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Conference call extracts: Biocon - Views on News from Equitymaster
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Conference call extracts: Biocon
Sep 20, 2004

Company background
Starting as an enzymes player, Biocon has leveraged its expertise in fermentation technology to evolve as an integrated bio-pharmaceutical company with expertise in manufacturing and marketing in the global markets. The major growth driver for the company has been the biopharmaceuticals in the last three years (statins in particular). Statins now contribute to about 57% of the sales of the company in FY04.

Statins still a growth driver
  • The company is expanding its capacity to cater to the growing demand for stains in the UK and other European markets. Currently, the company supplies about 40% to 50% of requirement of statins (in the bulk form) in Europe. The company has 6 out of top ten generics companies in Europe as its customers. It is also confident of gaining market share in the US. Simvastatin, one of the statins manufactured by Biocon, is coming out of the patent review in the US market in 2006.

  • When Simvastatin came out of the patent review in Europe in 2004, the value of the product declined sharply (more than 40%). However, volumes increased noticeably and if this happens in the US market as well, it will benefit Biocon.

  • The company is quiet confident that competition will be relatively lower in the bulk form of statins, as the technology used to manufacture the product is complicated and only two generic manufacturers i.e. Teva and Biocon have the required capabilities. Two other Indian players, Lupin Labs and Concorde laboratories are in the process of establishing new facilities. However, Biocon is likely to benefit from first-mover advantage. We expect revenues from statins to grow at a CAGR of 44% over the next three years.

Other Biopharma products
The Bristol Myers Squibb (BMS) contract for manufacturing human insulin will commence in 2006 and the company will receive capacity reservation fee from BMS in this regard. The molecule is undergoing clinical trial in US and Europe.

The company has presence in Immunosuppressants (2.5% of revenues in FY04) and is working on developing anti-cancer drugs. Immunosuppressants will go off patent in the US and Europe in 2007 and will offer an opportunity for the company to sell its drugs in those markets. However, the company will sell these drugs in bulk form. We expect revenues from immunosuppressants to grow at a CAGR of 30% over the next three years. However, we have been conservative in our estimates.

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.

Expansion plans
The company has plans to expand fermentation capacity by this financial year (almost 4 times). The total outlay for capacity expansion is about Rs 4 bn (74% of consolidated revenues in FY04), while Syngene's capacity will be increased with an outlay of Rs 400 m.

Conclusion
We gather that the management is confident about its ability to manufacture statins in a cost-efficient manner and capitalize on the growth opportunity in the US market. With its strong management and focus on R&D, we believe that this company is well placed as a bulk drug supplier in the medium term as far as statins are concerned. Looking beyond three years, the company hopes to reduce its dependence on statins and develop proprietary products (anti-cancer drugs and insulin to name a few).

At Rs 522, the stock is trading at a price to earnings multiple of 30.8 times FY05 our estimated earnings. While growth prospects are promising, we believe that the company may not be able to maintain operating margins at the current level going forward. On a relative basis as well as the largely API based business model of Biocon, we believe that valuations are on the higher side.

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