Biocon investors have their eyes on the big picture
Investors do not seem perturbed by Biocon Ltd’s results missing analyst estimates or by the management’s statement of cautious optimism for FY18. Sure, Biocon’s share fell 1.3% on Friday and it had been falling in the days preceding the result, after having risen sharply when the bonus was announced. Still, the fall does not reflect any significant concern.
The proposed bonus issue in the ratio of 2:1 itself could be providing support. Or, a miss in one quarter is a milder problem, compared with the more severe regulatory troubles faced by some of its peers. Investors may also be keeping sights on the big prize of a successful launch of a biosimilar product, in partnership with Mylan Inc., in the regulated market of Europe or the US.
Biocon’s revenue fell 2.1% to Rs925 crore, over a year ago, in the March quarter. Revenue from its research services subsidiary Syngene International Ltd declined 14%, due to a fire that affected operations. Excluding Syngene, Biocon’s sales growth of 4% is still slow. It said delays in getting approvals in emerging markets, discontinuance of some in-licensed products and pricing pressure affected growth. Branded formulations did well, though, with a 25% growth.
Biocon’s sales declined but its expenses did not decline as much, chiefly as staff costs increased along with other expenses.
Ebitda margin declined 1.4 percentage points and its net profit fell 61.7% to Rs127.5 crore. This was lower than the market’s estimate of Rs152.1 crore, based on nine analyst estimates polled by Bloomberg.
What lies ahead? A subdued fourth quarter has come after a good third quarter. Maybe this quarter was an aberration and growth will recover in the subsequent quarters. But the management’s caution is due to delays in getting approvals in emerging markets to launch new products. Meanwhile, the Malaysia plant’s cost and depreciation will add to expenses in FY18. This is in addition to growing spends on research and development.
All these potential concerns are being held at bay by the possibility of a biosimilar launch in Europe/US. Investors will be happy if they can see progress on this front, although the actual time is some time away. When that happens, it will not only validate Biocon’s work in this area but can also bring significant returns.
Investors have taken this quarter’s performance in their stride but would be hoping that business improves in the subsequent periods. If that does not happen and there is little progress on the developed market front, investors may begin to feel the pressure.