Biocon: EBITDA Decline A Major Concern

Helped by higher rupee depreciation, India’s leading biotech company, Biocon, has reported a 28 per cent jump in revenues to Rs 593 crore. The company, however, has posted only 13 per cent rise in its net profit. The EBITDA margins were also down by 586 basis points mainly because of the higher input costs and research & development expenditure. The company also suffered a forex loss of Rs 5 crore.

During the quarter its material and power expenses were higher than expected. As a percentage of sales, there was a jump of nearly 150 basis points. The R&D costs also jumped but the management has said that this should not be viewed as a negative factor since it will yield benefits in terms of future revenues.

On the business front the company has registered 28 per cent growth to Rs 454 crore in the bio-pharmaceutical segment which contributes over 75 per cent to its revenues. The growth in this segment was mainly due to an increase in its branded formulations which clocked 51 per cent growth to Rs 86 crore. The contract research revenues grew by 40 per cent to Rs 123 crore. Also, the company’s growth was largely helped by rupee depreciation. In the course of a conference call, the management said that the actual growth, excluding the rupee impact, is only 12 per cent. This is quite low considering that the pharmaceutical companies are currently showing growth of over 20-25 per cent.

Going ahead the company has said that the R&D expenses will mostly remain at the current level. In our opinion, after the Q1 results the R&D spends will keep the margins under pressure. Biocon has also claimed to be the fastest growing company in the oncology and diabetology segment and currently has insulin approval in 55 countries of which it is marketing the product in 32 countries. It is not known whether the company is scouting for a partner to market its product in other countries. In the biosimilars business it is going through a market development phase and has successfully completed the global Phase I trials for the biosimilar Glargine. 

Currently it has got five clients who are waiting for the approval of Atorvastatin in the U.S. market. Once the approval is received then Biocon will see an increase in the export of Atorvastatin. This, however, will remain capped as there is fierce competition in this space in the U.S. We remain skeptical about the margins of the company given the fact that Atorvastatin has seen 97 per cent price erosion.