style="text-align: justify; margin: 0px">Investment bank Espirito Santo has downgraded Pharma company Biocon to "sell" from "neutral" with a revised target price of Rs.186 from Rs.350 earlier.

According to the bank, several concerns raised accounting and corporate governance questions over at the biotech firm mainly the fizzling out of the deal with Pfizer and its stake sale in Germany's AxiCorp.

Pfizer recently scrapped a deal to sell insulin products made by Biocon. However, Espirito Santo was more concerned with the manner in which Biocon was to use the money it received when the deal was terminated.

Espirito Santo estimates the amount to be $40 million and the company now has Rs.4.93bn on the balance sheet as deferred revenues.

Ideally, this balance of deferred revenues would have been recognised as a one-off payment in the first year. But instead the company has chosen to match it with its R&D costs associated with its insulin programme, reports said. 

Espirito Santo analyst Chirag Talati explains that if, for instance, Biocon were to spend $25mn on insulin R&D this year, it will "net it off" by recognising an equal amount of deferred revenue from the balance sheet.

“The removal of R&D from P&L will smooth Biocon's earnings over the coming 3-4 years and to that extent it will also inflate earnings. This is an issue as it could lead to consistent over-valuation should investors, particularly, less informed retail investors, choose to value the company on a P/E basis,” he highlighted.

Biocon, however, stressed that it did nothing wrong and that its accounting treatments are in line with accepted accounting policies.

Apart from the Pfizer deal, Espirito Santo has also expressed concerns over Biocon’s 77% stake sale in Germany's AxiCorp to minority shareholders, citing lack of further synergies.

The company had then stated that the sale happened at Euro 40mn, 33% higher than its acquisition cost in 2008.

Espirito Santo estimates Biocon received only Euro 5mn in cash for the divestment and the remaining Euro 35mn was ascribed to buying back intellectual property rights, the initial value of which was just Euro 14mn.

“Thus, while on the face of it, it seems that the company made a profit of  Euro 10mn on the transaction, in reality, there was a cash loss of  Euro 10mn, and notional loss of Euro 21mn in buying back the IP rights,” said Talati.

Biocon concedes it did not receive any material amount from divesting the stake.