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Nath Balakrishnan

INVESTORS can retain their holdings of the Biocon stock. Though the stock trades at about 23 times its expected per share earnings for FY05, the rich valuation, in our view, is not unwarranted. Biocon appears well positioned to capitalise on the opportunities available for statins in the European market and those that would arise when a couple of key statins lose patent protection in the US, by the middle of the next calendar. However, our view is tempered by the escalating competition in this market, as new entrants may resort to aggressive pricing tactics.

We maintain that Biocon's scale and its first-mover advantage would act as buffers, should the competitive environment intensify further.

The biopharmaceutical business — Biocon's flagship — registered revenues of Rs 138 crore, a 22 per cent jump over the corresponding previous period.

Revenues from this segment, however, were seven per cent lower than that recorded in the second quarter of FY-05. Sales in the quarter just ended also include a contribution from a brand of insulin that Biocon launched in last November, though the magnitude of the contribution is not known.

The enzymes portfolio grew 35 per cent year-on-year, even as the contribution from the contract research business saw a ramp up of 80 per cent at Rs 18 crore. The contract research arm has on its roster clients as Merck and Novartis, which were added in the latest quarter.

Notwithstanding the dip in overall revenues on a sequential basis, the operating margin remains intact. The margins for the just ended quarter are not only better than that registered in the year-ago period, but even a few basis points higher on a sequential basis. This can be attributed to a greater control over costs, a better product mix and the gains in productivity.

The management thinks the prices of key statins have bottomed out in the European market; in such a case, margins could sustain at current levels. However, when the statins opportunity opens up in the US market by the middle of next year and the fresh capacities being commissioned become available, the pricing could get more competitive. Biocon, too, is in the process of significantly adding to its fermentation capabilities to address this space.

Biocon continues to make progress on its monoclonal antibody (MAb) for the treatment of head and neck cancer, commercialisation of which could happen in the next calendar; Biocon has also tied up with Vaccinex of the US to develop more molecules in the MAb space. The contract research business, too, is showing a significant scaling up, though on a small base.

The current valuation captures to a significant extent the growth prospects in Biocon's business and downside from the current levels should be minimal. Stay invested.

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