Biocon's Mazumdar Shaw: Going through a phase of transition

The past 15 months have been a roller coaster ride for Kiran Mazumdar-Shaw, the Chairman and Managing Director of Biocon, and the poster woman of Indian biotechnology. The first pure play biotech company to debut on the bourses, Biocon's offering of shares at Rs 315 apiece was oversubscribed 33 times, and on the day the company listed, it was instantly valued at more than $1.2 billion (Rs 5,200 crore). With a 65 per cent ownership of Biocon, the 52-year-old "biotech baroness" became India's richest woman, and her senior team, India's first biotech millionaires.

However, the honeymoon between the company and the stock markets seems to have been short-lived. After touching a high of Rs 695 soon after listing in April last year, the Biocon stock has been mostly slipping. In fact, compared to the Sensex's gain of 30 per cent in that period, Biocon is 38 per cent off its peak. And now comes the news that the Rs 728-crore company's first quarter revenues and profits are down-revenues marginally down from Rs 178 crore in the same period last year to Rs 176 crore, and net profits by a whopping 20 per cent to Rs 39 crore. The stock market reacted to the news by hammering the share and by the end of the day, it had lost close to 4 per cent. So what's going wrong?

Before we get into the why of it, a word of caution. Just as a single swallow doesn't make a summer, a dip in a single quarter is no indication of the way things could eventually pan out. Biocon has still a great story to tell the market. It has a fairly steady business in its mainstay statins market, its pipeline of new drugs looks promising and its strategy of ensuring revenues from generics to build a portfolio of proprietary drugs seems the safest route. It is also venturing into branded formulations instead of being just an API (read: bulk drugs) supplier. Says S. Subramanyam, Managing Director, Ascent Securities: "While the short-term sentiment is negative, there are chances for large upsides in the medium to long term."

There are three broad reasons why the stock market's love affair with India's only listed biotech stock isn't quite the stuff of fairy tales. One has to do with the market's expectations, the second has to do with the nature of the biotech business, and the third with the recent market conditions. Biotech is perceived as a relatively high-risk sector by investors; therefore, when the high stock price is not met by promises of high future returns, the price corrects (falls) to match the expected return. The industry itself has more lumpy revenues-typically, revenues and profits surge with the launch of a new product, but begin to taper off, until the next drug comes along and provides the fillip. Says Mazumdar-Shaw: "It's unfair to compare biotech with it. We can't boost revenues by simply adding people; we need R&D breakthroughs."

More immediately, though, what the stock market is worried about is the pricing pressure that Biocon's core business of statins (cholesterol-lowering drugs that fetch more than half of Biocon's revenues) has come under in Europe. According to Mazumdar-Shaw, there has been a price erosion of 40-45 per cent in the case of lovastatin in Europe, although for the basket as a whole (other products include atorvastatin and simvastatin) the price drop is 35-40 per cent. What's behind the sharp fall in statin prices? "Chinese competitors," says Mazumdar-Shaw. "While we expected stiff competition, we were surprised by this sharp fall." What helps Biocon's Chinese rivals is the fact that unlike in the US, where entry into the biotech and pharmaceuticals industry is regulated by the Food and Drug Administration (FDA), Europe has lower entry barriers.

The Road Ahead

How does Biocon plan to take on competition, especially at a time when simvostatin and provastatin are expected to go off patent early next year? Through a differentiated strategy even in generics, says Mazumdar-Shaw. For example, while the Chinese players depend on synthetic molecules, Biocon will go in for double fermentation process, given its expertise in fermentation technology. "This will be much harder to copy," she says.

For that, however, Biocon has to address its capacity bottlenecks. A big part of the reason why Biocon's Rs 450-crore investment in a new 90-acre facility, labelled Biocon Park, is facing teething troubles is because of massive infrastructure problems locally. The state government is yet to provide electric connection to the facility, leaving it to generate its own power. (On July 22 when BT visited Biocon Park, some local officials had descended on the facility to provide power connection.) Worse, the facility is yet to get water supply, and local laws prevent Biocon from digging bore wells. "Imagine trying to do fermentation without water supply," says Mazumdar-Shaw, trying hard not to show her frustration.

Biocon's other big plan is to launch branded formulations. It already has one in 'Insugen', an insulin drug for diabetics. This therapeutic segment is big not just globally, but in India too. At least one in every four diabetic patients is an Indian, making the addressable market 32 million-big. Making the switch from being a bulk drug supplier to generic manufacturer and then to a branded player won't be easy. Building a brand requires advertising and marketing expenses. While these investments are upfront, returns take longer to come. Multinational companies like Novo Nordisk and Eli Lilly have already signalled their intention by slashing prices by nearly a third. So it won't be a cakewalk for Biocon.

Simultaneously, Biocon is trying to build a portfolio of proprietary products. Again, while this is a sound strategy, it has a lot of pitfalls. Its monoclonal antibodies (read: cancer vaccines) for head and neck cancer are undergoing clinical trials on humans, and the market is looking forward to its launch by the first quarter of the next financial year. Understandably, Biocon is under pressure to keep the deadline. Says Ajay Bharadwaj, President (Marketing), Biocon: "We could address the global market with these products."

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Its biggest bet, however, is in trying to develop an oral insulin (unlike the injectible and inhaler forms, an oral insulin is seen as the holy grail in the industry). The drug is in its pre-clinical development. Says Mazumdar-Shaw: "I hope that Biocon's oral insulin will be the first blockbuster drug from India." If everything goes well, the drug should be ready by 2009.

To even out the lumpiness of its core business, Biocon is aggressively building its contract research (under Syngene) and clinical research (Clingene) businesses. Syngene, which boasts of having four of the world's top 10 pharma companies as its customers, has grown 35 per cent in the first quarter to Rs 19 crore. And Clingene does work for Merck (besides Biocon), and has entered into a tie-up with Scirex, a us-based CRO.

Syngene and Clingene will be among Biocon's growth drivers starting 2008, when statins will no longer be the company's big business. By then, branded generics and proprietary drugs (including the insulin drug) are expected to account for a huge chunk of the revenues. Says Mazumdar-Shaw: "This is a year of transition for us, but going forward we see huge potential to become a global player. What's required is staying power." That must be her message to investors, too.