Biocon: Negative news flow may wane; maintain Add - Avendus

Negative news flow may wane; maintain Add

BIOS' above-estimated revenue and PAT growth during the Mar12 quarter was led by a pleasant growth in core biopharma - aided by a combination of a favourable currency and a strong performance in domestic formulations, on a low base. This segment, however, has been rather volatile, and bunching up of sales, if at all, could normalize in the coming quarters. Over the medium term, the costs to progress in the biosimilar insulin space are protected, despite the calling off of the PFE deal. BIOS has underperformed the Sensex/BSETHC by 9%/18% over the past three months, with an absolute fall of c10% over the period. We marginally lower our Mar13 TP to INR285; maintain Add. In the immediate term, the risk of losing ground in the statin space stays; the first half of FY13f, would thus likely witness pronounced challenges, restricting near term gains in the stock.

Favorable currency, and a modest push in core biopharma, research

After a lull in the Dec11 quarter in the core biopharma portfolio, the segment reported a strong 28% growth in the Mar12 quarter. Adjusted for the domestic business, which on a low base continues to spring ahead, the constant currency growth, however, settles lower, though still recovering sequentially, at 14% y-o-y. This segment has been rather volatile, and bunching up of sales, if at all, could normalize in the coming quarters. Licensing income at INR463 further accelerated the segmental revenues. The research services segment continued to clock in growth, up 33% y-o-y, aided partly by a weak INR. On constant currency, growth settled at 20% y-o-y; 7% up q-o-q.

With PFE off, cash could drain over the longer term, without a partner

With BIOS and Pfizer Inc (PFE US, NR) calling off their agreement for recombinant human insulin/insulin analogue biosimilars in Mar12, the licensing balance (cUSD175mn pre-tax) would likely cover near-term investment requirements for BIOS, including early investments in trials/registration and the USD161mn Malaysian unit. However, without a new partner on board, there could be a likely drain on the cash flow over the longer run.

Strong underperformance presents an opportunity to Add..

With an absolute fall of c10% over the past three months, BIOS stock has underperformed the Sensex and the BSETHC by 9%/18%. The threat of cannibalization in the key revenue stream of statins, coupled with the disappointing and abrupt end to the collaboration with PFE, has likely hurt sentiments, besides stroking fears of a cash drain. However, incrementally, incidences of negative news flow are likely to be limited. We marginally lower our Mar12 TP of INR285; maintain Add. A successful licensing deal from the novel R&D pipeline could be a catalyst for value unlocking.

... but near term upside limited on pronounced business challenges

In the immediate term, the risk of losing ground in the statin space stays, as generecization in atorvastatin will accelerate in the latter part of 2QFY13f; the first half of FY13f, would thus likely witness pronounced challenges, restricting near term gains in the stock.

Risk factors

- Lower-than-estimated growth in the biopharma business is the biggest risk to our earnings call.

- Launch of generic atorvastatin could provide an upside to our estimates. However, the market is likely to be highly competitive.

- Higher-than-estimated sales from fidaxomicin could provide an upside to our estimates.

Source : Equity Bulls

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