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Biocon: ‘Statins’ is the key - Views on News from Equitymaster
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Biocon: ‘Statins’ is the key
Jul 8, 2005

Biotechnology has assumed significant importance in the last few years especially in the areas of cancer and stem cell research. As per IMS data, biotech products accounted for 27% of the active research and development pipeline and 10% of global sales in 2004. With its focus on biotechnology, Biocon is gearing up to take advantage of this opportunity. In this article, we take a look at the company’s past performance and future prospects.

Company background
Biocon is India's largest biotechnology company with presence in biopharmaceuticals, enzymes, custom research and clinical research. It started as an enzymes (organic chemicals used in fermentation process) manufacturer and leveraged its expertise in fermentation to evolve into an integrated bio-pharmaceutical company with strengths in microbial techniques, manufacturing and marketing. The company has two subsidiaries – Syngene and Clinigene – which are involved in custom research and clinical research respectively. Syngene contributes over 9% to the total consolidated revenues of the company, while its bottomline contribution stands higher at 14% (FY05).

Business mix
(Rs m) FY01 FY02 FY03 FY04 FY05 CAGR (%)
Statins 343 508 1,203 3,028 - 106.8%
Immunosuppressants 1 29 37 137 - 360.8%
Anti-diabetic drugs - - - 20 -  
Others 474 606 770 1,168 - 35.1%
Total 818 1,143 2,010 4,353 5,570 61.5%
(% growth)   39.8% 75.8% 116.6% 28.0%  
Enzymes 405 463 532 665 900 22.1%
(% growth)   14.3% 14.9% 24.9% 35.3%  
Contract research 113 174 278 390 660 55.5%
(% growth)   54.0% 59.8% 40.3% 69.2%  
Total revenues 1,336 1,780 2,820 5,408 7,130 52.0%
(% growth)   33.2% 58.4% 91.8% 31.8%  

A peep into the past
Fast paced revenue growth:  Biocon derives its revenues chiefly from its enzymes and biopharmaceuticals business. Revenues have grown at a CAGR of 52% between FY01 and FY05. However, while revenues clocked a robust 92% YoY growth in FY04, the revenue growth lost steam in FY05 owing to VAT and excise related concerns and recorded a slower 32% YoY growth.

Let us look at the segment-wise performance of the company

Biopharmaceuticals:  Revenues from the biopharmaceuticals business have grown at a CAGR of 62% between FY01 and FY05, contributing 78% to the company’s FY05 revenues. Statins have been Biocon’s largest and fastest growing products over the years recording a CAGR of 107% (between FY01 and FY04). It must be noted that statins are cholesterol-lowering agents used to treat and prevent coronary diseases and are amongst the largest selling drugs worldwide. In FY04, revenues from statins soared 152% YoY, contributing 60% to overall revenues as against 47% in FY03. Amongst these statins, Simvastatin has been Biocon’s key growth driver. The patent expiry of Simvastatin in the US markets in 2006 provides a significant opportunity to Biocon to boost its revenues. Having said that, despite good volume growth, statins faced pressure on pricing front in FY05 on account of high competition from other generic players, as Simvastatin patent expired in the European markets in 2003.

Immunosuppressants (used in organ transplants to prevent organ and tissue rejection) have also been growing at a scorching pace, registering a CAGR of 361% between FY01 and FY04. The company is positioning itself to enter new segments and address exports market aggressively going forward. As far as the anti-diabetic drugs are concerned, Biocon developed and launched recombinant human insulin under the brand name ‘Insugen’ in mid November 2004. While the exact sales number from this product is unknown, Biocon is hoping to garner a good size in the Rs 2.5 bn market.

Enzymes*:  Biocon has been developing and marketing a mix of specialty and industrial enzymes for a range of industries including food and beverages, animal feed, textiles, pulp and paper and leather. The enzymes business has clocked a CAGR of 22% between FY01 and FY05 and contributed to around 13% of Biocon’s FY05 revenues. Biocon expects this business to contribute significantly to its revenues going forward.

* Enzyme is a substance that acts as a catalyst in living organisms, regulating the rate at which chemical reactions proceed without itself being altered in the process. The uses of enzymes in medicine include killing disease-causing microorganisms, promoting wound healing, and diagnosing certain diseases. (Source: www.enzymes.co.uk)

Research services:  Biocon provides custom research services through Syngene and Clinigene. Syngene focuses on custom research (managing pre-clinical research projects for MNCs) whereas Clinigene conducts clinical trials for drug development. Revenues from this business clocked a CAGR of 56% between FY01 and FY05, contributing to 9% of total revenues in FY05.

Operating margins and profitability:  Biocon has maintained robust margins above 25% levels since FY03 owing to a scorching growth in revenues and control over expenditure. This combined with a reduction in interest burden has enabled the company to maintain a healthy bottomline, which has grown at a CAGR of 114% during FY03 to FY05.

R&D thrust:  Biocon’s R&D expenditure has increased at a CAGR of 74% between FY01 and FY05 and now forms around 5% of the company’s revenues. The company intends to follow a three-pronged strategy by focusing on generics R&D in the short term, in-licensing opportunities in the medium term and new drug discovery research in the long term. As far as generics R&D is concerned, focus will be on the blockbuster drugs scheduled to go off patent post 2006. The company expects revenues for the next 3 to 5 years to be generated by generic products. The idea is to fund long-term discovery research through short-term generic strategy.

What to expect?
At 445, the stock is trading at a price to earnings multiple of 22.5 times FY05 earnings. We believe that, going forward, statins, insulin and immunosuppressants will be the key growth drivers for the company. Statins opportunity in the form of Pravastatin (came off patent in Europe recently) and Simvastatin and Pravastatin (both will come off-patent in mid of CY06 in US) will help boost the company’s revenues. Though management has stated that it will be able to maintain margins in FY06, it has also warned of higher depreciation charge attributable to its new facilities, which will cater to large US market opportunities for Simvastatin and Pravastatin emerging in 2006. Moreover, Biocon plans to significantly increase R&D investments to support a discovery led research strategy. Backed by this, profit growth in FY06 will not grow as fast as sales.

Having said that, apart from being a major beneficiary as far as statins are concerned, the company's successes in R&D such as human insulin and monoclonal anti bodies and other biological products will help it to grow in the long term.

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