IndiaEquityResearch

Pharmaceuticals

June24,2011

ADD

Biocon

TargetPrice(INR)384

Growingemphasisondomesticformulations

BIOSFY11annualreportlaysemphasisonthecompanysambitionsin
the branded domestic formulations market. The current contribution
341.4
BIOSIN of under 15% to sales from the segment is targeted to grow to 25%.
BION.BO We continue to believe the core profitability for BIOS remains weak.
449,442 On the research services side, revenue scale up is not particularly
162
encouraging.WhileClinigeneslippedintoaloss,Syngenealsoreported
473/301
alowermarginduringtheyear.BIOScontinuestoinvestinbothfixed
17,727
68.27/1.52 assets and human resources; with the exception of fidaxomicin
supplies, revenue triggers are unclear. We lower our FY12f/FY13f
03/11 estimatesby5%/6%andintroduceFY14fwithtoplinegrowthof19%
60.9
and PAT of INR4.9bn, up 23% yoy. We roll over our target to Jun12
11.1
5.9 and maintain it at INR384. Launch of generic atorvastatin could
13.2 provideanupsidetoourestimates.Since14Jun11,BIOShaslostc10%
8.9 invalueonwhichweupgradeourratingonthestocktoAdd.

Rating
LastPrice(INR)
Bloombergcode
Reuterscode
Avg.Vol.(3m)
Avg.Val.(3m)(INRmn)
52wkH/L(INR)
Sensex
MCAP(INRbn/USDbn)

Shareholding(%)

12/10

Promoters

60.9

MFs,FIs,Banks

11.5

FIIs

7.1

Public
Others

12.9
7.6

StockChart(RelativetoSensex)

FY11annualreportfocusesonbrandeddomesticformulations

480

BIOS FY11 annual report lays emphasis on the companys ambitions in the
branded domestic formulations market. Driven by a field strength of c1,100
MRs, BIOS operates this business under six divisions: diabetology, oncology,
nephrology, cardiology and the two new divisions in 2010 comprehensive
care (antiinfectives) and immunotherapy. Domestic formulations recorded
c36%growthinFY11,accordingtothecompany,and,weestimate,contributed
under15%tosales(exAxicorp).BIOStargetsacontributionof25%torevenues
inthecomingyears,thoughtimelineshavenotbeenspeltout.

420

360

Coreprofitabilityremainsweak;researchservicesslipabit

300
Jun10

Oct10

Feb11

Biocon

Jun11

Sensex Re-based

StockPerfm.(%)

1m

6m

1yr

Absolute

5.5

15.3

6.1

Rel.toSensex

6.9

4.0

6.2

Financials(INRmn)

03/11

03/12f

03/13f

Sales

27,707

20,704

24,994

17

25

21

20.4

26.0

26.5

3,675

3,113

4,029

Sho/s(diluted)

200

200

200

A.EPS((INR)

18.4

15.6

20.1

yoy(%)
EBITDA(%)
A.PAT

25 (15) 29

yoy(%)
D/E(x)

0.2

0.1

0.1

P/E(x)

18.6

21.9

16.9

EV/E(x)

11.2

12.4

9.8

16
19

13
15

15
17

RoCE(%)
RoE(%)
QuarterlyTrends
Sales(INRmn)
PAT(INRmn)

03/10

06/10

12/10

03/11

6,622

6,787

7,281

7,016

768

892

1,007

1,008

Pleaserefertothedisclaimertowardstheendofthedocument.

Inresearchservices,therevenuescaleupisnotparticularlyencouraging.Sales
fromClinigeneslippedc28%inFY11,whilegrowthinSyngeneslowedtoc21%.
On a low revenue base, Clinigene reported a loss of INR37mn; Syngenes
earningsdippedfromINR308mntoINR283mninFY11.Inresearchservices,the
companyisshiftingfromafeebasedmodeltointegratedR&Dandpartnered
codevelopment on a risksharing platform. We continue to believe the core
profitability for BIOS remains weak. Adjusted for licensing income, core OPM
for the company, we believe, settled at 16.5% in FY11. With Axicorps exit,
marginswouldimprove,butthebasemargin,inourview,remainsshaky.

UpgradetoAddonpricecorrection
WelowerourFY12f/FY13festimatesby5%/6%andintroduceFY14fwithtop
linegrowthof19%andPATofINR4.9bn,up23%yoy.Webuildinfidaxomicin
supplies to Optimer Pharmaceuticals (OPTR US, NR) from FY12f. However,
otherthanfidaxomicinsupplies,revenuetriggersareunclear.Werolloverour
target price to Jun12 and maintain it at INR384, which includes an upside of
INR21/sharefromthePfizer(PFEUS,NR)deal.Launchofgenericatorvastatin
couldprovideanupsidetoourestimates.Since14Jun11,BIOShaslostc10%in
valueonwhichweupgradeourratingonthestocktoAdd.

MonicaJoshi,+9102266842852
monica.joshi@avendus.com

India Equity Research

Biocon

SomekeytakeawaysfromtheFY11annualreport
BIOScommandsc11%marketshareininsulinvialsand13%shareintheGlarginevialsegment,in
volumeterms.
Revenuesfromstatinsgrew13%yoy,despitepricingpressure.
RegisteredBasaloginRussia, NewZealandandMexico;InsugenwasregisteredinJapanandNew
ZealandduringFY11.
Till date, 2,500 patients treated with BIOMAb EGFR (monoclonal antibody for head and neck
cancer);BIOSbrandispriced40%lowerthancompetingproducts.
In nephrology, BIOS brands Erypro, Renodart and Tacrograf, rank No. 5, No.3 and No.2,
respectively,intheirrespectiveproductcategoriesinIndia.
Innovelresearch,oralinsulinIN105isundergoingPhaseIIIclinicaltrialsforTypeIIdiabetesandis
in PhaseI studies for TypeI diabetes. AntiCD6 molecule T1h is undergoing PhaseIII clinical trials
forpsoriasis.
Exhibit1: Changeinestimates(FY12f/FY13f)andintroducingFY14f
(INRmn)

FY12f

FY13f

FY14f

Old

New

Change(%)

Old

New

Change(%)

21,113

20,704

25,505

24,994

29,716

EBITDA

5,684

5,377

7,017

6,624

8,022

PAT

3,290

3,113

4,267

4029.2

4,949

Revenues

Source:AvendusResearch

Exhibit2: OneyearforwardrollingP/EchartandP/Eattargetprice
WevalueBIOSat17x
Jun13EPS.

60

40

20

Jun07

Jun08

Jun09

Jun10

Jun11

Jun12

Source:Bloomberg,AvendusResearch

WevalueBIOSat17xJun13EPSatc10%discounttoits2yearaverageforwardP/E.

Marginexpansionincorebusinessisakeyrisk
We factor in a 50bp improvement each year in EBITDA margin (excluding licensing income from
PFE)fromFY12f.Slippageonthisfrontprovidesakeyrisktoourearnings.
Gainsfromthelaunchofgenericatorvastatincouldprovideanupsidetoourestimates.

Pharmaceuticals

India Equity Research

Biocon

Financialsandvaluations
Incomestatement(INRmn)
Fiscalyearending
Totaloperatingincome
Totaloperatingexpenses
EBITDA
Otherincome
Depreciation
EBIT
Interest
RecurringPBT
Netextraordinaryitems
PBT(reported)
Totaltaxes
PAT(reported)
(+)Shareinassoc.earnings
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Avendusnetincome
Sharesoutstanding(mn)
Avendusdil.shares(mn)
AvendusEPS(INR)

Cashflowstatement(INRmn)

03/11
27,707
22,055
5,652
644
1,568
4,729
257
4,472
0
4,472
721
3,750
0
75
0
3,675
3,675
200
200
18.4

03/12f
20,704
15,327
5,377
475
1,705
4,147
196
3,950
0
3,950
850
3,100
0
13
0
3,113
3,113
200
200
15.6

03/13f
24,994
18,370
6,624
495
1,836
5,283
165
5,118
0
5,118
1,101
4,017
0
12
0
4,029
4,029
200
200
20.1

03/14f
29,716
21,694
8,022
475
2,035
6,461
171
6,290
0
6,290
1,353
4,937
0
12
0
4,949
4,949
200
200
24.7

17.0
18.4
28.4
27.2
25.3
25.3

25.3
4.9
12.3
11.7
15.3
15.3

20.7
23.2
27.4
29.6
29.4
29.4

18.9
21.1
22.3
22.9
22.8
22.8

20.4
17.1
13.0
14.4
16.1

26.0
20.0
14.7
12.0
21.5

26.5
21.1
15.8
9.7
21.5

27.0
21.7
16.4
7.5
21.5

Fiscalyearending
Netprofit
Depreciation
Deferredtax
Workingcapitalchanges
Less:Otherincome
Cashflowfromoperations
Capitalexpenditure
Strategicinvestments
Marketableinvestments
Changeinotherloans&adv.
Goodwillpaid
Otherincome
Cashflowfrominvesting
Equityraised
Changeinborrowings
Dividendspaid(incl.tax)
Others
Cashflowfromfinancing
Netchangeincash

03/11
3,675
1,568
0
4,102
644
8,701
3,299
0
299
0
0
644
2,953
0
1,794
1,053
114
2,733
3,015

03/12f
3,113
1,705
0
5,054
475
711
1,654
0
500
0
0
475
680
0
568
1,170
231
1,507
2,898

03/13f
4,029
1,836
0
1,133
495
4,237
1,700
0
500
0
0
495
705
0
398
1,170
246
1,322
2,210

03/14f
4,949
2,035
0
1,277
475
5,232
1,350
0
501
0
0
475
374
0
279
1,170
305
1,144
3,714

03/11

03/12f

03/13f

03/14f

KeyRatios

Growthratios(%)
Totaloperatingincome
EBITDA
EBIT
RecurringPBT
Avendusnetincome
AvendusEPS

Operatingratios(%)
EBITDAmargin
EBITmargin
Netprofitmargin
Otherincome/PBT
EffectiveTaxrate

Balancesheet(INRmn)
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Minorityinterest
Totaldebt
Deferredtaxliability
Totalliabilities
Grossblock
less:Acc.depreciation
Netblock
CWIP
Goodwill
Investments
Cash
Inventories
Debtors
Loansandadvances
less:Currentliabilities
less:Provisions
Networkingcapital
Totalassets

03/11
1,000
0
19,328
20,328
377
3,342
497
24,544
20,630
6,519
14,111
1,796
0
4,605
4,414
4,137
5,124
1,355
9,855
1,141
4,033
24,544

03/12f
1,000
0
21,315
22,315
364
2,774
697
26,150
22,380
8,224
14,156
1,700
0
4,105
1,516
3,391
5,105
1,702
3,504
2,020
6,190
26,150

03/13f
1,000
0
24,174
25,174
352
2,376
955
28,857
24,130
10,060
14,070
1,650
0
3,605
3,726
4,169
6,163
2,054
4,308
2,271
9,533
28,857

03/14f
1,000
0
27,953
28,953
339
2,098
1,272
32,663
26,780
12,095
14,685
350
0
3,104
7,440
4,859
7,327
2,442
5,021
2,523
14,524
32,663

Fiscalyearending
Valuationratios(x)
P/E(onAvendusEPS)
P/E(onbasic,reportedEPS)
P/CEPS
P/BV
Dividendyield(%)
Marketcap./Sales
EV/Sales
EV/EBITDA
NetCash/Marketcap.
Pershareratios(INR)
AvendusEPS
EPS(Basic,reported)
CashEPS
BookValue
Dividendpershare
Totalassets/equity(x)
Returnratios(%)
ROCE
ROIC
ROE
ROA
OCF/Sales
FCF/Sales
Turnoverratios(x)
Assetturnover(x)
Grossassetturnover
Inventory/Sales(days)
Receivables(days)
Payables(days)
Workingcapitalcycle(days)
Solvencyratios(x)
Grossdebttoequity
Netdebttoequity
NetdebttoEBITDA
InterestCoverage(onEBIT)

18.6
18.6
13.0
3.4

21.9
21.9
14.2
3.1

16.9
16.9
11.6
2.7

13.8
13.8
9.8
2.4

1.3
2.5
2.3
11.2
13.2

1.5
3.3
3.2
12.4
8.2

1.5
2.7
2.6
9.8
10.7

1.5
2.3
2.1
7.7
15.4

18.4
18.4
26.2
101.6
4.5
1.3

15.6
15.6
24.1
111.6
5.0
1.2

20.1
20.1
29.3
125.9
5.0
1.2

24.7
24.7
34.9
144.8
5.0
1.1

16.2
25.2
19.4
15.3
31.4
19.5

12.9
20.1
14.6
12.3
3.4
11.4

15.1
21.5
17.0
14.6
17.0
10.2

16.5
24.4
18.3
16.1
17.6
13.1

1.2
1.3
51.7
63.1
151.2
22.0

0.8
0.9
66.4
90.2
221.1
37.8

0.9
1.0
55.2
82.3
105.7
76.5

1.0
1.1
55.4
82.8
106.4
79.2

0.2
0.2
0.6
18.4

0.2
0.1
0.5
21.1

0.1
0.1
0.4
32.1

0.1
0.2
0.3
37.7

Pharmaceuticals

India Equity Research

Biocon

AnalystCertification
I,MonicaJoshi,PGDBM,researchanalystandauthorofthisreport,herebycertifythatalloftheviewsexpressedinthisdocumentaccuratelyreflectourpersonalviewsaboutthe
subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific
recommendationsorviewsexpressedinthisdocument.

Disclaimer
ThisdocumenthasbeenpreparedbyAvendusSecuritiesPrivateLimited(Avendus).Thisdocumentismeantfortheuseoftheintendedrecipientonly.Thoughdisseminationtoall
intendedrecipientsissimultaneous,notallintendedrecipientsmayreceivethisdocumentatthesametime.Thisdocumentisneitheranoffernorsolicitationforanoffertobuy
and/orsellanysecuritiesmentionedhereinand/orofficialconfirmationofanytransaction.Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe,andmustnot
betakenas,thesolebasisforaninvestmentdecision.Theuserassumestheentireriskofanyusemadeofthisinformation.Eachrecipientofthisdocumentshouldmakesuch
investigationashedeemsnecessarytoarriveatanindependentevaluation,includingthemeritsandrisksinvolved,forinvestmentinthesecuritiesreferredtointhisdocument
andshouldconsulthisownadvisorstodeterminethemeritsandrisksofsuchinvestment.Theinvestmentdiscussedorviewsexpressedmaynotbesuitableforallinvestors.This
documenthasbeenpreparedonthebasisofinformationobtainedfrompubliclyavailable,accessibleresources.Avendushasnotindependentlyverifiedalltheinformationgiven
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DisclosureofInterestStatement(asofJune24,2011)

Analystownership
ofthestock

Biocon

Avendusoritsassociatecompanys
ownershipofthestock
No

InvestmentBankingmandatewith
associatecompaniesofAvendus
No

Axicorp

No
No

No

No

Clinigene

No

No

No

Syngene

No

No

No

OptimerPharmaceuticals

No

No

No

PfizerInc

No

No

No

Pharmaceuticals

India Equity Research

Biocon

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Pharmaceuticals