Investor's Eye: Viewpoint - Biocon

 

Investor's Eye [June 16, 2014]  Sharekhan www.sharekhan.com

Summary of Contents VIEWPOINT     Biocon Current market price: Rs490 View: Positive   A booster dose   Biocon is a key bio-pharmaceutical player in the mid-cap space, engaged in the businesses of insulin, contract research and branded formulations. The company is in the process of expanding its contract research business. It is also making value additions to the business, which could have the potential to grow exponentially over the next three to four years.   Key points   Strong traction in insulin business: Bicon is expected to see a strong traction in its insulin business on the back of an increasing demand in the emerging markets (a ramp-up in product filings in the key emerging markets and prospects of entering into the European markets through partners) and a new facility in Malaysia (which is expected to go commercial in FY2016) being set up to cater to the growing demand for insulin.  Value additions in contract research to yield better growth: The company has resorted to value additions and capability enhancement in its contract research offerings (to achieve $250 million of revenues by FY2018) and the business is set to see better growth and profitability in the subsequent years. Besides, Biocon has also planned the listing of its subsidiary, Syngene (which handles the contract research business), which will act as a trigger on the day of the announcement of the listing. Domestic business to flourish on introduction of novel molecules: We expect a better traction in the newly launched molecules like CAN MAB (a biosimilar of blockbuster drug, Herceptin) and Alzumab (a novel molecule developed in-house) in the Indian market. Alzumab also provides a significant out-licencing opportunity for the company. This is set to see a gradual improvement in the domestic branded business, which was adversely affected by the implementation of a new pricing policy in India. Near-term concerns: In the near term concerns mainly emanate from the margin pressure due to higher overhead expenses at the start-up Malaysian facility and higher research and development (R&D) spending that got deferred during H2FY2014.  Valuation--potential to give handsome returns on sustained basis: We mainly bet on Biocon's approach of achieving a balanced growth with equal focus on innovations, biologicals and contract research offerings, which are the key drivers of growth on a sustainable basis in the pharmaceutical business. The company is in the dawn phase of major expansions and ready to capitalise the opportunities emerging in the biological space in the next three to four years. We expect its revenues and profit to grow at a compounded annual growth rate of 24% and 45% respectively over FY2014-17. The stock is currently trading at 18x and 13x earnings per share estimates for FY2016 and FY2017 respectively as compared with a three-year average of 22x. We expect the valuation gap to narrow once the contribution from the Malaysian facility and traction in the contract research business start reflecting in the performance. We have a positive stance on the company; we believe that the stock can generate sustained returns for patient investors and also potentially provide a sudden fillip in terms of monetisation of its R&D pipeline (through tie-ups and alliances with global majors).     Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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