Biocon Ltd, a Bangalore based Rs 725 crore pharma major engaged in biopharmaceuticals, enzymes, custom research and clinical research, is currently passing through a difficult phase with modest fall in earnings during last four quarters on account of challenging conditions in the European statin market. The return on investment i.e., the net profit as percentage of total assets declined sharply to 11.5 per cent during 2005-06 from 17.1 per cent in the previous year.

The lower earnings impacted its share price quite badly with the scrip touching its 52-weeks lowest level at Rs 306 on June 9, 2006 (below its issue price of Rs 315 per share) as against its highest level of Rs 537.90 during October 2005. Though the BSE Sensex also experienced volatile movements, Biocon lost heavily and currently hovering around Rs 340-345.

The market has not responded positively to important developments like launching of Biocon's new cancer drug, inauguration of Biocon Park facility, licensing agreement with Bayer HealthCare and setting up of cGMP compliant new biologics facility during last couple of months. Factors like stagnant growth in revenues, sliding profitability during 2005-06 and also in first quarter of 2006-07 adversely impacting the share price movements.

Statin portfolio under pressure

Biocon's statin portfolio is facing stiff competition from various players and giving tough time. The statins portfolio comprises pf lovastatin, simvastatin, pravastatin and atorvastatin. The company is exporting simvastatin to Europe, Japan and Canada, lovastatin to the US and pravasatin to the European markets. Though the company is expecting windfall on account of patent expiration for simvastatin and pravastatin during 2007 in US, several players are jumping into this segment. The patent for atorvastatin is expiring during 2010/2011 in the US. The company is investing to enhance its statin capacities to capture market share after patent expiration. The return from these investments may take longer time and returns may under pressure due to stiff competition.

R&D activities

The research and development expenditure increased to Rs 40.07 crore from Rs 24.09 crore in the previous year, representing a growth of 66.3 per cent. This worked out to 5.8 per cent of sales during 2005-06 as compared to 3.7 per cent in previous year. Besides, it invested Rs 33.61 crore with its research collaboration partners Nobex Corporation, USA.

The company' R&D activities are mainly focusing on process and clinical development of novel bio-therapeutics in oncology, diabetes and cardiovascular segments. The company filed 266 patents/PCT applications in India and abroad.

New launches & acquisitions

Biocon is focusing more on R&D and bio-therapeutics as long term growth area. It's discovery-led research programs in diabetes and oncology may give better earnings in coming years. The company launched cancer drug BIOMAb EGFR for cancer during June 2006. Further the company received regulatory approval to commence phase I human clinical trials for its oral insulin molecule, IN 105. The acquisition of Intellectual Property assets of Nobex Corporation for US$ 5 million will provide a valuable IP platform and complete ownership of the oral insulin and oral BNP programmes.

Financial position

The company's standalone net profit for the year ended March 2006 declined by 23.5 per cent to Rs 133.48 crore from Rs 174.39 crore in the previous year. The net sales improved only by 6.4 per cent to Rs 687.49 crore from Rs 646.36 crore. The net profit margins turned down to 19.4 per cent from 27 per cent in the preceding year. The story goes on in the first quarter of current year and its net profit declined to Rs 27.57 crore from Rs 32.89 crore though its net sales increased to Rs 183.70 crore from Rs 155.08 crore.

Thus, the annual earning per share for the year 2005-06 worked out to Rs 13.97 as against Rs 18.43 in the previous year. The same for the quarter ended June declined to Rs 2.86 from Rs 3.44.

The company's domestic revenues increased by 22 per cent to Rs 329.77 crore during 2005-06 from Rs 270.21 crore, but its exports declined by 4.9 per cent to Rs 357.72 crore from Rs 376.15 crore in 2004-05. Its revenues from biopharmaceuticals grew by 8.2 per cent to Rs 602.54 crore from Rs 556.68 crore. However, its sales of enzymes declined by 5.3 per cent to Rs 84.96 crore from Rs 89.68 crore. The contribution of Biopharmaceuticals sales improved to 87.6 per cent, but that for enzymes declined to 12.4 per cent from 13.9 per cent in the last year.

The production of enzymes increase by 11.8 per cent to 40.21 lakh kgs from 35.95 lakh kgs and that of Pharmaceuticals went up by almost 58 per cent to 64.96 lakh kgs from 41.13 lakh kgs. The company's inventories grew by 47.7 per cent to105.31 crore from Rs 71.29 crore.

Investments in subsidiaries & joint ventures

Biocon's investment in subsidiaries, joint ventures and other companies increased to Rs 139.05 crore during 2005-06 from Rs 47.94 crore in the previous year. The company stepped up its investment in joint venture - Biocon Biopharmaceuticals - to Rs 6.73 crore from Rs 2.24 crore. It offered inter corporate deposits to subsidiaries and joint venture to the tune of Rs 72.28 crore as against Rs 19.27 crore in the previous year. Its total investment, including advances, in Nobex Corporation, USA increased to Rs 33.85 crore from Rs 8.96 crore and that in Vaccinex Inc USA, moved up to Rs 17.70 crore from Rs 8.98 crore. These investments may assist the company to boost its operations in different segments

Biocon set up Syngene International Pvt Ltd as its wholly owned subsidiary for undertaking custom research services. Syngene achieved net profit and net sales growth of 64 per cent and 49 per cent respectively during 2005-06. Its net sales touched to Rs 98.20 crore from Rs 66.10 crore in the previous year. Syngene, with employees strength of 528, is now investing in additional laboratories located at Biocon Park. The state-of-the-art facility is likely to be operational by 2007.

Biocon's another subsidiary - Clinigene International Pvt Ltd is undertaking clinical trials and research activities. The demand for outsourced clinical research is likely to go up in near future and Clinigene is extending its operations to a 60,000 sq.ft facility. The subsidiary company reduced its loss to Rs 1.09 crore during 2005-06. The net revenue, however, increased to Rs 5.65 crore from Rs 1.40 crore.

Biocon Biopharmaceuticals Pvt Ltd, a 51:49 joint venture with a Cuban company to manufacture monocional antibodies and other recombinant therapeutics, has developed a monocional antibody, BIOMAB EGFR for the treatment of head and neck cancers and entered into original molecules.

Outlook

Biocon is expanding and investing in fixed assets and its capital work-in-progress amounts to Rs 456.43 crore as at the end of March 2006. Its gross fixed assets increased to Rs 316.11 crore from Rs 270.20 crore. The company's total investment came down to Rs 139.06 crore from Rs 243 crore as it sold out its investments in various mutual funds during the year to part finance its expansion schemes. The company has built up strong reserves position of Rs 753 crore and this may help the company to invest in acquisitions or R&D.

Thus, the short term outlook is not bright mainly on account of international market conditions in respect of statins. The long-term outlook will largely depend on the success of launching new biotech products in the domestic as well as international markets. The investments in R&D, joint ventures and subsidiaries may start yielding results after couple of years and success depends on marketing strategy.
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