At a price band of Rs 270-315 for a share of face value Rs 5, is Biocon too expensive?

Yes, say analysts who contend that valuation may be a tad high for India's first pureplay biotech company to go public. A quick poll among pharmaceutical analysts from five leading equity research firms revealed that although they felt Biocon is expensive at the current price, it is a good buy.

Biocon will be offering 10 million equity shares in a public offer that opens on March 11 and closes on March 18. Biocon plans to list on both the National Stock Exchange and the Bombay Stock Exchange.

Biocon's IPO comes at a time when a spate of companies are planning to go public with IPO offerings. Oil and Natural Gas Corporation has its IPO also opening on March 5 and it has been popularly dubbed the 'mother of all IPOs'.

ONGC's public offering of 14.26 crore (142.6 million) shares is estimated to rake in about Rs 10,000 crore (Rs 100 billion) and is expected to suck out a lot of liquidity from the market.

Despite being under the shadow of ONGC's offering, Biocon founder and CEO Kiran Mazumdar Shaw says she is confident that its issue will sail through at the price band set.

"We are completely different industries and of different sizes and you cannot compare both companies. Biocon is the first biotechnology company from India to list on the stock market and investors will be willing to pay for that premium that we command," says Shaw.

However, analysts say that Biocon is expensive at its current price band.

While there is no doubt that Biocon is a stock that investors interested in the segment must buy, they say that the valuation is a bit high.

At a price of Rs 300 a share, for instance, analysts say that Biocon is quoting at 15 times one year's forward earnings, which has been termed as 'not cheap.'

For the nine months ended December 2003, Biocon has stated its earnings per share (for a share with face value Rs 10) to be Rs 19.1, under the unconsolidated financial data (Indian GAAP accounting system).

This would put the price-earnings ratio (P/E ratio) (calculated as the ratio of market value per share to the earnings per share) at around 15.

For a share value of Rs 5, this P/E ratio goes up to 31.25, which is way above the P/E ratios of established pharmaceutical companies like Dr Reddy's and Ranbaxy which hovers around 25 and 22, respectively. In India, the average PE for the pharmaceuticals sector is 22.

This, say analysts, makes Biocon an expensive stock at its current price band.

The analyst verdict seems to be go for Biocon if you are looking at it as a medium to long term bet, but do remember that the valuations are a tad high. Analysts also suggest that there will be an upside of 20-25 percent to the stock.

Here's a quick analysis of what Biocon has going for it and where its weaknesses lie.

Strengths:

Biocon is one of India's first biotech companies. Started nearly 25 years ago and headed by the very competent Kiran Mazumdar Shaw, Biocon has been certified by analysts as a company to be taken very seriously.

Biocon also has a patented fermentation process, which is a big plus as fermentation is one of the key enabling technologies in the manufacturing of pharmaceutical products. It also has a strong research & development team and is focused on developing new products and manufacturing techniques.

Opportunities:

Biocon is targeting three market segments:

The first is the statins segment. Statins are cholesterol lowering drugs that are used to treat cardiovascular diseases.

Worldwide the statins market is estimated to be over $ 20 billion.

Biocon derives about 60 per cent of its revenues by catering to the market for the four statins -- lovastatin, simvastatin, pravastatin and atorvastatin that comprise the statin family.

What makes it an attractive segment for Biocon is the opportunity for supply of APIs in the statins space. The statins market is likely to explode as two of the statin molecules slowly go off-patent in the United States and Europe. Two of the four molecules have already gone off-patent while the other will lose patent protection in 2006 in the US.

In the second segment, Biocon is looking at recombitant insulin and oral anti-diabetic products, the market for which is estimated to be over $7 billion.

And the third segment that it is active is immunosuppresants whose market is estimated to be $2 billion.

Weaknesses:

Biocon is betting big on the statin molecules going off-patent to enter that space.

However, analysts say that once the drug loses patent protection, a number of players will descend on the market, pushing down the value of the total market segment and making it very competitive.

Biocon hopes to use the money from its IPO to further its expansion plans and set up its second fermentation and chemical synthesis plant to meet the increase in demand expected from the statins space.

This strategy could backfire if the demand for statin varies, but that is a market risk that most drug companies face, say analysts.

Threats:

The domestic market in India is a significant one and Biocon plans to tap it with the launch of its recombitant insulin product called Insugen in the first half of 2004.

Wockhardt, one of the biggest pharmaceutical companies in India already has an r-insulin product in the market and Biocon will have to reckon with some serious competition there.