Biocon born again
From the first week of October, frequent visitors would have begun to notice subtle changes at the 25-acre headquarters of Biocon, India’s best known biotech company.
Three months after selling its enzymes business to Novozymes, for $115 million (Rs 460 crore), in June this year, company executives have finished reallocating some of the space previously occupied by the erstwhile (and oldest) business unit.
The company, which founder Kiran Mazumdar-Shaw started from her garage three decades ago to extract Papin enzyme from papaya, is on course to make its latest evolution. Mazumdar-Shaw now wants to re-position the company in the lucrative biopharma market.
Since the late ’70s, Mazumdar-Shaw has steered the company through several re-inventions, first moving from being an enzymes maker to statins (cholesterolbusting drugs) and when prices crashed and Chinese competition became too hot to handle, she shifted focus to biopharma.
Now, she wants to take the next few steps in Biocon’s evolution, as she seeks to unlock value from her three main businesses—Biocon, Syngene (contract research and manufacturing, started in 1994) and Clinigene (clinical research and trails)—and invest in transforming the company into a global biopharma company.
“We keep re-inventing ourselves. In the first 20 years we focussed on enzymes, in the last 10 we focussed on biopharma and services. We now want to get into the market with our own products. It was first about branded enzymes, now it is about branded biopharma,” says Mazumdar-Shaw.
Already, Biocon has made some progress down this path with its BioMAB (monoclonal antibody) EGFR (epidermal growth factor receptor) for treatment of head and neck cancer and has focussed its energies on high-potential areas such as oncology and diabetes where there is a clear and accessible market.
The incidence of cancer is high in India, with 100 out of every 100,000 people suffering from some form of it; the country is also home to the world’s largest diabetic population—25 million people at present and expected to increase to around 57 million, according to a recent ASSOCHAM study.
To target the massive market for diabetes, Biocon is working on an oral form of insulin, which will re-define the way the drug is delivered to patients, since it would go directly to the liver (and from there to the pancreas), thereby increasing the efficacy of the formulation. Meanwhile, its first high-profile step into branded drugs came last year, when it unveiled BioMAB EGFR. “BioMAB is the first step in our branded products evolution.
We have a long way to go from here, but have a strong product pipeline,” says Arun Chandavarkar, COO, Biocon.
According to some estimates, around 10 per cent of the global $650-billion pharma market is accounted for by biopharma and this industry is growing at around 17-18 per cent annually. “Traditional pharma companies, under pressure for some years to deliver the next big-bang drug, are increasingly buying into this market to try and bolster their product pipeline,” says Alok Gupta, Head, Life Sciences and Technology Practice, YES Bank.
Indian biotech companies like Biocon and smaller firms such as Shantha Biotech and Bharat Biotech are looking at different routes to tap this market. Shantha and Bharat, for example, primarily focus on developing vaccines for a range of diseases, Biocon’s focus has been on developing therapeutic products for illnesses such as diabetes and cancer.
These biotech companies rely on a combination of skills in scientific research (and a large resource pool) and contract manufacturing to compete with their global rivals.
Unlocking Value
In the immediate context, Mazumdar-Shaw plans to unlock value in her other businesses and hopes to invest those funds in expanding her product portfolio and geographical spread. “We have built value all these years and now we’re looking to unlock this value in our businesses. Syngene is further ahead in this process than Clinigene. We plan to list in the US either on the NASDAQ or NYSE,” says Mazumdar-Shaw.
According to industry watchers, analysts account only for sales (and exclude intellectual property) while valuing a company, but in the West IP is also factored into the equation leading to much higher valuations. “Most analysts valued our enzymes business at only $40 million, but we ended up getting three times the amount,” says Murali Krishnan, President (Finance) Biocon and a 26-year veteran at the company.
Already, both Syngene and Clinigene have begun to build strong third-party businesses as they prepare for the umbilical cord to be cut.
“We started out in 2000 by getting around 80 per cent of our business from Biocon and the rest from third parties. That ratio has been reversed in the last couple of years,” says A.S. Arvind, COO, Clinigene and a medical doctor by training.
Biocon has acted as a good test bed for Clinigene, since it managed the trials for BioMAB as well as its oral insulin programme. Elsewhere, Syngene, the company’s first diversification into services back in 1994, contributes over 10 per cent of the company’s revenues, says Goutam Das, the unit’s president.
Balancing Risk
Despite the high-profile launch of Biocon’s BioMAB a year ago (Bollywood superstar Shah Rukh Khan did the honours), Mazumdar-Shaw is not about to move away from her generics business just yet. “Both our insulin and anti-arthritis drugs have $1 billion-plus (Rs 4,000 crore) potential,” she says, but quickly admits that “it is impossible to churn our big-selling drugs constantly.” Instead, Biocon will continue to leverage its pipeline of generic drugs to earmark funds to invest in its own R&D.
Alongside BioMAB, Biocon also has two generics, GCSF (Granulocyte-Colony Stimulating Factor, used to slow or stop reduction in white blood cells that fight infections) and Streptokinase, a clot-dissolving medication used in cardiology, in the market.
Simultaneously, Mazumdar-Shaw also recognises that she can’t rely purely on her own formulations to grow her business and has begun to tie-up with other companies to sell their products. For example, she has tied up with Abraxis Life Science to market its oncology drugs in India. “Drug development is taken very lightly in India,” she complains, adding, “Each drug takes 4-5 years to develop. I need something to fill up my pipeline in that period.”
Part of Biocon’s evolution from enzymes to biopharma (and in that segment from generics to proprietary drugs) involves a makeover in mindset, says Rakesh Bamzai, the company’s marketing head. “We have to move from a B2B to a B2C focus and this involves much more visible marketing and branding than earlier. There are dozens of brands in a crowded market and we need to get noticed,” he adds.
However, YES Bank’s Gupta argues that several companies have had a spotty record with regulators over the safety of these drugs (compared to conventional, and cheaper generics) and Biocon and other players in this market can expect to face the same regulatory hurdles when they expand, especially into developed markets.
Global Ambitions
While Biocon will get the rights to market Abraxane (Abraxis’ breast cancer drug) domestically and in south and west Asia, it had previously signed a licensing agreement for GCSF in the European and North American markets with the same company. According to Mazumdar-Shaw, Abraxis will handle the development of this drug, while Biocon will get licence fees and royalties for selling it.
Biocon had also inked a 50-50 JV with Neo Pharma to create an entity called NeoBiocon to tap countries in the rich Gulf Cooperation Council region, including the UAE, Bahrain, Kuwait, Saudi Arabia, Oman and Qatar. Under this deal, Neo Pharma will act as the local front-end, allowing Biocon to focus on tapping a potentially massive opportunity in the region. “We would like to start on an equal footing for our JVs and learn the contours of each market, before we eventually become a majority partner.
We want to access global markets for our branded formulations; we want to create a presence on our own. We have begun licensing our formulations overseas, for example, linking up with Bayer for our branded insulin in China and we want to take insulin to the US and Europe on our own,” says Mazumdar-Shaw.
While these markets may help Biocon cut its teeth on the global stage, Mazumdar-Shaw is well aware that the real opportunity lies in the US and Western Europe, where hundreds of billions of dollars are spent on pharmaceuticals every year. The US, for example, accounts for half the world market at around $250-300 billion, but by Mazumdar-Shaw’s own admission is extremely hard to enter. “Regulatory charges are high and there are many large competitors, much larger than us,” she says.
According to her, Biocon “will not make money for at least four or five years in the US market” and can expect to face entretched competition from the likes of the $13-billion Amgen. Mazumdar-Shaw’s global expansion is also likely to be slowed by stringent regulatory environment both in the US and Europe, with neither region showing any signs of making amendments to let companies like Biocon through the door.
Biocon will also begin to feel the heat as larger global competition, including Amgen and Biogen, prepare for an India foray.
Mazumdar-Shaw says she will use a mix of her own business, joint ventures and acquisitions to hasten her growth. “The only way we can hope to enter some markets is through acquisitions. We don’t have the luxury of time to build capabilities ground up. If we want to become a big marketing company, we have to look at companies with strong distribution channels,” she contends.
According to investment bankers, Biocon is focussing on two types of inorganic deals; one, a company with broad sales and marketing reach to quickly ramp up the distribution of products and second, a company with a strong IP portfolio, which could complement its existing pipeline. Mazumdar-Shaw has had some experience in the second area, when it acquired the bankrupt Nobex (and its oral insulin programme for $5 million) in March last year.
Margin Worries
Re-positioning Biocon isn’t only about a biotechnology alphabet soup, but is closely linked to the declining margins for the company over the last three years. While operating margins have declined from 33 per cent three years ago to 29 per cent last year, company executives say the move out of enzymes has little to do with this trend. “This move was not to ease margin pressure or for resources.
It was part of our broader strategy to focus on biopharma,” says COO Chandavarkar. However, Bala Manian, a long-time Biocon watcher and serial biotech entrepreneur (who is also on the company’s management and scientific boards), argues that focussing on biopharma would yield “significant margin upside to the business.”
While traditional pharma companies try their luck with big-bang drugs that could yield billions of dollars in revenues, Biocon has preferred to focus on drugs where the mode of treatment and the end result are well known (insulin for diabetes), but it’s only the method of treatment that varies.
It has already made some headway with its insulin, for instance, where it has moved away from the traditional intravenous form of delivery to an oral medication. “Our insulin will be more effective and 30 per cent cheaper than those in competition,” says Harish Iyer, General Manager, R&D, Biocon. Here, too, Biocon has had to cope with an up to 20 per cent drop in prices in the last 12-18 months and has been compelled to rework its strategy for these new rates.
Money Matters
To fuel Biocon’s growth in biopharma, especially in proprietary drugs, the company will need to invest heavily in not just branding and marketing but, perhaps more importantly, in ramping up its manufacturing capacity and acquisitions. “We will not go to the market again to raise funds for our future growth. However, we have not leveraged our borrowings completely and that is an option we should consider,” says Krishnan.
Mazumdar-Shaw may also need external funding for Biocon’s future growth. The company has around $100 million in its war chest, but by Krishnan’s own admission, it may have to raise further funds to sustain growth. “We want to be a billion-dollar company in four or five years, but that will require us to take some risks,” admits Mazumdar-Shaw. Already, she has invested $160 million (Rs 640 crore) in a new manufacturing and R&D centre at a little distance from her Bangalore headquarters as well as opened a new unit in Andhra Pradesh to keep pace with her growth.
Risk, Regulators and Beyond
Part of Mazumdar-Shaw’s challenge involves juggling investments (and longer gestation period) in its new products, with steady revenues from Biocon’s breadand-butter generics business. “I may spend heavily on oral insulin, but if it fails, it’s money down the drain; but we’re prepared to take risk. I am willing to take these big risks; it’s highrisk and high-reward,” she says.
The company also has to worry about myriad regulatory issues that could potentially hold back its ambitious expansion plans. “Regulatory paths are different and divergent. In pharma itself, regulations are different for generics and proprietary molecules. We are learning these pathways and creating some of them too,” says Mazumdar-Shaw, adding, “In biotechnology, the regulatory path is more cumbersome and it could take up to a year more than our competitors to develop products.” Moreover, Biocon needs to apply for approval from regulators every time it undertakes animal toxicity studies and often there aren’t competent labs to undertake them in India.
Future Gazing
Despite these hurdles, Biocon has tried to put in place the foundation and building blocks to support its latest evolution. It will increase R&D headcount from 200 to over 300 in the next few months and will look to bring in talent from overseas to bridge any skill gaps. While its insulin and anti-arthritis drugs are being touted as $1 billion-plus possibilities, it’s already set some more realistic ambitions back home. “We’ve shown some strong growth in insulin, where we have overtaken Eli Lilly in new prescriptions. Now we want to overtake the #1 player in this segment, Novo Nordisk,” says Mazumdar-Shaw.
Given how she has successfully steered her company through previous evolutions, few people would bet against her this time around.
Interview with Kiran Mazumdar-Shaw on the next page...
“We want to sell our own drugs in global markets”
A day before flying overseas to look after her ailing husband, Kiran Mazumdar-Shaw, 53, founder and Managing Director of Biocon, met with BT’s Rahul Sachitanand in early September to discuss the evolution of the company she started in her garage three decades ago and strategies for the future. Excerpts:
Question: Biocon is reportedly looking to unlock value in its newer businesses by listing them overseas. What’s the plan?
Answer: We have built value all these years and now we’re looking to unlock this value in our businesses. We will spin them off to a level and consider the next level. Syngene is further ahead in this process than Clinegene. We do plan separate listings for the three entities. I am unable to comment on expected valuations. I can say Biocon is an under-valued stock, because no one knows how to value IP. We would only look to listing in the US. We will also consider private equity investment.
Question: Is inorganic expansion part of Biocon’s strategy?
Answer: Biocon would like to move up the value chain and actively market finished formulations in global markets. The only way we can hope to enter such markets is through acquisitions. If we want to become a big marketing company, we have to look at companies with strong distribution channels.
Question: Does the enzymes business’s sale signal the re-invention of Biocon?
Answer: Yes, we do keep re-inventing ourselves. In the first 20 years we focussed on enzymes, in the last 10 we have focussed on biopharma and services. We now want to get into the market with our own products.
Question: Will a larger pharma focus help arrest sliding margins?
Answer: Yes, there is potentially a large margin upside, but competition is very strong. In insulin, we have overtaken Eli Lilly in new prescriptions and now want to overtake market leader Novo Nordisk. Our product is priced 25 per cent cheaper, which is a huge saving for a chronic therapy.
Question: Can you update us on your drug discovery pipeline?
Answer: Our discovery programme is robust; our insulin and anti-arthritis drugs have $1 billion-plus potential. Our antibody for rheumatoid arthritis is entering Phase 2 trials and we have global rights on oral insulin, which is delivered directly into the liver.
Question: You have a deal with Abraxis to sell their drug. Why not develop your own?
Answer: It is impossible to churn out big-selling drugs constantly on your own. Each drug takes 4-5 years to develop. I need something to fill up my pipeline.
Question: Do you have a longer-term goal for Biocon? What will drive that goal?
Answer: We clearly want to be a billion-dollar company in the next 4-5 years. Biotechnology is still a very risky business. We are balancing risk with predictable business. I may spend heavily on oral insulin, but if it fails, it’s money down the drain. Indian companies have yet to understand this business. I am willing to take these risks; it’s high-risk and high-reward.
