Biocon: Up the value spiral

Rather than speculations, positive fundamental developments have spurred positive sentiment.

The Biocon stock has been buzzing over the past week, when it gained six per cent. While some of the steam was built up on the back of a possible stake sale to Pfizer, or even a marketing alliance, the biotechnology major has also been enjoying attention due to its evolving marketing mix. Ahead of analyst estimates, Biocon has launched its Comprehensive Care division and will also launch its immunotherapy division as well.

The branded formulations business has witnessed a 28 per cent growth in the June quarter over the same period of the previous year.  The market share in this segment is now at around 12 per cent. This move towards focused proprietary products is expected to see the company’s operating profit margins expand as it moves away from commodity products. The margins could expand by 60-100 basis points from around 22 per cent at present.

This net earnings growth, however, is expected to remain at 15-18 per cent levels as expenditure on R&D is expected to almost double from Rs 80 crore in FY10 to Rs 160 crore in the current financial year, according to analysts. Earnings, however, could get an upside boost in case its two launches are successful.

There's an oral insulin in Phase-III of the product pipeline and is ready for a launch by the third quarter of the current financial year. Similarly, Anti CD6 (oncology/inflammation) is at the end of Phase-II and will soon be ready for a launch date. Still, a possible failure in the oral insulin programme and a subsequent loss of out-licensing could dent estimates.

From an operational perspective, Axicorp – the German subsidiary which had sluggish sales – actually witnessed a 37 per cent revenue growth at Rs 260 crore and now contributes around 38 per cent to consolidated revenues. Biocon’s revenue growth will be driven by formulation sales in India and emerging markets as it has 25 new chemical entities (NCEs) in the pipeline along with 40 registered products in these markets.

Then again, any unfavourable development here would also be a risk. If not, then the management reckons this segment could clog a 28 per cent compounded growth over the next four years.