Biocon looks for life beyond Pfizer

Sometimes success can put a company in a spotlight which it can do without. That’s exactly what has happened with Biocon, India’s largest listed biopharmaceutical company.

A series of events, including a $350-million deal with Pfizer, being abruptly called off recently hasn’t helped matters either.

To its credit, the 30-year-old Bangalore-based biopharma (drugs derived from life forms) company has largely been a steady performer posting profits year after year and making a transition from just being a contract manufacturing company to being a biopharma company without any major hiccups.

It went public in 2004 even as the investor community tried to define the company: was it a technology company or a generic pharma company.

“…and I fall in between. People don’t understand what that ‘in-between’ is. It’s very difficult for people like us to constantly try and engage with the investor community or the various other stakeholders to make them really understand what our businesses is all about,” says the 59-year-old Ms Kiran Mazumdar Shaw, Chairman and Managing Director of Biocon, in an interview to Business Line.

It is the ‘confused’ investor community that has resulted in wild swings of Biocon’s stocks, claims Ms Shaw. Over the last two years, the company’s stock price climbed to a high of Rs 464 (October 2010) before plunging to Rs 236 now.

“And with such wild swings, you can see that it’s a very reactive (stock) market. Nothing has changed. My profit hasn’t sunk. My profit has been pretty steady. So if a market can respond with such violent swings, has it understood your business?” asks Ms Shaw, clearly irritated with the Indian bourses’ treatment of her company.

What has undermined the stock price is the disturbing news of Biocon’s insulin deal with Pfizer being terminated prematurely.

In fact, it was announcement of the deal, under which Pfizer acquired exclusive rights to market biosimilars of human insulin developed by Biocon, which pushed the stock to a new high in October 2010.

Implications

The deal with the world’s largest drug maker, US multinational Pfizer, for development and commercialisation of insulin, was expected to result in $150 million in milestone payments and subsequent royalties for Biocon.

It received $200 million as upfront payments.

The scrapping of the deal was a body blow to Biocon’s global aspirations but Ms Shaw isn’t exactly worried over the fiasco though she admits it was a bit of a setback.

“Now we will again rebuild them like we did before Pfizer came. If you look at it, the only thing that changes for Biocon is that instead of having one global partner we have multiple partners. And in terms of the financial investments Pfizer made into this programme we benefited hugely out of that. So ultimately there is nothing so negative in its impact to Biocon’s future.”

Financial impacts

But analysts aren’t as optimistic. They feel that having an alliance partner like Pfizer could have made a big difference to the commercialisation of the drug.

There are financial implications too. According to the terms, if the deal fell through at any given point of time, Biocon would retain payments already received from Pfizer, plus it would receive additional amounts as settlements from an escrow account.

Now that the deal has fallen through, analysts feel that Biocon needs to recognise the upfront payments in its books right away.

The company, however, has been deferring recognition of these revenues and plans to bring them into its P&L over the next three years.

Accounting controversy

This accounting treatment has led to its share of controversy.

Espirito Santo Securities, a foreign brokerage, for instance, highlights that there is considerable confusion over the timing and accounting treatment of Pfizer milestones through P & L as Biocon currently has deferred revenues of Rs 493 crore on the balance sheet.

“In our experience, globally, post a deal termination, the balance of deferred revenues lying on the balance sheet is typically recognised in year-one as a one-off revenue item. This is in line with the matching principle as the revenues from a terminated deal should not ideally be matched against costs of another deal (internal or external). Based on the guidance provided by the management, we believe that the company is likely to recognise the deferred revenue in line with R&D costs associated with its biosimilar insulin program. We see this accounting policy as aggressive. We believe it will lead to consistent over-reporting of EPS (and potentially over-valuation) to the tune of 20 per cent every year during FY13-15 while also leaving investors blind-sided with the clinical spend and progress in biosimilar insulin development.”

The company’s auditors have drawn reference to this method of treatment ‘as matter of emphasis’.

But Biocon has refuted the charges stating that its accounting practices are in full compliance with GAAP.

“The accounting method followed in the case of fees received from Pfizer is in compliance with GAAP and appropriate disclosures have been provided.”

Further, the licensing agreement with Pfizer was not an outright licensing deal but a development licensing deal that mandated Biocon to incur development costs for obtaining regulatory approvals.

“Post the termination of the agreement with Pfizer, Biocon has obligations to continue the development and accordingly has treated the retained fees as deferred revenues to be set off against development expenses to be incurred up to regulatory approval in various global markets,” Biocon explains.

But accounting apart, what about the business implications? Ms Shaw points out that pharma companies constantly review their partnerships with regard to return on investment.

“And when they looked at their own bio-similar programs versus the bio-similar programs they had with us, they felt that their return on investment in their own in-house bio-similar programs was higher than what they would get with us,” she said.

‘No inside story’

Ms Shaw feels that the media is making a “big deal’’ out of the Pfizer-Biocon deal coming unstuck.

“Frankly there is no inside story. If you look at how much they are investing in the insulin bio-similar program versus monoclonal antibody bio-similar program which is 100 per cent their own, here they have to share it with us; they have to share the profit. Within Pfizer obviously you will have groups competing for funds. And if you feel that your in-house programmes are going to deliver much higher values for you, you would rather spend money on that. So this happens all the time.”

But the road she took hasn’t actually been a smooth one. Even as the company ventured into drug innovation and novel programmes, the stock has been hammered.

The biopharma czarina believes that Indian investors didn’t have the kind of confidence which foreign investors have in her business.

“I think Indian investors are extremely besotted with short-term profits. Whereas I find a lot of overseas investors, if they understand what you are trying to do, they understand the strategic future of your business and then they say it is an interesting opportunity. So they are long-term in their view,” she explains.

Future biz strategy

For the future, Biocon has identified five growth verticals. The first one is the API business (active pharmaceutical ingredients) which, according to her, is a very big opportunity as it doesn’t get commoditised rapidly.

The second vertical is the bio-similars in which the company is developing insulin products.

The third is the formulations business, basically India-centric, which it expects to grow from Rs 300 crore to a Rs 1,000-crore business in five years.

The fourth is the novel programmes vertical through which the company will partner with certain companies to develop drugs. Once a licensable asset is created, Biocon hopes that it will turn out to be a huge revenue earner for the company.

The fifth is the research services business in which Biocon is the market leader.

Biocon may be a 30-year-old company but the fact is that it is being taken seriously only now because of its rapid growth in the biopharma space which it entered just a decade ago.

What it needs to learn rather quickly is the ability to wade through controversies as well as stay focused.

>vinaykamath@thehindu.co.in>kgiriprakash@thehindu.co.in

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