The biggest risk I see is KMS carving out Biologics separately and listing it as a separate entity rather than demerge and give existing shareholders proportionate shares.
If the former is done, Biocon becomes a holding company largely and hence discount would weigh in on valuations.
More importantly, Biocon shareholders who have nurtured and been patient with the business since 15 years would get a raw deal. It would be a disaster
I agree completely. Shareholders of Biocon should write to IR dept. and get this clarified.
If existing shareholders of Biocon will not get proportionate shares in Biologics entity then they will be short-changed.
Biologics is going to be the biggest growth and value driver for Biocon. If Biocon becomes merely a holding company for Biologics and only has active API and Generics business then it is unfair to existing investors of Biocon.
See Nikhil’s response - very valid question that needs to be clarified from Biocon IR dept.
Biocon - Biologics = Biocon as Holding company for Biologics + API and Generics business. There is not much to be excited about API and Generics business. The sunrise sector is Biologics.
Biologics has a revenue target of USD 1 Billion for FY 22.
Folks - any intel on the recent Form 483 observations? Being touted as integrity issues in social media which is quite surprising for Biocon…
Biocon denies Data Integrity issues.
If there really are any - then its knowledge will be restricted to a very close circle in the management.
The general feedback I have on Biocon operations is that it is much more professional than the peers in pharma industry.
Having said that, the risk all pharma companies face is employees having malafide intent or grudge against the company can intentionally cause some or the other SOP violation.
No system is completely Fool Proof. Especially for insiders who have seen the operations for reasonable period of time.
The Total addressable market is $30Bn (based on branded drugs current prices) The split of the same by molecule is available in their A/Rs and in the post by Bina on this thread. Please read the entire thread before posting questions, that will help avoid duplication.
As for the spin off & what the market reaction to it - Your guess is as good as mine, I don’t see the point in speculating about it. It would probably be a better use of our time to focus on the business. As for the IPO, Dr Mithun pointed out earlier that during the Syngene spin off, Biocon shareholders got a preferential allotment during the IPO. So I don’t understand why Nikhil thinks this will be a “disaster” for existing share holders. Just apply for the Biologics IPO if thats what interests you.
Sorry have a differing view here.
Syngene Ipo - measely 10% was reserved for Biocon holders, How does this justify anyway?
More so, in case of Biocon, shareholders, many of them since 2004, have safed through gestation period to see Biologics come to where it is today. To have a separate IPO (with again 10% meaningless reservation) would put in vain the pain over the years of of shareholders. If this was the case, then why incubate business in first place and then list separately? Why not demerge and provide equivalent shares?
And this is not speculation. This is a forum to discuss related points within the realms of practicality and that is what we are engaging in here, with due respect.
The Syngene IPO was a disaster from a corporate governance as well as minority shareholder friendliness perspective. I would hope that the management and promoters would take some lessons from it. However, I would be vary careful because somehow in India, promoters and management rarely change. If and when buying, we need to adjust valuations accordingly and give a discount due to poor management practices towards minority shareholders.
Wondering that Isnt SBI card IPO is on same lines - current shareholder can bid in both quotas (per Angel mailer) ? More of a gesture only to minority holders.
@basumallick - from your experience - what could be the worst case scenario impact on Biocon valuation at ballpark levels? it is likely that pattern of Syngene will recur (like TrueNorth in both cases), thanks.
I don’t know. But, for a company which has a history of bad governance, I would either stay away or not pay up.
Note: This is also a reason why quality companies are rarely available cheap in any market.
Bit lost here Dada. Sorry for nagging question, but based on my limited know how, it seems to be happening in all cases irrespective of parentage?
HDFC AMC or HDFC Life - with quality parentage - IPO didnt have any positive riders for existing HDFC or HDFC bank holders - how is Biocon case different here from construct of IPO of a subsidiary.
Or other way around has there been cases of preference to minority holders during IPO that I should read about?
Lets say there is a company A. which has two divisions B & C. Now the valuation of A is based on the sum of parts of B&C.
When A decides to demerge or sell C then the proceeds comes to A. Whether A sells C directly (through an IPO) or demerges and lists or whatever else, the money is still coming to A.
Now, let’s say you were owning say 2% of A and management owns 51%. If the management of A decides to go through an IPO and does not give you any share and A retains 70% of share of C, your share of earnings from C reduces from 2% to 1.4% (passed through to A). The management while selling the IPO pockets the money and you don’t the full benefit of the earnings. In case of a demerger and proportional share allotment your share of C’s earnings would still be retained at 2%.
In case of HDFC holding in HDFC Life and HDFC AMC etc, I think they do get a holding company discount. Do you see the same valuation for HDFC’s proportion of the holdings in these companies? No. Same case with Kotak Bank. The value of Kotab Bank shares is much lower what it would be valued at if the parts were listed separately for Kotak (bank+insurance+amc+brokerage).
HDFC does not have a promoter holding. Today I think around 90% is owned by institutions, so the question of promoter cheating the other shareholders do not arise. Not so with Biocon and their ilk.
Not so sure why so much is being made about this, literally all spin offs happen this way, be it HDFC or whoever else you hold as the gold standard of CG. So you’re argument being that if there is a promoter group and they do this (spin off) it is somehow bad but if there is no promoter (like in the case of HDFC) its some how considered kosher, I’m not sure I agree with that. In either case with or without a promoter the end result is the same for all parties (especially for us minority shareholders). Bajaj finance plans do the same with its HFC business, I don’t think we would call it bad corporate governance.
As for your ABC example - That’s a complete misrepresentation - We own 2% of A, Management owns 51% of A & management divests 30% of C. Our share of C’s profit does indeed go down from 2% to 1.4% AND SO DOES THE MANAGEMENTS SHARE IN C which goes down to 35.7% directly. With you so far. But in exchange for my 0.6% stake of C, I am being paid the present value of 0.6% of C’s expected future cash flows by way of the stake sale (or the value of C). So I am not sure the basis for you comment of ““Management pockets the money & we dont get any benefit”” ?? The money raised by A by spinning of C, I still own 2% of A, don’t I?
Case in point - Syngene spin off - Management used the money to get the bio similar portfolio through the clinical trials and to market. I am not complaining of the way the spin off was done, I think I am better off because of the way they deployed the funds towards the advancement of biosimilars. If I think that the funds raised by IPO are not going to be deployed well, then I am free to sell my holding.
Also could you please substantiate your statement ““But, for a company which has a history of bad governance, I would either stay away or not pay up.”” Are you suggesting that Biocon has a history of bad governance? We don’'t want to make unsubstantiated assertions here do we? Could you maybe back this up with data / fact that we may have overlooked?
Cheers!!
I agree with you totally rks00!
What is the reason for selling bit by bit of Biologics business to PE? To fund R&D expenses for biologics business, as simple as that! The best route is to sell small stakes to outsiders at a premium…Why would current investors (biocon shareholders) pay a premium and that too sizeable chunks of biologics business??
Just think about it - assume that biologics will be proportionately distributed to the existing shareholders (that is what many of the investors want). Everyone will be happy - but who will pay for the huge R&D expense which will be a significant expense every year - will you be happy with “rights issue” periodically? The other way to fund R&D is take out loans…
Discl - holding and adding since 2016
What he meant was that if current shareholders do not get any allotment in IPO then entire IPO proceeds will go to management. While you will not have direct ownership in New company. Holding discount will apply as well.
Please correct me if I am wrong
No that is not true. Management can’t take out money like that! The proceeds of recent stake sale in biologics business stays within the company (Biocon)
Holding company discount is another matter
Management cannot take out money. But money remains with Management as well as Stock of new company. We just have holding company stock. And We can just hope that Holding Company stock provide adequate and proportionate returns. But going by history that seems improbable. I hope it is demerger.
I would rate Biocon management very high on corporate governance. They have been booking considerable amount of R&D to P&L on an on-going basis unlike some companies who capitalize these expenses. Company has always had long term view and focused on their mission rather than giving in to short term market expectations. They have one of cleanest records with USFDA.
Very difficult to build a Biocon kind of organization in India.
A holding structure discount is a market perception and with new tax structure discount should come down as holding company is not expected to pay tax on dividend if dividend it pass thru to share holders.
Demergers are usually done if no “new capital” is required for the demerging business and to focus on the core business…
The main point is that Biologics business needs “new capital” to fund its R&D and this will be a significant recurring expense. They are raising the money from PE investors and the likes by means of stake sale at “premium valuations”. This is not possible with demergers.
Existing shareholders will not pay premium valuations for new investments in the business they already own (rights issue, share purchase plan etc - money raised using these methods are usually at a discount) and hence this method of raising new capital is also not the optimal one for biocon.
So the biologics ipo will be similar to Syngene ipo. Biocon shareholders might get preferential allocation…
I also feel that Biocon are raising the money in the best possible way for all stakeholders in the company. I have no doubts about their corporate governance
