a low base of 1QFY10 of Rs20m. AxiCorp posted 37% YoY
growth to Rs2.6b boosted by new launches and supplies to AOK. Contract research
revenue grew 8.6% to Rs720m and were lower than our estimates.

REVENUE BREAK-UP (RS M)

1QFY11 1QFY10 % YOY 4QFY10 % QOQ

Bio-Pharma 3,312 2,405 37.7 3,382 -2.1

% of Sales 50.0 48.5 51.5
Axicorp 2,591 1,891 37.0 2,467 5.0
% of Sales 39.1 38.1 37.6
Contract Research 720 663 8.6 719 0.1
% of Sales 10.9 13.4 10.9
Total 6,623 4,959 33.6 6,568 0.8
Source: Company/MOSL

EBITDA of Rs1.3b better than estimates

EBITDA grew 30% YoY to Rs1.3b (against our estimate of Rs1.1b) mainly due to better-
than-expected revenue and a ramp-up in licensing income (it contributes directly to EBITDA)
and EBITDA margins declined by 60bp YoY to 19.8% (in line with our estimate).

EBITDA MARGINS

EBITDA (Rs m) Margin (%) - RHS

20.4
19.9 19.8 19.8
19.5
1,267

1,303

1,313
1,013

1,132

1Q 2Q 3Q 4Q 1Q

FY10 FY11

Source: Company/MOSL

PAT grew 34%YoY led by higher revenues and licensing income

PAT grew by 34% YoY to Rs767m (on a low base of 1QFY10), and was higher than our
estimate of Rs698m due to higher-than-expected revenue and licensing income.

23 July 2010 2
 Biocon

Initiatives in insulin segment to remain key growth driver

„ Biocon expects insulin (13% of revenue) to be a key growth driver in the medium to
long term.
„ The short-to-medium term growth in this segment will be driven by formulation sales
in India and emerging markets. The company has registered products in 40 emerging
markets and 25 more are in the pipeline, where they are expected to be registered
over two years. The long-term growth for the insulin business will be driven by generic
launches in Europe (expected in FY13) and other regulated markets.

Insulin launch in regulated markets some time away

In Europe, Biocon expects to launch biogeneric, recombinant human insulin in FY13.
Biocon expects to commence Phase III clinical trials for this product in 2QFY11. This
product can potentially become a key growth driver for Biocon in the long term, given high
entry barriers in the business.

We believe that since the biogenerics in Europe will be more like branded generics in
nature, the ramp-up in revenue will be gradual unlike in pure generic markets. In Germany,
Biocon will launch it through its subsidiary, Axicorp, and in other countries it plans to have
a marketing partner.

Oral Insulin NCE an option value

„ Biocon is awaiting Phase-III data for its oral insulin NCE program, which will be
available by the end of FY11, after which it might evaluate an out-licensing opportunity.
„ In the past many attempts by innovator companies to launch oral insulin failed. So, we
believe the risk to this project is high.
„ However, a successful out-licensing of this NCE has the potential to generate significant
option value for Biocon as the oral delivery of insulin will bring in significant convenience
for diabetes patients over the current injection.

Contract Research: changing focus may hit profitability temporarily

„ Biocon’s CR business has stagnated over the past few quarters despite a ramp-up in
the BMS contract. While the reasons for this are unclear, it may imply increased
competitive pressure.
„ The Biocon management indicated it was attempting to change its CR focus to deliver
value-added Integrated Drug Development services compared with existing FTE-
based services.
„ While this is a long-term positive, we believe that in the short-term, this may lead to a
temporary decline in the profitability of the CR business as the company will have to
invest in resources/capabilities for the changed priorities of the business.
„ The BMS contract is also operating at ~80% of its potential and hence we do not
expect a major ramp-up in revenue from the contract.
„ We expect Biocon’s CR business to post 14% revenue CAGR over FY10-12.

23 July 2010 3
 Biocon

CONTRACT RESEARCH REVENUE (RS M)

3,638
3,032
2,807
2,253
1,760

FY08 FY09 FY10 FY11E FY12E

Source: Company/MOSL

Statins: short-term growth led by Atorvastatin launch in Spain; long-term

growth contingent on Lipitor genericization in the US
„ Statins contribute ~20% to Biocon’s overall revenue. It recently started supplies of
Atorvastatin to Spain. Atorvastatin is going off patent in Europe in 2010 (in some
countries) but the US market will witness generic entry in May 2012.
„ Biocon has tied up with a few generic companies for the supply of Atorvastatin API.
We believe that though Atorvastatin is the largest selling product globally (Lipitor has
annual revenue of ~US$11.5b), we expect intense competition among generic players
in this market as the product is not fermentation based and hence has low entry
barriers. About 17 companies have filed DMFs with the US FDA for this product
implying that generic competition will be intense.
„ Such intense competition for Atorvastatin may result in a significant price erosion and
can indirectly impact demand for generic Simvastatin (Biocon is a key API supplier
for this product). Hence, the long-term growth for the statins portfolio is contingent on
the extent of price erosion for Atorvastatin. We believe the full impact of Atorvastatin
going generic and its consequent impact on Biocon’s Simvastatin supplies will be
visible in FY13.
„ We expect Biocon’s statins sales to post 14% CAGR over FY10-12.

Axicorp: large size, low profitability; front-end for insulin launch in Germany
„ Axicorp accounts for 38% of Biocon’s revenues but only 7-8% of PAT. Axicorp’s
EBITDA margins improved to 6-7% from 3-4% in FY09 led by better sourcing of
products and cost cuts. We estimate this business to post 20% revenue CAGR over
FY10-12.
„ In the long-term, Axicorp’s front-end relationships in Germany are likely to be leveraged
for launch of biogeneric insulin (expected in FY13).

23 July 2010 4
 Biocon

Domestic formulations: continued high growth; profits under pressure

„ Biocon’s domestic formulations business (~6% of revenue) is likely to post double-
digit growth for the next few years led by a ramp-up in high-growth life-style segments
(like diabetology, oncology, nephrology and cardiology) and increasing field-force
strength (currently ~900 mkedical representatives).
„ The Biocon management has guided for revenue of ~Rs5b from this business over 4-
5 years implying CAGR of 28%. We forecast revenue CAGR of 27% over FY10-12.
While Biocon does not disclose the profitability of this business separately, we believe
it will continue to be under pressure (lower than average company profitability excluding
Axicorp) due to an increasing spend on branding and promotion, expansion of its field
force and other ramp-up initiatives.

Biogenerics development, oral insulin clinical trials to lift R&D spend,

depress profitability
„ The Biocon management indicated that R&D expenses for FY11 were likely to increase
significantly due to a ramp-up in biogenerics development and additional costs of
conducting clinical trials for oral insulin NCE.
„ FY10 R&D costs grew 31% to Rs784m and we expect them to increase by 60% to
Rs1.25b in FY11. We believe the increasing R&D cost is likely to suppress EBITDA
margins as the benefit of the R&D spend will accrue only from FY13 or FY14. An
early out-licensing of oral insulin can potentially reduce the pressure of higher R&D
costs significantly.

Valuation and view

Key growth drivers for FY11 will be: 1) traction in Biocon’s insulin initiative, (2) a ramp-
up in the contract research business, and (3) incremental contribution from immuno-
suppressants API supplies. However, higher R&D costs, increased depreciation and higher
expenses linked to the scale-up of the domestic formulations business will temper earnings
growth. Option values for future include a separate listing of Syngene and a potential out-
licensing of the oral insulin NCE. Despite the better-than-expected 1QFY11 performance,
our EPS estimates are unchanged as the increase in revenue forecast will be offset by
higher R&D expenses and lower other income. We estimate EPS of Rs17 for FY11 (up
15.7%) and Rs20.3 for FY12 (up 19.5%) leading to 17% earnings CAGR over FY10-12.
The stock is valued at 18.9x FY11E and 15.8x FY12E earnings. Maintain Buy with a
target price of Rs345 (17x FY12E EPS).

23 July 2010 5
 Biocon

Biocon: an investment profile

Company description
Biocon is an integrated biotechnology company,
encompassing the three critical stages of drug development
– drug discovery, development and manufacturing, and
commercialization of biopharmaceuticals and enzymes.
With over 25 years of expertise in fermentation technology,
the company has built a strong presence in lucrative high-
growth segments like statins, immuno-suppressants and anti-
diabetes remedies.
Key investment arguments
„ Biocon is well placed to take advantage of emerging
opportunities in the biopharmaceutical space backed by
established capabilities along the drug value chain.
„ Biogenerics in emerging markets followed by regulated
markets and contract research will be a key growth
driver for the company.
„ Biocon is developing an oral form of insulin as a part of
its NCE research, thus offering the potential for an
“option value” (if successful) over the core business.
Key investment risks
„ Significant capex and investment to fund future
initiatives may temper earnings growth in the short-term.
„ Higher R&D costs and higher expenses linked to the
scale-up of the domestic formulations business will
continue to temper earnings growth.
Recent developments
„ Biocon bought the 49% stake held by its Cuban partner
in Biocon Pharmaceuticals.
Valuation and view
„ Traction in Biocon’s insulin initiative and domestic
formulation business coupled with incremental
contribution from immuno-suppressants and ramp-up
in the contract research business would be key growth
drives in FY11.
„ Biocon is valued at 18.9x FY11E and 15.8x FY12E
earnings. Valuations do not fully factor in the potential
upsides from Biocon’s insulin and IPR initiatives and
the value unlocking from a potential listing of the
contract research business. Maintain Buy.
Sector view
„ The US and emerging markets will be key sales and
profit drivers in the medium term. Japan will emerge as
the next growth driver, particularly for companies with
a direct marketing presence.
„ We are Overweight on companies that are towards the
end of the investment phase, with benefits expected to
start coming in from the next fiscal.

COMPARATIVE VALUATIONS EPS: MOST FORECAST VS CONSENSUS (RS)

BIOCON CIPLA DRL MOST CONSENSUS VARIATION

P/E(x) FY11E 18.9 23.2 28.1 FORECAST FORECAST (%)

FY12E 15.8 19.4 23.0 FY11 16.96 17.01 -0.2

P/BV(x) FY11E 3.2 4.0 5.2 FY12 20.28 19.08 6.3
FY12E 2.7 3.5 4.5
EV/Sales(x) FY11E 2.2 4.3 3.3 TARGET PRICE AND RECOMMENDATION

FY12E 1.8 3.7 2.9 CURRENT TARGET UPSIDE RECO.

EV/EBITDA(x) FY11E 11.0 16.4 21.3 PRICE (RS) PRICE (RS) (%)

FY12E 9.5 14.4 18.0 321 345 7.7 Buy

STOCK PERFORMANCE (1 YEAR)

Biocon (Rs) - LHS Rel. to Sensex (%) - RHS

360 45

320 30
SHAREHOLDING PATTERN (%)

JUN-10 MAR-10 JUN-09 280 15

Promoter 60.9 60.9 60.9
240 0
Domestic Inst 13.3 13.2 12.0
200 -15
Foreign 4.7 4.8 5.7
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
Others 21.2 21.1 21.4

23 July 2010 6
 Biocon

Financials and Valuation

Note: Financial not updated for FY08 Annual report

23 July 2010 7
 Biocon

For more copies or other information, contact

Institutional: Navin Agarwal. Retail: Manish Shah
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Disclosure of Interest Statement Biocon

1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No

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23 July 2010 8