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Nath Balakrishnan

SHAREHOLDERS can retain their holdings in the Biocon stock. This represents a continuation of our stance on the stock after the company announced its first quarter numbers this fiscal.

While the stock has been confined to a range since our earlier recommendation, we do not anticipate any significant downside risk from the current level, as the statins (compounds that reduce cholesterol levels) story continues to exhibit robustness.

Our view is tempered by the rich valuation the stock commands (at about 24 times its expected per share earnings for FY05), which captures the likely momentum in earnings growth.

In the just-ended quarter, Biocon's earnings were driven by a strong performance across all its businesses, with the flagship biopharmaceuticals division registering sales growth of 19 per cent on a year-on-year basis.

On a sequential basis, the biopharmaceutical revenues have moved up 5 per cent. The first two quarters of the previous fiscal saw a sequential growth of close to 50 per cent, driven by pravastatin going off patent in Europe in end-June 2003. This resulted in a sharp pick up in the second quarter of the previous year.

In the near term, we believe that the statins segment would be the key driver of Biocon's earnings profile, with both simvastatin and pravastatin going off patent in the American market in 2006.

Given its expertise in this space, and considering that additional capacity would kick in a few months from now, Biocon is well-positioned to capitalise on the emerging opportunities in this market.

However, even as the pricing environment remains relatively stable, as such, any competition-driven pricing erosion would be a risk, given the significant proportion of revenues that Biocon derives from this space.

Over the medium term, the insulin segment and the immunosupressants category hold promise. Biocon recently launched its brand of human insulin, Insugen, in the domestic market.

Given the dynamics of the domestic insulin market, which has well-entrenched players, there might not be significant upside possibilities in the immediate term.

Over a longer period, export to the regulated markets would hold the key. Access to the American market is still clouded by regulatory uncertainty, as the US Food and Drug Administration is yet to put in place a mechanism that facilitates the entry of biogenerics.

Biocon has in place an agreement to supply insulin to the global major, Bristol-Myers Squibb (BMS), for an inhaled product that the latter is developing; Biocon has also received an upfront payment (the quantum has not been undisclosed) from BMS, which has not been reflected in the latest quarter. This payment would get reflected as and when supplies commence.

As in the case of drug development projects, Biocon's fortunes on this deal would be contingent on whether BMS is successful in commercialising the said product.

Given the uncertainty that encompasses any drug development project, no upside from this deal has been factored in.

Biocon also has announced a partnership with Nobex Corporation, US, for developing a form of oral insulin; this would be a New Drug Application candidate and its proof of concept is likely to be established in a little over two years from now.

The monoclonal antibody that Biocon, in collaboration with CIMAB of Cuba, is developing to treat head and neck cancer, is likely to hit the Indian market by the end of next year. This is also a vindication of Biocon's intent to be in the business of proprietary products over the longer term.

The stock's current price impounds Biocon's growth possibilities in the near term. With no significant downside possibilities, remaining invested would be the better course of action.

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