Kiran Mazumdar-Shaw, chairperson and MD of Biocon, has taken bold bets, some of which were ahead of their time Image: Bmaximage
On September 9, 2016 , Bengaluru—India’s IT hub—came to a grinding halt due to a general strike called against a Supreme Court directive, asking the Karnataka government to release water from river Cauvery to Tamil Nadu.
One prominent Bengaluru citizen, industrialist Kiran Mazumdar-Shaw, decided to raise her voice on Twitter against the demonstrations that were crippling normal life. As is the trend these days, Mazumdar-Shaw immediately got trolled by the pro-agitation brigade. Undaunted, she followed this up with an open letter, where she empathised with the farmers who would suffer from the SC verdict, but reiterated that bandhs weren’t the solution.
This isn’t the first time that Mazumdar-Shaw has spoken up on issues of public concern. She has been as much vocal about Bengaluru’s civic infrastructure as she has been with gender biases in corporations. Says TV Mohandas Pai, an old acquaintance and chairman of Manipal Global Education, “She is a strong person who is not afraid to share strong views that are based on fact.”
It is this feistiness with which the 63-year-old chairperson and MD of Biocon has pioneered an enterprise in the field of biopharmaceuticals, emerging, in the process, as India’s richest self-made woman. Pai believes that Mazumdar-Shaw is perhaps at “the peak of her career”, and her strong return to the Forbes India Rich List for 2016, after dropping out last year, reflects his confidence.
The reason for her comeback isn’t far to seek. The company ended fiscal 2016 with Rs 3,570 crore in revenues, up 14 percent over FY15, and a net profit of Rs 896 crore (including an exceptional gain of Rs 575.40 crore fuelled by the listing of its contract research subsidiary Syngene), up 80 percent over the previous year. Over the last five years, Biocon’s topline has grown at a compound annual growth rate (CAGR) of 14 percent, while its bottomline has risen at 19.5 percent annually. Its market value has skyrocketed to Rs 19,107 crore (as on October 5), more than double of what it was a year back. The benchmark S&P BSE Sensex rose a modest five percent in that period.
To get to this point, Mazumdar-Shaw has taken bold bets, some of which were ahead of their time and not always palatable to stakeholders. But she stayed the course even as questions were repeatedly raised over Biocon’s business model and its need to spend copiously on research and development (R&D), without immediate sales and profitability. For instance, five years ago, Biocon’s shares were trading at about Rs 350 apiece; they appreciated to only about Rs 450 till a year back, representing a CAGR of only six percent. But on October 5, they closed at Rs 955.35 per share.
“It used to bother me [that investors didn’t appreciate Biocon’s efforts earlier],” admits Mazumdar-Shaw in a telephone interview. “But not anymore. Investors prefer to bet on simple ideas and Biocon is a complex, technology-driven story. This technology will be a big differentiator for Biocon in future and lead to sustainable value creation. Ours is a long gestation business and it can take up to 10 years for a product to come to market. Very few investors are willing to wait for that long.”
Before establishing Biocon in 1978, Mazumdar-Shaw had returned to India with a master’s degree in malting and brewing from Ballarat College, Melbourne University. Her biography, Myth Breaker: Kiran Mazumdar-Shaw and the Story of Indian Biotech, points out that Mazumdar-Shaw, the daughter of Rasendra Mazumdar, former chief brewmaster at United Breweries, realised it wouldn’t be easy for a woman to land a job at a brewery in India those days. She was about to leave for Scotland to work at a malting company when she was approached by Les Auchincloss, the owner of an Irish company called Biocon Biochemicals. He wanted Mazumdar-Shaw to be their partner for the company’s proposed Indian foray.
Though initially hesitant, she decided to enter into a joint venture with the Irish firm. Just 25 at the time, she became the head of Biocon India. (Biocon Biochemicals was acquired by Unilever in 1989, and its stake in the Indian joint venture was sold to Mazumdar-Shaw in 1998.)
Biocon India has come a long way since its start as India’s first exporter of enzymes to the US and Europe (the enzymes division was divested in 2007). By the time Mazumdar-Shaw completely acquired Biocon, the company had perfected an in-house proprietary fermentation technology and used it to enter biopharmaceuticals and statins (drugs used to lower cholesterol levels).
The Indian pharmaceuticals industry, as a whole, has done well for itself by catering to the lucrative generic drugs market in the US. Most of the medicines made by Indian companies are chemically-synthesised from small molecules, which are organic compounds that help regulate a biological process. But the biologic drugs that Biocon specialises in are made from large molecules, which, essentially, are proteins found in living organisms. Biologics are believed to be capable of delivering better targeted treatment for ailments, with fewer side-effects than small molecule drugs.
“Our overarching mission was to provide affordable access to very expensive life-saving drugs in the field of biologics,” says Mazumdar-Shaw. “I always believe that if any business idea succeeds in India, it will be a success globally. So we wanted to make these world-class drugs in India at a much lower cost.”
The first blockbuster drug that Biocon made and sold was human insulin, using a new method known as the Pichia fermentation technique. The novel method helped Biocon make insulin with the same efficacy, but at a much lower cost. This encouraged her to set up a large insulin-making facility in Malaysia with $250 million, and also expand the scope of the company’s biologic drug discovery initiatives and development of biosimilars (a drug with similar properties to a previously licenced biologic drug). Some therapeutic areas targeted by Biocon include diabetes, oncology, autoimmune diseases and dermatology.
Biocon’s drug discovery programme includes four molecules that are under development: Insulin Tregopil (a rapid-action insulin); Itolizumab (commercialised in India to treat psoriasis and being developed for other global markets); siRNA (for rare diseases); and fusion proteins (combination of large and small molecules for targeted cancer treatment).
Work on these new biologic drugs puts Biocon among the few innovator companies in the Indian pharmaceuticals industry, where most other players are making generic versions of drugs that are going off-patent. This has also helped the drugmaker develop a robust biosimilars programme, since it understands the process of discovering a new drug in a lab to developing it for end-use. “Our legacy in biotechnology propelled us to get into biosimilars very early on,” says Arun Chandavarkar, Biocon’s chief executive and joint managing director.
At present, Biocon has a robust pipeline of 10 biosimilar drugs (including different types of insulin) under development with an addressable market size of $60 billion. In order to diversify the risk associated with the development of these products, Biocon has partnered with US generic drug-maker Mylan. The strategic collaboration leverages Biocon’s development and manufacturing capabilities and Mylan’s regulatory and commercial expertise.
In its latest investor presentation in June 2016, Biocon stated that, in FY17, it is on track to file for regulatory approval pertaining to four of these drugs across the US and Europe. These drugs have either completed Phase-III trials or are in advanced stages of doing so. Despite the rapid strides made by Biocon towards developing new biologics as well as biosimilars, the company’s stock had been out of favour with investors who had the option of buying into several Indian generic drugmakers. Many of them have been reporting consistent operating profit margins of over 30 percent and return on equity (RoE) of over 40 percent. In comparison, Biocon’s RoE and operating profit margin stood at a relatively modest 24 percent each in FY16.
The Street’s scepticism over Biocon’s future potential stemmed from the fact that compared to small-molecule generic drugs, the R&D costs for developing biologics, including biosimilars, are significantly high and the time taken is long. According to Chandavarkar, each biosimilar molecule costs anywhere between $50-150 million to develop, as compared to the $3 million needed for a traditional generic drug.
Also, biologics and biosimilars are at a relatively nascent stage around the world and comprise a smaller, though fast-growing, portion of the global pharma market. That is expected to reach around 20 percent of the global pharmaceuticals market in 2017, according to data from IMS Health, an American provider of global health care information and technology services. Also, the regulatory landscape governing their use is still evolving in mature markets like the US and Europe.
“Although the global biosimilar story has more questions than answers at this point, these will be addressed by market forces, regulators and courts in the years to come,” says a Morgan Stanley research report dated April 5.
But as the maxim goes, nothing succeeds like success. A couple of encouraging international developments pertaining to its biologics portfolio have turned the investors’ tide in Biocon’s favour.
Biocon received regulatory approval to sell Insulin Glargine (a long-acting insulin biosimilar) in a tough regulatory market like Japan in March 2016. This was followed by announcements in July and August that the European Medicines Agency had accepted Biocon’s application to market biosimilar Pegfilgrastim and Trastuzumab (both cancer drugs) for review. Meanwhile, Biocon also started selling Insulin Glargine and Trastuzumab in emerging markets last fiscal.
All of this has led investors to believe that Biocon may be on the right track after all. The Morgan Stanley report says: “2016 could be a turning point for Biocon. Four potential filings in the US and EU (European Union) would add credibility to its pipeline and bring market recognition. Emerging markets monetization is underway, but the US and EU opportunities will take at least two years.”
The greater opportunities opening up in the global biopharma market are well-suited to Biocon, considering its headstart in the sector. For one, a larger proportion of new drugs being approved by regulators like the US Food and Drug Administration (USFDA) are biologics (due to their higher efficacy and lower side effects). “More than half of the top 10 drugs sold in the world now are biologics,” says Chandavarkar. Besides, the global biosimilars market is also nearing an inflection point with original drugs worth around $70 billion slated to lose patent protection by 2025. This opens up a significant opportunity for companies like Biocon.
Because of the high entry-barriers (such as R&D cost) and limited competition in this space, the erosion in the prices of biosimilar drugs is going to be less severe than in the case of generic drugs. Depending on demand and competition, the generic version of a small-molecule drug can sell for as cheap as at 10 percent of the price of the original drug. “Given the limited competition, pricing discount to brand could be around 30-40 percent, implying around $15 billion biosimilars market by 2025,” says a report by Axis Capital dated January 5.
Industry experts expect drug regulators to expedite the process of approving biosimilar drugs in order to ease the pressure on government health care budgets. Besides, private sector health insurance companies are also likely to promote the use of biosimilars, since they are considerably cheaper than the expensive original biologic versions.
While Biocon’s promising biopharma business is one leg of its growth story, the other and equally important aspect is Syngene International, Biocon’s contract research organisation (CRO).
In 1994, Biocon set up Syngene to address the growing need for outsourced R&D in pharma. Syngene was listed as a separate entity last year and its shares have skyrocketed since then. The company, which was earlier a 100 percent subsidiary of Biocon, helps pharma companies from across the world with their drug discovery, development and commercialisation endeavours. It has emerged as Asia’s largest CRO that caters to eight of the top 10 drugmakers in the world, including marquee global names like Bristol Myers Squibb, Amgen, and Abbott Nutrition.
In August 2015, Biocon raised Rs 550 crore by selling a portion of its holding in Syngene through a public issue. The parent company holds a 73.4 percent stake in the company at present. Syngene’s share prices have risen over 60 percent since, to Rs 498.70 per share as on October 5, and its present market value is at Rs 9,970 crore.
The growth in Syngene’s earnings and market value also partially reflect in Biocon’s consolidated performance by virtue of the latter’s shareholding in the company. According to Syngene’s latest investor presentation dated July 2016, the company’s revenues have grown at a CAGR of 28 percent between FY12 and FY16 to Rs 1,113 crore; during the same period, operating profit rose at a CAGR of 27 percent to Rs 363 crore, and the company reported an average operating profit margin of 32 percent.
The other hallmark of Syngene’s business model is the longevity of its contracts. “The company manages to roll forward around 90-95 percent of its existing business into the next year. Every year, around two-thirds of new business comes from existing clients and the rest comes from new clients,” says a Motilal Oswal research report dated October 4. “This demonstrates the company’s strong client relationship-building skills.” To further improve connect with consumers from different corners of the world, Syngene roped in Jonathan Hunt as CEO in January this year. Hunt was president and director at AstraZeneca, Austria, and chief operating officer at AstraZeneca India, before joining Syngene.
Syngene has set itself a target to achieve a turnover of $250 million (around Rs 1,666 crore) by FY18 and appears on its way to achieve that goal. One of the strategies adopted by the company to boost its earnings is to move up the value chain. As part of its current business offerings, Syngene manufactures, for its clients, limited batches of drugs for the initial commercial launch phase. The CRO is now getting into full-scale commercial manufacturing of APIs (active pharma ingredients) for its customers, and is building a $100-million facility for this purpose in Mangaluru. It expected to be ready in 2019.
“Over the course of our work we have built a lot of process knowledge and will use that to take up manufacturing on behalf of clients,” says Manoj Nerurkar, Syngene’s chief operating officer. “Taking the final manufacturing of the end-product elsewhere would involve technology transfer and risk to intellectual property (IP). Since we have maintained an impeccable track record of maintaining data integrity and confidentiality, it becomes an attractive proposition for clients to stick with us even for commercial manufacturing.”
And therein lies the secret of Syngene’s success: Despite being the subsidiary of another pharmaceuticals company, and a CRO to multiple drug-makers from around the world, it has been able to manage strict control on data integrity and IP. “There is a very strong firewall between Biocon and us,” says Nerurkar. “Except Kiran, who is the group chairperson, every other functional team, including the R&D team, are separate. If you ask the Biocon CEO about the projects that Syngene is working on, he wouldn’t know.” Even Syngene’s employees who work on different projects at the same time have been trained not to chat casually about their confidential work, even over a cup of coffee in the canteen.
Syngene was born out of Mazumdar-Shaw’s foresight that if Indian IT companies can work on critical projects for global corporations, then there was an opportunity to replicate the same model in the pharma space. And whether at Biocon or Syngene, Mazumdar-Shaw’s focus on technology and intellectual property, along with her resilience, have helped her build pharma enterprises of global scale. These qualities may well have seen Mazumdar-Shaw become a globally renowned brewmaster. But fortuitously, the brewing industry’s loss has been Indian pharma’s gain.