Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable' rating on the bank loan facilities of Biocon Biologics Ltd (BBL). CRISIL Ratings has withdrawn its rating on the non convertible debentures (NCD) of Rs.200 crore on request from the company and on receipt of requisite documentation, in line with CRISIL Ratings policy on withdrawal of rating on debt instruments.

 

The rating continues to reflect the company’s healthy operating performance and strong product pipeline in the niche biosimilar segment. The rating also factors in benefits derived from being a subsidiary of Biocon Ltd (Biocon; ‘CRISIL AA+/Stable/CRISIL A1+’), India’s leading bio-pharmaceutical company. These strengths are partially offset by uncertainty in payoffs in the research and development (R&D) driven model for development and commercialisation of biosimilars, and exposure to regulatory risks.

 

Biocon Biologics reported a modest performance in the first half of fiscal 2025. The company registered revenue of Rs. 4,265 crores, a 7% growth on-year; and consolidated earnings before interest, tax, depreciation, and amortisation (Ebitda) margin of ~20.1% as against 22.8% for full year 2024. It achieved notable growth in the Biosimilars business (on like-for-like basis at 15%; post sale of branded formulations business), driven by increased demand in the U.S. and steady expansion in Europe and emerging markets, reflecting a solid market share in oncology and insulin biosimilars. Over the medium term, growth will be supported by new launches aided by regulatory approvals (Biocon Park recently classified by food and drug administration [FDA] as Voluntary Action Indicated), resulting in double-digit revenue growth, while the operating margin will be supported by benefits of operating leverage. BBL has raised $800 million through bonds due 2029 at a coupon of 6.67 percent in October, 2024. Additionally, Biocon Biologics has entered into a agreement for a new $320 million syndicated debt facility. Proceeds of the bonds, together with the new syndicated debt facility, have been used to substantially refinance existing debt of $1.1 billion (~Rs 9,200 crore). As a result, debt obligation over fiscals 2026 and 2027 has reduced to ~Rs 1,800 crore from over Rs 7,700 crore, mitigating the debt refinancing risk.

 

In November 2023, the company divested its non-core nephrology small molecule formulations and branded generics immunotherapy business units in India to Eris Lifesciences Ltd at consideration of Rs 366 crore. Thereafter, in the first quarter of fiscal 2025, it divested its metabolics, oncology and critical care products businesses for Rs 1,242 crore, effective April 1, 2024 (resulting in gain of Rs 1,057.3 crore). The company utilised the proceeds to pare down debt as well as part-pay its deferred consideration obligation to Viatris Inc (Viatris; $175 million out of $335 million). For the balance deferred consideration due to Viatris on November 28, 2024, the company’s management is in discussion with Viatris.  Any funding towards this, which may result in additional debt in the near term, shall be a key monitorable.

 

With sizeable debt addition to fund the acquisition as well as subsequent fund-raise through structured debt instrument, total debt outstanding remained elevated at Rs 14,323 crore as on September 30, 2024, and is expected to remain at similar levels at the end of this fiscal, as accruals remain muted this fiscal amidst delay in product approvals. With increase in accruals coming in from new product launches supported by approvals, larger accruals shall gradually contribute to reducing leverage. This remains a key monitorable.

 

With sizeable debt addition to fund the acquisition as well as subsequent fund-raise through structured debt instrument, total debt remained elevated at Rs 14,323 crore as on September 30, 2024. Biocon’s leverage will continue to remain elevated in the near term, with net debt to Ebitda ratio expected at ~5.5-6.0 times in fiscal 2025; with high likelihood of part deleveraging happening over the next 6 months. Further, over the medium term, deleveraging plans are also likely to include an initial public offering (IPO) at BBL which may happen in fiscal 2027 (delay of 12-18 months from expectation given the delay in product approvals) coupled with growth in scale of operations and better profitability. This will be critical to bring down leverage to comfortable levels and will also remain a monitorable.

 

Consolidated revenue growth of 58% in fiscal 2024 was driven by healthy growth in the biosimilars business of the company and full-year revenue from the acquired business of Viatris. While revenue growth will likely remain muted this fiscal owing to delay in key product approvals impacting launches as well as loss of revenue from the divested branded formulations business, the revenue growth will likely remain healthy over the medium term, with market share gains in existing molecules and launch of few biosimilars. Operating margin declined to 22.8% in fiscal 2024 (from 24.9% in fiscal 2023) owing to increased spend on R&D and costs related to the integration of the Viatris business. CRISIL Ratings expects the operating margin to improve to 26-27% with new launches and benefits of operating leverage.

 

Earlier, the company, after completing the acquisition of the biosimilar business of US-based Viatris in November 2022, completed the integration of the acquired business in December 2023. The acquisition has resulted in value addition for BBL, which includes attaining commercialisation and regulatory expertise in developed markets, and realising higher revenue and associated profit from its partnered products. Also, the acquisition places BBL in an advantageous position to realise the entire gains from the multiple product launches planned over the next 2-4 years.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in strong operational, financial and managerial support from Biocon. Furthermore, CRISIL Ratings has combined the business and financial risk profiles of BBL and its subsidiaries and step-down subsidiaries.

 

CRISIL Ratings has amortised goodwill and intangibles from the acquisition of the biosimilars business of Viatris over 15 years while the balance goodwill and intangibles (including products under development) have been amortised over five years.

 

Compulsorily convertible preference shares (CCPS) issued to Viatris and compulsorily convertible debentures issued to Edelweiss Alternate Asset Advisors Ltd (Edelweiss) have been treated as quasi equity, while optionally convertible debentures issued to Goldman Sachs India AIF Scheme-1 have been treated as debt. Barring CCPS, the remaining structured instruments are backed by pledge of pre-determined number of BBL shares.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong parentage: Biocon and BBL have raised funding through structured instruments from Kotak Investment Advisors Ltd and Edelweiss, backed by pledge of pre-determined number of BBL shares. On a fully diluted basis, Biocon holds ~70% stake in BBL and Viatris is the second-largest shareholder at ~14%. While partnership with SILS has been made void, SILS continues as an equity investor in BBL and holds ~5% stake. Although BBL plans to undertake an IPO in fiscal 2027, Biocon will continue to be the majority stakeholder post the IPO. CRISIL Ratings expects Biocon to continue to provide operational, managerial and need-based financial support to BBL.

 

BBL has strong operational linkages with Biocon. The biosimilars and domestic branded formulations businesses complement the small molecules business of Biocon. The contribution of BBL to Biocon’s consolidated revenue and profit is around 58% in fiscal 2024, backed by healthy growth in revenue and higher profitability. Furthermore, Biocon has provided financial support by way of investments through preference shares and loans and advances during the growth phase of BBL. Also, in the past, Biocon had provided letter of comfort and corporate guarantee for the bank facilities of BBL. Further, Board of directors have executed a Equity Support Agreement with Biologics as per the arrangement, by which Biocon may be required to extend support to Biocon Biologics in case of default.

 

• Comfortable business risk profile, supported by healthy operating performance and product pipeline: Among domestic pharmaceutical companies, BBL is a leader in biosimilars with several products in regulated and semi-regulated markets. As on September 30, 2024, the company had eight approved biosimilar products in Europe and five in the US. Yesafili® (biosimilar aflibercept) was recently approved as the first interchangeable biosimilar and marks the company’s entry into ophthalmology. Hulio® (biosimilar adalimumab) was launched in the US in July 2023 and was Biocon’s fourth launch in the market after Semglee® (biosimilar insulin glargine), Fulphila® (biosimilar pegfilgrastin) and Ogivri® (biosimilar trastuzumab).

 

Biocon received the European Commission’s approval for Abevmy® (biosimilar bevacizumab) and Kixelle® (biosimilar insulin aspart) in fiscal 2021 while their approval is still pending in the US. The company has multiple products in the pipeline and will launch these products in regulated and semi-regulated markets. Also, with the acquisition of the biosimilar business of Viatris, BBL is now well-placed to commercialise the upcoming products by itself and realise the entire gains.

 

BBL has strong R&D capabilities and several biosimilars under development across diabetes, oncology and autoimmune therapeutic segments. Also, with the acquisition of the biosimilars business of Viatris, BBL is well-placed to commercialise upcoming products and realise the entire gain. Steady product launches will support growth momentum and boost the operating margin over the medium term. Scaling up of revenue from key biosimilar assets and improvement in profitability will be key monitorables.

 

• Sound operating capabilities: BBL is an R&D-focussed company and is among the few domestic companies to have launched biosimilar products in regulated markets. Over the years, the company has set up and expanded manufacturing facilities at multiple locations in India and in Malaysia and utilisation rates remain healthy. Operating margin was healthy at 25-30% over the past few years. While profitability may be impacted in the current fiscal with delay in key product approvals and change in revenue profile and operating deleverage post divestment of branded formulations, with expected increase in revenues, the operating margin is expected to improve to ~26-27% over the medium term.

 

Weaknesses:

• Weak financial risk profile with sizeable debt and large working capital requirement: Fresh equity raised for part funding the acquisition of the biosimilars business of Viatris substantially augmented the networth of BBL, and helped buttress the impact of sizeable debt raise of $1.2 billion and subsequent fund raise through structured debt instruments from Kotak Investment Advisors Ltd and Edelweiss, leading to comfortable adjusted gearing of 0.8 times at March 31, 2024. However, the lower operating profitability and higher debt resulted in moderation in debt protection metrics with net debt/EBITDA ratio at ~6.3 times in fiscal 2024 (lower on-year due to retirement of debt via proceeds from sale of some business units to Eris Lifesciences Ltd as well as contingent consideration received from Viatris). Return on capital employed (RoCE) though will continue to remain subdued at low single digits, as benefits from the  from the acquisition are yet to fructify.

 

BBL plans to undertake capital expenditure (capex) of USD 80-100 million per annum over fiscals 2025-2026 towards expansion of its insulin facility in Malaysia. The company plans to fund the capex majorly from internal accrual with low reliance on debt. Working capital requirement is likely to increase with ramp up in sales and product launches.

 

However, the group has an obligation to pay the balance $160 million of total deferred consideration of $335 million to Viatris in November 2024 (out of which $175 million was paid in April 2024). The company is in discussion with the management of Viatris for the same. Any funding towards this, which may result in additional debt in the near term, shall be a key monitorable.. CRISIL Ratings notes that the debt metrics may show sharp improvement once the equity fund-raise through various means, including planned IPO at BBL, is completed over the near-to-medium term and proceeds are used to pare debt.

 

• Uncertainty regarding payoff in the R&D-driven model in biosimilars, especially in regulated markets: The group will continue to spend extensively on R&D for developing new molecules and biosimilars, particularly for the US and Europe markets. It remains exposed to long gestation period and uncertainty regarding timing and extent of returns on investments on new molecules given the nature of the drug discovery model. Net R&D (net of capitalisation) was 10% of revenue in fiscal 2024 (16% in fiscal 2023). While the absolute R&D expenditure will remain sizeable over the medium term, driven by expenses on clinical trials and R&D to build a robust product pipeline, net R&D as a percentage of revenue should remain at 7-9%. Uncertainties regarding revenue visibility and return on the R&D expenses expose the company to investment risk. However, the company has achieved critical milestones in the past with approvals for biosimilars and launch in regulated and semi-regulated markets in partnership with Viatris, leading to strong revenue growth. The extent of ramp-up, particularly in regulated markets, will be a key monitorable.

 

• Exposure to regulatory risks: Regulatory risks are manifested in increasing scrutiny and inspections by regulatory authorities, including the US FDA (United States Food and Drug Administration), European Medical Agency, and those in Asia and Latin America markets.  Any delay in approvals can lead to loss of opportunity.

 

On June 21, 2022, BBL issued a clarification to the stock exchanges on the alleged bribery charge against its official with regards to the approval of one of its products, Insulin Aspart, in India. As per the company’s management, BBL has not been implicated in the case and has in place a governance framework with stated policies and procedures, in keeping with regulatory requirement, as well as anti-bribery and anti-corruption clauses in its contracts with all its vendors. As given to understand by the management, in late October 2024, the CBI filed a supplementary charge sheet, from which BBL was excluded, effectively closing the matter for the company.

Liquidity: Strong

Expected cash accrual of more than Rs 2,000 crore in fiscal 2025 will comfortably cover debt obligation of ~Rs 600 crore and capex of ~Rs. 800 crore. Liquid surplus was healthy at ~ Rs 1,400 crore as on September 30, 2024. Debt obligation will be moderate at ~Rs 1,800 crore over fiscal 2026 and 2027, post refinancing undertaken during the fiscal, and will be serviced from accrual . The company is taking initiatives to optimise the working capital cycle in the near term which, if materialises, will add to the liquid cushion.

 

BBL had sizeable acquisition debt-related obligation in fiscals 2026 and 2027, which has reduced due to refinancing via the $800 million bonds, which have a 5-year bullet repayment and the $320 million syndicated loan facility. However, it also has remaining deferred consideration obligation of $160 million due to Viatris on November 28, 2024 (for which under discussions with Viatris are underway). Any additional debt needed to honour obligations, shall remain a key monitorable.

Outlook: Stable

CRISIL Ratings believes the business risk profile of BBL is likely to benefit from its healthy market position in the biosimilar segment and strong product pipeline. The financial risk profile will remain moderate for the rating category until significant portion of the acquisition debt is retired through equity raise.

Rating sensitivity factors

Upward factors:

• Improvement long term rating on bank facilities of Biocon 
• High double-digit revenue growth and improvement in operating profitability to over 30-32% leading to healthy annual cash accrual
• Faster-than-anticipated correction in the financial risk profile and debt protection metrics, supported by higher equity raise, leading to improvement in net debt to Ebitda ratio

 

Downward factors:

• Moderation in long term rating on bank facilities of Biocon or change in stance of support by the parent, in case of exigency
• Lower-than-expected revenue growth and operating margin of below 22-24%, impacting cash generation
• Material delay in correction of debt protection metrics due to further debt-funded capex/acquisitions, or working capital cycle not improving in line with expectations, or refinancing needed to honour put obligations exercised by private equity investors
• Any adverse US FDA regulatory action

About the Company

Biocon transferred its biosimilars and domestic branded formulations business to BBL in fiscal 2020. BBL undertakes in-house development of biosimilars and derives revenue from manufacturing and commercialisation of biosimilars, with presence in domestic as well as global markets, either directly or through local partners. On a fully diluted basis, Biocon held ~70% stake in BBL as on September 30, 2024, and the balance is held by other investors.

Key Financial Indicators

As on / for the period ended March 31	Unit	2024	2023
Revenue	Rs crore	8,824	5,584
Reported profit after tax (APAT)	Rs crore	218	134
RPAT margin	%	2.5	2.4
Adjusted debt/adjusted networth*	Times	0.83	0.85
Adjusted interest coverage	Times	2.42	4.72

*Adjusted for amortisation of intangible assets

Any other information: Not Applicable