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Biotech major Biocon’s research subsidiary Syngene International may eventually be hived off as a standalone entity, according to Biocon chief Kiran Mazumdar Shaw. The executive was speaking ahead of the initial public offering (IPO) of Syngene which is scheduled to open on 27 July. Biocon’s direct equity stake of 83.6% in Syngene will be diluted to 72.6% following the issue. Bangalore-based Biocon will sell 2.2 crore shares in Syngene in the range of INR240-250 apiece through the IPO which will be a pure offer for sale (OFS) issue,. Since it will be an OFS, all proceeds will be pocketed by Biocon and Syngene will not receive any funds. If you want to know why this IPO makes sense for investors, read our analysis of the public issue here. Private equity investor India Value Fund (IVF) bought 10% stake in Syngene in January this year at the effective rate of INR190 per share but is not participating in the IPO.
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However, Synegene is critical to Biocon and the parent may decide to offload more equity stake of the contract research organization (CRO) in coming years. A demerger may happen as and when Biocon is less financially dependent on Syngene, said Shaw. The parent company is involved in the high risk – high reward drug discovery business while Syngene offers the much needed stability through consistent profits. Biocon focuses on developing drugs for diabetes, cancer, immunotherapy, kidney diseases and cardiology – a strategy that can offer blockbuster results but with a high risk of failure. Profits in the more mundane CRO business increased from INR27.2 crore in FY 2010/11 to INR175 crore in FY 2014/15. Syngene counts Bristol-Myers Squibb, Abbott Laboratories and Baxter International among its biggest clients.
Biocon is at a time when it needs to invest in capacity expansion of its production units. Syngene’s margins, profitability and revenue are very, very helpful to buoy up some of Biocon’s own needs
– Biocon chief Kiran Mazumdar Shaw
Biocon CEO Shaw’s grand vision for Syngene is to transform the subsidiary from a CRO to a Contract Research and Manufacturing Services (CRAMS) organization with commercial-scale manufacturing capabilities. However, we wouldn’t read too much into these transformative plans as almost every CEO has plans to make his/her organization the dominant player in the respective areas. On ground, Syngene had earnings per share (EPS) of INR9.2 per share. This means the issue is priced in the range of 26 – 27.2 times its historic EPS. This is not inexpensive but growing risk appetite in the markets has resulted in IPOs with steeper valuations.