Biocon: Syngene valuation near-term trigger

Start of production at Malaysian facility may ease capacity concerns

The Biocon scrip was up about three per cent after its contract research subsidiary Syngene, in which the company owns about 85 per cent, got the regulator’s nod to launch an initial public offering (IPO). Syngene plans to sell about 22 million shares in its IPO, which would entail a dilution of 11 per cent on a post-issue basis. The last deal for Syngene was a 10 per cent stake sale to India Value Fund, for Rs 380 crore, which had valued the company at Rs 3,800 crore.

Analysts at IndiaNivesh Research say if valuations are pegged on recent deals, Syngene would probably command 3.7 to 4.5 times FY15-16 enterprise value-to-sales. At these valuations, it would get about Rs 530 crore from the IPO, valuing the company at a little over Rs 4,800 crore. This would be about half of the market cap of Biocon. In case, Syngene manages to get better valuations, it will be a near-term trigger for the Biocon stock.

  Before the current uptick in Biocon stock, it had shed over 20 per cent from its 52-week high on moderate growth expectations. This is because sales for FY15 grew at a muted seven per cent due to weak show by its core biopharmaceutical business. This business, which contributes 56 per cent of overall revenues, grew two per cent in FY15 due to pricing pressure in the Middle East and North Africa (MENA) region consequent to the economic situation there. Capacity constraints, too, were responsible for the lower growth. Rise in competitive intensity in statins and lower supply of anti-biotic fidaxomicin to Cubist Pharma also dented the performance.

Growth, according to analysts at Sharekhan, would be driven largely by branded formulations business, due to higher sales of cancer drug CANMab and its contract research business Syngene. While branded formulations business grew 10 per cent in FY15 and accounts for 14 per cent of revenues, Syngene grew by 15 per cent and contributes 27 per cent to revenues.

While the listing of Syngene will be a positive, other triggers include favourable data from phase 3 clinical trials on insulin glargine, to be launched by FY18. At the current price, the stock is trading at 15 times its FY17 earnings estimates. About 42 per cent of analysts covering Biocon have a buy with nearly an equal number with sell recommendations. For now, most of the positives seem to have been captured in the price.