Biocon opens book for Syngene IPO

Indian pharma company spins off contract research arm, hoping markets will regain a solid footing after Monday's sharp fall.
Markets in need of careful handling
Markets in need of careful handling

Indian pharma company Biocon launched a Rs5.28 billion to Rs5.5 billion ($82.2 million to $85.7 million) initial public offering in its clinical research arm Syngene International on Monday.

The deal had seemed well-timed, taking advantage of a stock market rally, which began in mid-June. The company will now be hoping Monday's sharp fall does not presage a new downswing.

The Sensex suffered its biggest one-day drop in two months yesterday, closing down 1.96% as it took its cue from China's 8.5% slide. Over the past three trading days it has lost 3.6%.

Biocon is looking to divest an 11% stake in the Bengaluru-based group at a price range of Rs240 to Rs250 per share, giving the group a market capitalization of Rs48 billion to Rs50 billion.

The 22 million share transaction will constitute all secondary shares, with two million shares reserved for existing shareholders and the remaining 20 million split between Qualified Institutional Buyers (QIB), retail and high-net-worth investors, according to a term sheet seen by FinanceAsia.

QIBs will be allocated a maximum of 50% of the total deal size excluding the Biocon shareholder subscription portion, while retail and high-net-worth investors will be allocated at least 35% and 15% respectively. 

A total of 13 anchor investors have subscribed to Rs150 million in paper according to the company’s stock exchange filings. They will be subject to a 30-day lock-up and include the Monetary Authority of Singapore, Government of Singapore, Goldman Sachs India Fund, DB International (Asia) and ICICI Prudential Top 100 Fund.

Biocon will be subject to a one-year lock up for 80% of its post IPO stake. The remaining 20% will subject to a three-year lock-up.

The divestment of an 11% stake complies with Securities and Exchange Board of India (SEBI) regulations that companies with a market capitalization of more than Rs4 billion offload a minimum of 10% in an IPO.

Valuation

ICICI Securities values Syngene at 27 – 29 times forward earnings, basing its assumption on a 31.5% increase in earnings per share this year. The valuation represents a significant premium to Biocon, which currently trades at around 20.5 times earnings for the financial year ending March 2016.

On a 2017 basis, Kotak Securities values Syngene at 18 – 19 times. In a research note it said it does not “expect any material value accretion for Biocon as based on our estimates, ex Syngene it will trade at 16 – 17 times 2017 EPS, which we believe fully captures the core business potential.”

Syngene’s richer valuation relates to a stronger growth profile than its parent. Over the last three financial years, Syngene’s EBITDA has grown by a compound annual growth rate of 30.8%, compared with Biocon’s 11.08% over the same period.

In the most recent financial year, Syngene reported EBITDA growth of 31.2% compared to a less than1% for its parent.

Syngene’s best domestic comparable, Divi’s Laboratories, is currently trading on a forward p/e ratio of 24.2 times. Divi’s shares have gained 10.63% year-to-date, outperforming the benchmark SENSEX Index’s 1.1% loss. Biocon is also up 9.24% over the same period.

Profile

Syngene equity story revolves around the R&D outsourcing trend by large, global pharmaceutical companies.

India has traditionally been a low-cost alternative for global pharmaceutical and biotechnology companies seeking clinical research support. Yet as outsourcing to the country increases, ICICI Securities says more and more companies consider the move a strategic one to create quality and value rather than simply about reducing costs.

Syngene currently provides pharma and biological R&D support to 221 clients, including eight of the world's top 10 global pharma companies. Three of the world’s largest pharma companies - Bristol-Myers Squibb, Abbott Laboratories and Baxter International – are its main clients.

Over the past five years its top 10 clients have consistently accounted for about 70% of total revenues.

It its IPO is successful, it will rank as the third largest from India this year, according to data provider Dealogic. The two largest were Inox Wind’s $167 million deal in March and UFO Moviez India’s $95 million issue one month later.

Syngene will end its subscription period on Wednesday and finalize the offer price a day later. Trading is set to begin on 11 August.

Axis Capital, Credit Suisse and Jefferies are joint book-runners.

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