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BW Businessworld

Kiran’s Latest Gamble

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 Kiran Mazumdar-Shaw, the feisty chairman and managing director of Bangalore-based Biocon, is out to woo again. In 2004, the first- generation entrepreneur persuaded hard-nosed public investors to buy into her relatively obscure biopharmaceutical firm’s IPO (initial public offering) with spectacular results. Her latest overture, a bid to buy Siro Clinpharm, India’s largest homegrown clinical trials management company, is similarly ambitious.

 
Mazumdar-Shaw has to convince the Mumbai-based Siro’s owners, private equity (PE) investors Kotak Private Equity and 3i Group, who own nearly 70 per cent, and the Daftary family, who own the rest, to sell. As BW’s website reported earlier this week, the deal is still far from being tabled and Mazumdar-Shaw may have an extended courtship ahead.
 
The objective, it appears, is to unlock value from Biocon’s research and development (R&D) services business, concentrated in two subsidiaries — Syngene and Clinigene. Syngene does contract research for pharma and agrochemical companies, and Clinigene, like Siro, manages drug trials for a fee.
 
The Logic Behind The Deal
Cobbling together the three entities could enable Mazumdar-Shaw to replicate the biopharma business’ success in the growing pharma R&D outsourcing space. Five years ago, she leveraged investor excitement around the promise of biotechnology to raise Rs 300 crore and build a biotech drug business. At the time, Biocon only made industrial enzymes and bulk statins (the active drug in certain heart pills made by a number of companies). It has since launched products such as human insulin and a monoclonal antibody against cancer.
 
 
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This time, however, Mazumdar-Shaw is doing the buying and she has to be careful that she does not end up paying a hefty premium. PE investors are well-known for their ability to drive hard bargains. And to complicate matters, Siro’s PE investors are comfortable holding on to their stakes for a couple of years at least.
 
When contacted, Mazumdar-Shaw denied any acquisition plan. “We are only in discussions with Siro for a possible alliance to bundle some complementary services (of Siro and Clinigene),” she said. “There is no prospect of a stake sale,” she said, adding that Syngene did not figure in the discussions. Siro chairman Gautam Daftary declined to comment. Nitin Deshmukh, CEO of Kotak Private Equity, and Anil Ahuja, head of Asia, 3i Group, could not be reached for comments. But a source close to one of these investors said, “Nothing has been signed or formalised yet. Things are still at the negotiation stage.” Mazumdar-Shaw is believed to have roped in investment bank Allegro Capital, which earlier advised her on the acquisition of German firm Axicorp, as advisor to the deal.
 
Mazumdar-Shaw has shown her intent to float the research services business, which had a combined turnover of Rs 225 crore in FY09, as a separate entity on several occasions. The global meltdown in 2008 forced Biocon to can plans to list Syngene, the bigger and more successful of the two arms.
 
Global economic conditions have put pressure on rates charged by companies such as Syngene, says one consultant who has advised such companies. Besides, at the best of times, contract research is a competitive business with numerous contenders from India, China and East Europe. Siro, with revenues at about Rs 200 crore, manages trials of new drugs for pharma companies on human subjects in hospitals and doctors’ clinics. Drugs can only come to market if they convincingly pass these trials. This is a multi-billion dollar business globally. In India, it is worth $250-275 million, notes an Ernst & Young study. Indian companies such as Siro score by offering the India advantage — low costs, a huge patient pool, doctors and the English language to western drug companies.
 
However, this is a long-gestation business and no Indian company has the scale yet to compete on a sustainable basis with multinationals such as the US-based Quintiles, whose Bangalore-based arm is the market leader in India. Siro, second after Quintiles in India, has been trying to build up a multi-country presence with small acquisitions. It has been more successful than others, but is still far from achieving global scale.
 
The synergy between Siro and Clinigene is obvious. Clinigene, started in 2000, is much smaller and still gets a lot of business from Biocon itself. But it has some high-quality infrastructure, including a central laboratory that can perform tests for drug trial sites and a specialised unit capable of testing a drug for the first time in a human being. Such a unit should have intensive care facilities and trained staff to tackle emergencies. Siro has neither the lab nor the units, but it has more customers. Syngene’s expertise lies in getting a drug to the point where it is ready to be tested in humans. This requires a different set of skills and capabilities.
 
 
THE SIGN: Siro’s investors are said to be in talks with other potential buyers including foreign companies
Contract research and clinical trials are two separate activities and customers award contracts for these separately. Mazumdar-Shaw admits that the only synergy between the two activities is that customers being pitched for one type of service can be informed about the other. Still, combining with Siro adds to the topline of Biocon’s research services business. It also provides a more attractive ‘pharma outsourcing story’ to stockmarkets in the event of a listing. “Such a firm would be valued far higher than Syngene by itself, for instance,” says an analyst with a foreign brokerage.
 
Biocon’s offer could provide either a partial or full exit to the Daftarys, who also own Bharat Serums and Vaccines, a pharma company that they are committed to grow. “It was obvious when the family sold off a substantial stake to PE investors that their eventual aim was to exit,” says a person familiar with the development. Siro is the only services business that the Daftarys are managing. The others are into manufacturing and R&D.
 
Show Me The Money
At this point, Siro’s PE investors are amenable to an exit at the right valuation. A deal could cost in the region of Rs 400 crore, assuming a multiple of two times revenues. The PE investors are believed to have together invested around Rs 100 crore and expect a return of 2 to 3 times at least.
 
However, if the PE investors do sell, they are more likely to prefer an all-cash deal rather than a cash-and-stock deal. Such deals, where investors accept stock, are rare in the Indian PE market and are usually restricted to the sale of stake in distressed investee companies. Siro is far from distressed. Sources close to the PE investors say that Biocon is not the only unsolicited bid that they have received. They are also in talks with other potential buyers including a couple of foreign companies who may not be averse to paying top dollar.
 
Even if the deal were to involve stock, it is not clear yet if Siro’s current investors will be offered equity in Biocon or some other company representing the services business. Biocon appears to be in a position to pay cash too. The company has in excess of Rs 300 crore of cash on its books. It can also raise debt. According to CMIE’s Prowess database, it had a debt-to-equity ratio of 0.12. Its market capitalisation tops Rs 5,000 crore. Now, it is a matter of convincing Siro’s shareholders. Can Mazumdar-Shaw pull it off this time?
 
bweditor at abp dot in
(This story was published in Businessworld Issue Dated 08-02-2010)