| Biocon Limited | ||||||
| Long-term rating continues on 'Watch Developing'; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has continued its rating on the long-term bank facilities of Biocon Limited (Biocon) on ‘Rating Watch with Developing Implications’ and has reaffirmed the 'CRISIL A1+' rating on the short-term bank facilities.
CRISIL Ratings had placed its long-term rating on watch with developing implications in March 2022, following announcement by Biocon Biologics Ltd (BBL, subsidiary of Biocon) that its Board of Directors, at a meeting held on February 27, 2022, approved the proposed acquisition of the biosimilar business of US-based Viatris Inc. Accordingly, BBL entered into a definitive agreement with Viatris Inc to acquire its biosimilars business for a total consideration of USD 3.335 billion, including cash up to USD 2.335 billion and compulsorily convertible preference shares (CCPS) in BBL of USD 1 billion. The upfront cash payment of USD 2 billion is expected to be funded by ~USD 800 million raised through equity infusion in BBL and the remainder is to be funded by debt for which the company has commitment letters from certain foreign banks. The transaction is expected to close in the second half of calendar year 2022, subject to satisfaction of closing conditions and certain regulatory approvals.
CRISIL Ratings will continue to monitor progress on the transaction and will remove the ratings from watch and take a final rating action once the regulatory approvals are in place and the transaction is concluded. While this transaction will enable BBL to attain commercialisation expertise in the developed markets and realize the higher revenue and associated profits from its partnered products, its debt protection metrics could moderate in the near-term due to the large debt expected to be taken for the acquisition. Nonetheless, CRISIL Ratings expects the debt protection metrics to improve back to almost current-levels by fiscal 2024.
CRISIL Ratings will remain in discussion with BBL’s management to better understand the terms of debt funding for the transaction as well as the synergy benefits that may emerge post completion of the transaction. CRISIL Ratings also notes that the company may undertake an initial public offering (IPO) over the next two years depending on the market conditions.
Earlier, in September 2021, BBL and Serum Institute Life Sciences Pvt Ltd (SILS), announced a strategic alliance as part of which BBL will offer around 15% stake to SILS at a post-money valuation of around USD 4.9 billion, for which it will get committed access to 100 million doses of vaccines per annum for 15 years. This alliance received approval from the competition commission of India (CCI) in May 2022 and is subject to other regulatory approvals and is on track to be implemented by October 1, 2022. CRISIL Ratings expects this alliance to strengthen BBL’s business risk profile and product offerings over the medium term and will continue to monitor the developments in this regard.
The ratings continue to reflect the established position of Biocon in the biopharmaceutical (biopharma) segment, diversified revenue and healthy pipeline of biosimilar products. The ratings also factor in its strong financial risk profile, driven by healthy debt protection metrics. These strengths are partially offset by uncertainty regarding payoffs in the research and development (R&D)-driven model for development and commercialisation of biosimilars and novel molecules. The company is also susceptible to regulatory uncertainties and intense competition. |
Analytical Approach To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Biocon and its subsidiaries as all the companies, collectively referred to herein as Biocon, primarily operate in the biopharma sector and are under a common management. The joint venture, Neo Biocon FZ-LLC, has been moderately consolidated. CRISIL Ratings has amortised goodwill on acquisition and intangibles (including products under development) over five years.
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:
Biocon is the leading biopharma company in India with a track record of 40 years. In the biopharma segment, the company has presence primarily in India and semi-regulated economies. In the domestic formulations market, it is a biosimilars-focused specialty products company, mainly in chronic therapy areas. The domestic business has multiple divisions such as metabolics, oncology, nephrology, immunotherapy, and comprehensive care. Biocon has strong brands such as Insugen® (rh-insulin), BASALOG™ (insulin glargine), BIOMab-EFGR® (nimotuzumab), BLISTO® (glimepiride + metformin), CANMab (trastuzumab), KABEVA (bevacizumab), Evertor® (everolimus), TACROGRAF™ (tacrolimus), and ALZUMAb™ (itolizumab) across its biosimilar and novel biologic portfolio. It is among the leading players in insulin in Asia, with its global capacities making it a leading insulin producer globally. Biocon also is a leading supplier of complex, small molecule APIs across the cardiovascular, anti-obesity and immuno-suppressants therapeutic areas.
Revenue is diversified primarily across generics (29% of revenue in fiscal 2022), biosimilars (42%), research services (32%) and novel biologics (1%), including the inter segment revenue (-4%).
Generics segment witnessed recovery in the last quarter of fiscal 2022 after muted performance in the first half of the fiscal; its revenue in fiscal 2022 remained almost in line with last fiscal. Biocon has consolidated its position in this segment through its portfolio of differentiated APIs, including fermentation based, synthetic, high potent and peptides as well as vertically integrated complex formulations and a moderate growth is expected in this segment over medium term.
Biocon’s long-term growth potential is expected to be led by its biosimilar and novel biologics segments in both semi-regulated and regulated markets. While these segments continue to require large investment for R&D and capital expenditure (capex), the company is supported by steady cash flow from all its established business segments – generics, biosimilars and research services. As on March 31, 2022, the company had five approved biosimilar products in Europe and three in the US in partnership with Viatris. Semglee® (biosimilar insulin glargine) was launched in the US in August 2020 and is Biocon’s third launch in that market after Fulphila® (biosimilar pegfilgrastin) and Ogivri® (biosimilar trastuzumab). Additionally, Biocon received the European Commission’s approval for Abevmy® (biosimilar bevacizumab) and Kixelle® (biosimilar insulin aspart) in the second half of fiscal 2021. Further, the United States Food and Drug Administration (US FDA) intimation is awaited for site inspection of facilities for biosimilar bevacizumab. For biosimilar aspart, on-site pre-approval US FDA inspection for the company’s Malaysian facility was carried out in September 2021 and commercialisation should happen in due course. The company will also continue to launch its products in other key geographies.
Syngene enhances revenue diversity with its sustained healthy growth and profitability. In fiscal 2022, Syngene accounted for about one-third of the consolidated revenue and operating profit of Biocon. With commercialisation of the recently completed capex and expected ramp-up of operations, Syngene is expected to sustain its operating performance and revenue contribution over the medium term.
Biocon has strong R&D capability and has several biosimilars and novel biologic products in development in the diabetes, oncology and autoimmune therapeutic segments. In partnership with Viatris Inc, Biocon’s biosimilar assets received approvals from various regulators and were launched in regulated and semi-regulated markets. The scaling up of revenue and market share of key biosimilar assets (trastuzumab, pegfilgrastin and insulin glargine) in the US and Europe and successful launch of biosimilars bevacizumab and insulin aspart will be key monitorables.
Adjusted gearing was healthy at ~0.6 time as on March 31, 2022, and interest coverage and net cash accrual to total debt ratios were healthy at 29.2 times and 0.3 time, respectively, in fiscal 2022. The company completed a series of fund-raising rounds at its subsidiary, BBL, in the past two fiscals and built up healthy cash and liquid investments of Rs 2,975 crore as on March 31, 2022, which will be utilised to partly fund capex and R&D. Biocon, BBL and Syngene plan large annual capex of USD 80-100 million each over the medium term. Biocon plans capex for operationalising its immunosuppressants and API facilities; BBL will undertake capex for commercialising a monoclonal antibodies facility and towards R&D for building a product pipeline; while Syngene will increase capacity of its research and API manufacturing facilities. Given the expected consolidated net cash accrual of over Rs 2,000 crore per fiscal, strong liquidity, and part funding of capex in biosimilars by Viatris Inc, the financial risk profile will likely remain healthy over the medium term. Debt protection metrics will nevertheless, moderate due to sizable debt addition by BBL to fund the proposed acquisition of the biosimilar business of Viatris. For instance, the debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is seen moderating to 3.5-4 times in fiscal 2023 (from 2-2.5 times in fiscal 2022), before correcting back to 2-2.5 times in fiscal 2024.
Weaknesses:
The company will continue to spend extensively on R&D for developing new molecules and biosimilars, particularly for the US and Europe. 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. Gross R&D and net R&D (net of capitalisation) were 13% and 11%, respectively, of operating revenue, excluding Syngene, for fiscal 2022 (13% and 11%, respectively, in fiscal 2021). The R&D expenditure will increase over the medium term, driven by expenses on clinical trials and R&D to build a robust product pipeline. The uncertainty regarding revenue visibility and return on the R&D expense exposes the company to investment risk. However, it has achieved critical milestones in previous fiscals with approvals for biosimilars and launch in regulated and semi-regulated markets in partnership with Viatris Inc, leading to strong revenue growth. The extent of ramp up, particularly in the regulated markets, will be a key monitorable.
Regulatory risks are manifested in increasing scrutiny and inspections by regulatory authorities, including the US FDA, European Medical Agency, and those in Asian and Latin American markets.
The company faces intense competition in the regulated markets, which is characterised by aggressive defence tactics by innovator companies through introduction of authorised generics and the presence of several cost-competitive Indian players. In the branded formulations segment, additions to lists under Drug Price Control Order impact product pricing and profitability. |
Liquidity: Strong CRISIL Ratings expects Biocon to generate cash accrual of over Rs 2,000 crore, against term debt obligation of around Rs 350-400 crore (including Syngene and BBL) for fiscal 2023. Financial flexibility is high because of unencumbered cash and marketable securities of Rs 2,975 crore as on March 31, 2022. Biocon, BBL and Syngene each plan large annual capex of USD 80-100 million over the medium term, which is likely to be funded in a prudent mix of cash accrual and debt. Liquidity may moderate should Biocon use the cash surpluses to infuse funds into BBL for the proposed acquisition of the biosimilar business of Viatris, but still remain healthy. Repayment obligations should be sizeable in the medium term, post raising of the loans by BBL, but would be serviced mainly from accruals.
Environment, social, and governance (ESG) profile CRISIL Ratings believes Biocon’s ESG profile supports its already strong credit risk profile.
The pharmaceutical sector can have a significant impact on the environment on account of greenhouse gas emissions, water use and waste generation. The sector’s social impact is characterised by impact on the health and wellbeing of consumers on account of its products and on employees and local community on account of its operations.
Key ESG highlights
There is growing importance of ESG among investors and lenders. Biocon’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Biocon, founded in 1978, is India’s leading biopharma company. It is fully integrated and delivers biopharma solutions, ranging from discovery to development and commercialisation. It has diversified revenue streams covering biologics (including branded formulations), contract research, and small molecules and APIs. As on March 31, 2022, the promoters held 60.64% stake in Biocon, foreign portfolio investors held 15.62%, and the balance was held by the public and others. |
Key Financial Indicators
*Adjusted for amortisation of goodwill and intangibles | ||||||||||||||||||||||||
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Proposed Short Term Bank Loan Facility | 2 | Not Applicable | CRISIL A1+ |
| Proposed Working Capital Facility | 148 | Not Applicable | CRISIL AA+/Watch Developing |
| Working Capital Facility | 100 | HDFC Bank Limited | CRISIL AA+/Watch Developing |
This Annexure has been updated on 19-Aug-22 in line with the lender-wise facility details as on 18-Jul-22 received from the rated entity.
Criteria Details
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