The Hindu Business Line : Biocon: Hold

The stock, which, opened at a price that was significantly higher than what it was offered at, continues to attract substantial interest, as the company emerges at the most-focussed player in the statins segment. Statins are a class of compounds that essentially serve to reduce cholesterol levels.

Investors can retain their holdings in the stock. We are confident about Biocon's prospects in the medium-term; however, the rich valuation at which the stock trades now (about 27 times the expected per share earnings for FY05) serves to temper our view. Any fall in the stock price, linked to broad market weakness, could be used to add exposures.

As the only player to have the approval of the US Food and Drug Administration for lovastatin, pravastatin and simvastatin, Biocon is uniquely positioned to address the ever-expanding space for these compounds as they go off patent in key markets such as Europe and the US.

Compliance with regulation, strong process skills and a business model that revolves around not competing with partners which would be responsible for producing the final formulation (medicines in dosage form) constitute the crux of Biocon's strategy.

These are elements that would play a pivotal role, as the company prepares to address the generic opportunity in the US for both pravastatin and simvastatin, when both go off-patent there a couple of years from now.

Statins, by virtue of being the key business driver, accounted for 54 per cent of the Biocon sales in the latest quarter.

With limited competition in this segment , operating margins have remained stable if one adjusts for a one-off item arising out of a forex loss.

In a pricing environment that has been relatively stable, such a dependence does not have negative implications. Should we see a contractionary trend in prices, margins could come under pressure. In the latest quarter, Biocon was also faced with capacity constraints on its statin products.

Once the capacity expansion goes operational, in the last quarter of this fiscal, Biocon should be able to ramp up statin sales in the early parts of the next fiscal.

The other space in which Biocon has considerable strength is the insulin segment; a launch in the domestic market is on the cards later this fiscal.

The ability to straddle both the bulk drug as well as the formulation space in the domestic market (it also has products in the cardio-diabetes range) would be a key challenge.

What can provide an impetus to Biocon in this space is the clarity on regulatory procedures that would enable it to launch insulin in such markets as the US and Europe, which are more lucrative.

The US FDA statement that it would consider permitting the launch of insulin through the 505(b)(2) route does have a positive implication, as it might reduce the molecule's time to market; this might not, however, mean that a launch could happen in the near term; it could be a couple of years away.

We also view as a positive the product pipeline that Biocon has with its joint venture partner, CIMAB of Cuba.

A monoclonal antibody developed by the venture for the treatment of head and neck cancer is expected to undergo Phase II (b) trials in India shortly.

Successful completion of trials would mean a launch in India and subsequently in other geographies. Developments on this front will be crucial.

A successful trial and approval for commercial launch can have a meaningful bearing on the stock price. Such triggers need to be examined closely for possible opportunities to buy into the stock.

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