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Biocon: Conference call excerpts - Views on News from Equitymaster
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Biocon: Conference call excerpts
Nov 16, 2005

Biocon held a conference call post the declaration of its results for the second quarter and half year ended September 2005 to discuss its quarterly performance and growth prospects for the future. Below are the key extracts.

About the company
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. These subsidiaries contributed over 11% to the total consolidated revenues of the company (as per 1HFY06 numbers).

Biogenerics potential: Recently the European regulatory authorities came out with guidelines to launch biogenerics in the European region. These guidelines are for four products, which include ‘insulin’, GCSF, HGH (human growth hormone) and EPO (erythropotein, a hormone produced by the kidney that promotes the formation of red blood cells by the bone marrow).

Out of these four molecules, insulin and GCSF are immediate opportunities for Biocon. The company has stated that it has a good level of preparedness for these two molecules in terms of addressing all guideline requirements. However, it must be noted that currently these guidelines are draft guidelines, which have to be approved as regulatory guidelines. This means that potential launch of these biogenerics will not be before 2007 in the European markets.

Statins story: In the European markets, prices of formulations in various markets have collapsed in the statins segment, especially in the UK and Germany, which are the major markets in Europe. As a result, the entire supply chain, all the way back to the API, has been affected consequently impacting Biocon’s business. However, these statins, which constitute a major chunk of Biocon’s biopharma business, have huge potential in 2006, when 2 major statins ‘Simvastatin’ and ‘Pravastatin’ are going off patent in the US markets. Biocon, which is the bulk drugs supplier, expects the statins opportunity to start kicking in from 4QFY06.

Here again it must be noted that if Teva Pharmaceuticals (Israel) manages to get a 180-day exclusivity on Pravastatin 10 mg, 20 mg and 40 mg tablets, then the supplies to that extent are likely to get delayed. Biocon is also working strategically with some of the companies who are actually trying to build new molecule business out of combination statins. In this way, the company is trying to improve its margins on statins.

Enzymes: Growth in the enzymes business was flat in 1HFY06. Generally the growth in the enzyme market worldwide has not been very high, which has also been reflected in Biocon’s enzymes business. Going forward, Biocon is not planning to invest in creating more facilities for enzymes, but Biocon expects it to keep contributing about 8% to 10% of its total revenues. Margin contribution of the enzymes business is around 30%.

R&D progress: Biocon’s monoclonal antibody (MAb) for the treatment of head and neck cancer is currently undergoing Phase II-b clinical trials. The company is planning to file for a fast track approval in FY07. Therefore, it expects the next fiscal to capture some market numbers for this product.

As far as oral insulin is concerned, Biocon is progressing on track in terms of pre-clinical development both in the US and India. It expects to file an IND in India by the end of 2005 and in the US by the end of FY06. However, the product will not be in the market before 2007-08.

Contract research to drive growth: As far as contract research is concerned, Biocon, besides building up capabilities in the clinical development area based on its own trials, is planning to be a third party contract research organisation (CRO) as well. Third party CRO can be classified as clients from the domestic pharma sector, MNC pharma clients for Indian registration & MNC pharma clients for global studies where the Indian part is being done here. Currently Biocon is doing about half a dozen in total and it expects this number to increase rapidly with the SCIREX deal. The company is currently in the advanced stage of discussion to do trials in India through the SCIREX connection. As far as margins are concerned, the contribution of contract research is around 40%.

SEZ status: The Biocon Park project is coming up in about 50 acres of industrial land and has been approved as a SEZ. This park includes fermentation & chemical synthesis facilities, Syngene facilities & biopharma facilities for the manufacture of BioMabs. These units will be entitled to a 5-year 100% holiday followed by a 5 year 50% tax holiday. Thereafter, the units get a further extension of another 5 yrs of 50% tax holiday if they meet certain investment criteria. In Phase I, Biocon has planned an investment of about Rs 6.5 bn at Biocon Park. These projects are being funded out of IPO proceeds, amounting to Rs 3.2 bn and the balance will get funded by internal accruals.

What to expect?
At the current price of Rs 519, the stock is trading at a price to earnings multiple of 31.6 times its annualised 1HFY06 earnings. With ‘Simvastatin’ and ‘Pravastatin’ going off patent in the US markets in 2006, the statins markets provide tremendous potential and Biocon intends to capitalize on the same. However, considering the fact that statins have been witnessing pricing pressure and severe competition, the company is planning to reduce its dependence on statins by focusing on human insulin, immunosuppressants and branded formulations, which are expected to be the new growth drivers. The company’s clear strategy of using statins and other generic products as short-term cash-flow generators and investment in proprietary technology augurs well for investors who can remain invested for the long-term.

Having said that, the pricing pressure on the statins front in the European markets will continue to adversely affect the topline of the company this fiscal. Moreover, Biocon plans to significantly increase R&D investments to support a discovery led research strategy, which, though expected to reap benefits in the long-term, is likely to keep margins under pressure. We will update the research report on the company soon.

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