Booster dose

The recent move of the National Pharmaceutical Pricing Authority’s (NPPA), of increasing prices of 62 drugs that are mainly based on indigenously-manufactured insulin, will benefit Biocon. Insulin is used in the treatment of diabetes and a few drugs for tuberculosis too.

The price increase that will be in the range of 5-18 per cent should benefit Biocon, which manufactures bulk drugs from indigenously-produced insulin. Justifying the increase, NPPA said that the rising input costs necessitated the move. Analysts suggest that after the rise, these drugs will still remain competitively priced, as their prices would still be nearly 15 per cent lower than the formulations based on imported insulin.

Biocon bets big on research and manufacture of insulin-based products. Its efforts on oral insulin NCE (new chemical entity) continues, though Phase-III trials are yet to succeed. A report by analysts at Motilal Oswal Securities suggests that Biocon is confident of developing the NCE and plans out-licensing it to its partner in a few months.
 

IMPROVING PROFITABILITY
In Rs crore	Q3	% chg	FY11E	FY12E
Net Sales	728	15	2,750	3,093
Ebitda	168	23	578	675
Net Profit	101	25	354	425
EPS (Rs)	5.20	23.50	18.50	21.60
E: Estimated                                             Source:  Bloomberg, Company

According to its October 2010 deal with Pfizer, Biocon’s bio-similar versions of insulin and insulin analog products are to be globally commercialised by the MNC pharma company. Biocon would receive upfront payment of $100 million from Pfizer, while another $150 million is to be received over the next few years. Biocon will also get income related to Pfizer’s sales of these products.

However, in the contract research (CR) segment, analysts anticipate a temporary decline in Biocon’s profitability, as it now plans to focus on delivering value-added integrated drug development services from the earlier full-time equivalent-based (FTE) services. In the long run, however, they see gains from this shift in focus.

Taking into account the price decline for its German partner Axicorp’s products, and expectations of a higher tax outgo in 2011-12, analysts had cut their EPS estimates 5 per cent earlier. The price increases now will add to the company’s profits and earnings. The stock, at Rs 342.05, trades at 15.8 times 2011-12 consensus earnings estimates. While most analysts have a buy rating on the stock, they are advising to buy only on dips, as it has risen almost 10 per cent since mid-March 2011 (outperforming the Sensex).