New product mix nurses Biocon back to health

Biocon has managed to heal the wound fast. India's largest biotechnology company, which straddles high-end drug research to generics, bet the wrong way on how the rupee will move against the dollar and paid a big price last year.

The company incurred mark-to-market (MTM, marking down securities to reflect current value) losses of Rs 147 crore during FY09, which pulled down net profit by more than four times to Rs 93 crore as against a net of Rs 434 crore during FY08.

"We learned a lot from the blunder we committed last year in terms of hedging. We are out of the speculation game and that's why we are seeing a big turnaround this year," says Biocon CMD Kiran Mazumdar-Shaw.

Biocon has successfully immunised itself from currency volatility this year. The performance in the first two quarters showed a spectacular improvement, after the company adopted a new strategy that involves a currency insuring mechanism, which has helped it do away with MTM losses.

Even as the company was battling a complex hedging process and had to pay the price, its research and growth engine was humming nicely, as more global companies came in to leverage Biocon's expertise.

It is the new approach towards currency protection, coupled with a product-service mix that has put the company's financials back on track. Shaw attributes the turnaround to the company's performance across all sectors.

The company follows a business model wherein there is a balance between products and services. Its research efforts are balanced between generics and novel programmes. It has manufacturing capabilities in both high-end technologies such as biosimilars and small molecules such as statins (cholesterol lowering agents) and immunosuppressants (acting on the body's immune system).

Shaw says the gestation period is over, and the investment the company made in biopharmaceuticals in the past decade is beginning to pay off. The business of insulins and immunosuppressants has been a good contributor to both top line and bottom line. Similarly, the branded formulation business has yielded high returns.

The company, which began as a supplier of API (Active Pharmaceutical Ingredients), now has about 50 brands, mainly in the areas of diabetes, cancer and heart-care. Licensing income is also coming in, and Shaw believes IP (intellectual property) is going to be a big value driver. "We have focused on IP creation and innovation. We have chosen technologically challenging segments like biosimilars, where we think we can differentiate strongly," she says.

Analysts agree. Biocon is indeed aggressively charting its path forward in making diabetes care much easier for millions, as it is attempting to bring in oral insulin, which will do away the painful shots.

Biocon, along with its clinical research and contract research arms -- Clinigene and Syngene -- "is the only company in India that really has the biologics capability at the level and scale required, providing end-to-end high value research services and manufacturing," Shaw says. Given that India is a hub for clinical research, Biocon uses "the low-cost base to make high-end drugs," and aims to be among the top three biosimilar players in the world. Biosimilars or biologics are the approved versions of innovator biopharmaceutical products.

The company is parallely expanding its global footprints through partnerships. Its German subsidiary, AxiCorp, has started getting contracts for marketing insulin products in Germany. Milestone payments have also started trickling in from US-based Mylan Pharmaceuticals, with which the company entered into a partnership for development and marketing of biosimilars. Biocon recently teamed with US-based biopharma player Amylin Pharmaceuticals to develop, commercialise and manufacture peptide therapeutics for diabetes care. The company is beginning to have wider presence in Latin America through partnerships.

Biocon's revenues for the first half of the current financial year have crossed Rs 1,000 crore. "At this rate, we will almost be a half-billion top line company by the end of this year. Given the growth drivers, I am optimistic of reaching the $1 billion mark within four years," Shaw says.

And Biocon's oral insulin reaching late-stage clinical trials in India is being considered a global opportunity. "Oral insulin minimises the risk of hypoglycemia (lower than normal level of blood glucose) connected with insulin overdose. There are hordes of other benefits and we are excited about its potential. It will be the first oral insulin in tablet form. It is a blockbuster opportunity for Biocon, if things work as expected," she says.

There have been some voices of apprehension regarding oral insulin's safety aspects. Whether oral insulin turns out to be transformational for Biocon will be known only by next year, when the results of late stage trials will be out.

Insuring currency pays off

Last year, since there was a prediction that the rupee would strengthen and go down below 39 to the dollar, a number of companies were badly hit by hedging the rupee at a fixed price. Biocon, for instance, covered the rupee at about 41.5. That became disastrous for the company. For, contrary to expectations, the rupee weakened, climbing up to 48 and 49.

So, Biocon decided to insure the rupee this year, instead of hedging at a fixed price. "The insurance mechanism assures that we will get the value of the rupee at the given point of time, even if it goes below the level at which we insured it. And the beauty of this mechanism is that if the rupee weakens, we will get full benefit of it," Shaw says.

The mechanism allows for insuring the rupee by protecting the downside and getting the full benefit of the upside. This comes at a price. Banks charge more premium for insuring the currency. "Most companies want to pay a minimum premium and cover the rupee at a certain level. However, the moment you do forward cover, it is like taking a punt. So, it is worth paying a little more and protecting the volatility. It is a good way of de-risking," she says, adding, that companies are now beginning to see the advantages of insuring the currency.