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Biocon: A SWOT Analysis - Views on News from Equitymaster
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Biocon: A SWOT Analysis
Sep 16, 2005

Biotechnology has assumed significant importance in the last few years especially in the areas of diabetology and oncology (cancer). 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 write-up, we have done a SWOT analysis of Biocon, which has been a pioneer in the biotechnology field.

Strengths
Visionary management: The fact that the management was able to foresee the opportunity in the biotechnology field and leverage its strength in fermentation technology to gain substantial market share in statins is proof of vision. The company has been able to attract and retain talent in a knowledge intensive industry and the annual attrition is below 5%, which is impressive.

Biopharma advantage: Biocon’s biopharma revenues comprise of statins, immunosuppressants, cardio-diabetic products including insulin and other biological products constituting 86% of the company’s revenues. The company has become a key bulk drug supplier of statins due to its strengths in fermentation technologies. Biocon has also developed strengths in the immunosuppressants and diabetic field. Its diabetology focus has resulted in the offering of ‘Insugen’ in the Indian markets, which is expected to significantly contribute to revenues going forward. This product will be launched in the semi-regulated markets as well (Russia, CIS and Eastern European countries).

Leveraging on R&D: Biocon has adopted a three-pronged strategy of focusing on statins in the near term, insulin and immunosuppressants in the medium term and R&D led programmes in the long term. R&D expenditure as a percentage of sales currently constitutes 5% of the company’s revenues. The R&D focus areas include diabetology and oncology (cancer related) and the company has entered into collaborations with companies like Nobex Corporation and Vaccinex for the purpose of pursuing its R&D programme. We believe that these initiatives are likely to turn into significant growth opportunities in the next 3 to 4 years.

Weaknesses
Dependence on statins: Although statins are one of the fastest growing drug classes, the dependence on statins for Biocon is high (around 57% of the revenues). The company is already facing intense competition and price erosion on statins in the European markets. Though the US offers a significant opportunity in 2006 when 2 statins go off patent, the fact is that after a period of time (probably after 2008), the company is likely to face pressure in the US markets as well.

Low retail presence: Biocon does not have a strong retail back up, as compared to other domestic companies like Cipla or Ranbaxy. Currently, the branded formulation business, which comprises of anti-diabetic and cardiovascular drugs, forms a small proportion of total revenues (around 1%) as compared to statins, enzymes or immunosuppressants. However, as mentioned earlier, their branded formulation ‘Insugen’ is expected to contribute to revenues going forward.

Opportunities
Statins going off patent: The US markets hold huge potential when 2 major statins ‘Simvastatin’ (US$ 5.9 bn in revenues in 2004) and ‘Pravastatin’ go off patent. Biocon is well placed to capitalize on this growth opportunity, as it has got the capacity and the capability to deliver these technologically complex products at the cheapest rate.

Contract research: Biocon is one of the leaders in contract research in India (through its subsidiary, Syngene). It has companies like Novartis, Pfizer, Bristol Myers Squibb, Astra Zeneca and Glaxo SmithKline as its clients. The contract research work has very high barriers to entry (relationships are not easy to establish). Biocon has established these relationships over a period of time. Syngene contributed to 6% of consolidated revenues in FY04. Biocon’s other subsidiary Clinigene (involved in clinical trials) has also entered into an alliance with the US-based SCIREX for the purpose of conducting global clinical trials. These services are slated to be a key growth driver going forward.

Oncology focus: Worldwide, anti-cancer (oncology) is currently the third ranked therapeutic class with revenues to the tune of US$ 24 bn (growth of 17% in 2004). Cancer is growing at a faster clip in India too. Against this backdrop, Biocon has been developing the product ‘BioMab’, which is a monoclonal antibody for the treatment of head and neck cancers. This product is likely to be launched in the Indian markets in FY07 and is expected to be one of the key growth drivers going forward.

Biogenerics potential: Biocon was not able to launch generics of biopharmaceutical products in the US and European markets, as the guidelines with regards the same were not very clear. However, recently, the European Medicines Evaluation Agency (EMEA) issued guidelines for launch of generic versions of biopharmaceuticals in the European markets. Bio-pharmaceuticals have relatively higher barriers to entry owing to the fact that it involves the use of certain complex technologies, not easy to develop and master by all pharma companies. Given this backdrop, Biocon is in a position to garner a significant portion of the European biogenerics pie.

Threats
Price erosion: Statins, like any other generic drugs are subject to the threat of competition and price erosion, though the extent may not be as severe as other drugs due to the complex technologies involved. However, off late, Biocon has been facing large-scale price erosion on statins in the European markets. Though the US markets hold huge promise in 2006, the fact is that this market too is likely to be commoditised by 2008.

What to expect?
At 472, the stock is trading at a price to earnings multiple of 30.3 times its annualised 1QFY06 earnings, which is at the higher end of the valuation spectrum. We believe that, going forward, statins, insulin and immunosuppressants will be the key growth drivers for the company. Statins opportunity in the form of Simvastatin and Pravastatin (both will come off-patent in mid of CY06 in the US) will help boost the company’s revenues. However, the management has warned of higher depreciation charge attributable to its new facilities, which will cater to the statins opportunities in the US. 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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