Merrill Lynch on Biocon

1Q reflects strong earnings quality; Maintain Buy

Biocon’s 1Q net profit of Rs 530 million (36% growth YoY) and revenues of Rs 2.7 billion (28% growth YoY) were both in line with Mle. The highlight of the quarter was the sharp 8% gross margin improvement driven by licensing income (USD 3.5 million), higher contribution from insulin and 52% growth in the high margin Syngene/Clinigene operations. EBITDA margin at 28% was slightly lower than Mle due to high R&D and personnel costs. Maintain Buy with PO of Rs 600 per sh.

Likely earnings upside from out-licensing deals

We expect 26% and 18% EPS growth in FY08E and FY09E respectively driven by licensing revenues (insulin/GCSF), potential doubling of insulin revenues by FY09E (over 20% revenue contribution) and strong 40%+ growth outlook for Syngene/Clinigene. Further, we remain upbeat on Biocon’s potential to deliver on out-licensing deals for insulin and other biosimiliars resulting in EPS upside.

Insulin/GCSF licensing revenues to double in FY08E

We estimate Biocon’s licensing income to double in FY08E (about Rs 550 million in FY08E) driven by the recently announced out-licensing deal for GCSF (over USD 1.5 billion market size) with a global biopharma company, and insulin licensing income from a US partner (already announced) and semi-regulated markets.

Sale of enzymes business is a positive move

Biocon’s USD 115 million sale of its enzyme business to Novozymes implies a highly lucrative deal, in our view, at 4.8x sales and about 16x EBITDA multiple. Biocon expects to use these proceeds for acquisitions in biopharma/custom research services. In our view, the interim profit impact will be more than offset by the interest income earned from the proceeds.

Upbeat outlook; Reiterate Buy

Biocon’s 1Q net profit of Rs 530 million (36% growth YoY) and revenues of Rs 2.7 billion (28% growth YoY) were both in line with Mle. The highlight of the quarter was the sharp 8% gross margin improvement driven by licensing income (USD 3.5 million), higher contribution from insulin and 52% growth in the high margin. Syngene/Clinigene operations – EBITDA margin at 28% was slightly lower than Mle due to high R&D and personnel costs. Maintain Buy with PO of Rs 600 per sh.