Fascinating float

Biocon issue is the most interesting of them all

More than anything Biocon offers a quality, focused exposure to the fascinating biotech sector. 99.6 per cent of Biocon's stand-alone revenues came from sales of biopharmaceuticals and enzymes manufactured by the company.

Besides, the company has two 100 per cent subsidiaries, Syngene and Clinigene. While Syngene offers custom research services (research process outsourcing, if you will), Clinigene is in clinical development and its income mainly consists of clinical research fees.

The Biocon stock comes at a hefty price, though - at over 25 times annualised earnings for the nine-month period ended December 2003. But the valuation doesn't seem too much considering the fast pace of growth in the company's revenues and profit.

In the nine-months ended December 2003, Biocon posted revenues of Rs 371 crore (according to consolidated US GAAP numbers), which was 46 per cent higher than the revenues achieved in the whole of FY03.

More importantly, net profit jumped 109 per cent using the same periods for comparison. The reason profit has grown at a faster pace than revenues is a higher proportion of sales to regulated markets in US and Europe.

Exports in the nine-month period stood at 56 per cent compared to 43 per cent in FY03 and 28.3 per cent in FY02. Because these markets are tightly regulated, the company gets much better prices for its products.

Besides, the Syngene operations are highly profitable with a net margin of over 33 per cent. Currently, these are a small proportion of revenues, but the company plans a two-fold expansion of its custom research facilities.

More importantly, the facility for producing active pharmaceutical ingredients or APIs for statins (cholesterol-lowering drugs which account for 58 per cent of Biocon's revenues) will be expanded by four times. Near-term growth estimates are certainly bullish considering that many drugs will be off patent from 2005.

But this can also be seen as a risk factor, as an increase in competition especially from places like China would lead to downward pressure on prices and margins.

Besides, one would also have to wait and see how the company's plans to launch biotech products in the US takes off. This is because regulatory norms for biotech products have still not evolved and there could be delay in time to market.

Also, India's adoption of pharmaceutical product patents in the beginning of 2005 could result in higher development costs for the company and a longer time to market, since the company may have to wait till the patents expire or become invalidated.

While near-term prospects are good and past performance is excellent, it's early to comment on Biocon's long-term prospects.

Risks in the pharma sector

The US FDA has barred Dr Reddy from launching the generic version of Pfizer's anti-hypertension drug Norvasc, before the patent expires in September 2007. On the bourses, where the broad indices rose, the Dr Reddy stock ended over 18 per cent lower.

Analysts are now increasingly calling Dr Reddy's strategy as more risky, as patent challenges account for 74 percent of its pending US applications and one such adverse decision has the potential to change the fortunes of the company.

And with Dr Reddy's not having any big product launch since its exclusive marketing rights for a generic version of Eli Lilly & Co's anti-depressant Prozac ended two years ago, it's profits for the next few quarters would be lacklustre.

Instead of relying heavily on patent challenges, experts feel that generic manufacturers should focus on developing new dosage forms for existing molecules, enter niche product segments and diversify exports markets through acquisition of overseas companies that have a basket of well accepted compounds.

Ranbaxy Laboratories, for instance, is able to differentiate itself from its peers through its product pipeline, which is the largest and also through its ability to launch products in a time bound manner. By the end of CY03, the company had around 21 ANDAs approved by the USFDA and currently 24 ANDAs await approval.

Also it has been focusing on developing new delivery mechanism for its compounds, such as its recently launched RiometTM, which is the only liquid form of Metformin available in the American market.

In addition, Ranbaxy has recently taken over France-based RPG Aventis whose 18 compounds are among the top 20, in terms of generic sales in that country. Such a strategy should help reduce Ranbaxy's dependence on the US generic market.

While Sun Pharmaceuticals and its American arm Caracco, are strengthening their molecules pipeline - they are avoiding patent challenges instead and the key focus is on entering niche market segments.

Sun Pharmaceuticals is working on developing two new drug delivery systems and one new chemical entity in the next 12 months. Meanwhile Caracco would be filing 6 ANDAs in CY04 in the areas of cardiology and psychiatry.

It's no wonder these scrips have not been affected by the adverse ruling against Dr Reddy's.

With contributions from Mobis Philipose and Amriteshwar Mathur