>BIOCON (CITI)

Sell: Inline Quarter

■ Inline FY09 — Biocon's FY09 results were inline with expectations with recurring PAT of Rs2.2bn. While revenues were boosted by the Axicorp acquisition, margins suffered from the low margins in the distribution business. MTM losses of Rs1.5bn led to a reported PAT of Rs931m, down 80% YoY.

■ Tepid growth, profitability under pressure — Organic revenue growth of 13% YoY was disappointing given the currency depreciation. A 50bps YoY decline in operating margins on a like-to-like basis, despite favourable currency, indicates pricing pressure in the business even after accounting for lower licensing income (down 73% YoY).

■ Axicorp acquisition on track — Axicorp has won an AOK tender to supply Metformin to all regions in Germany. The contract is expected to generate revenues of c1bn over a period of 2 years. Biocon expects the contract to help expand Axicorp's presence in the German market – which it plans to use as the base for its diabetes franchise in Europe.

■ Other conf call takeaways — i) R&D expense to increase to cRs800m-1bn in FY10 – looking to take active projects further before licensing; ii) most of the forward forex contracts have been closed, except for a small part in Syngene. Has taken a mix of collar & put options to hedge its forex exposure; iii) Myco mofetil (cUS$150m opportunity) sales to start in 1QFY10; iv) working on tieups with larger players for distribution of biosimilars in regulated markets

■ Maintain Sell — Biocon's tepid FY09 results (pre forex losses) highlight our concerns about the lack of adequate breadth in its product basket. We believe Biocon's business model remains vulnerable despite efforts to build new growth drivers and maintain our Sell/High Risk recomme ndation.

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