| Biocon Limited | ||||||
| Long-term rating removed from 'Watch Developing'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its rating on the long-term bank facilities of Biocon Limited (Biocon) from 'Rating Watch with Developing Implications' and has reaffirmed the rating at ‘CRISIL AA+’ and assigned a ‘Stable’ outlook. CRISIL Ratings has also reaffirmed its 'CRISIL A1+' rating on the short-term bank facilities.
The rating action follows the completion of the acquisition of the biosimilar business of US-based Viatris Inc. by Biocon’s subsidiary, Biocon Biologics Ltd (BBL, rated ‘CRISIL AA+/Stable’).
CRISIL Ratings notes that BBL is now in final stages of raising/drawing the funds to make the payment and has completed the acquisition. The ‘stable’ outlook signifies that the acquisition will result in value addition for BBL which include attaining commercialisation and regulatory expertise in the developed markets, realizing higher revenue and associated profits from its partnered products. As per BBL’s management, the acquired business from Viatris is expected to generate additional revenue of ~USD 1.1 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of USD 250 million in fiscal 2024. Also, going forward, the acquisition will place BBL in an advantageous position to realise the entire gains from the multiple product launches planned over next 2-4 years.
While company’s debt protection metrics will moderate in the near-term due to the large debt taken for the acquisition, it is expected to show rapid improvement through various deleveraging plans of the company including an initial public offering (IPO) at BBL over next 18 months.
As per the agreement, BBL will pay a total consideration of USD 3.335 billion, including cash up to USD 2.335 billion (of which 335 million will be deferred consideration to be paid in fiscal 2025) and compulsorily convertible preference shares (CCPS) in BBL of USD 1 billion. The upfront cash payment of USD 2 billion will be funded through equity infusion in BBL by Biocon (USD 650 million) and by Serum Institute Life Sciences (SILS, USD 150 million), totalling USD 800 million and the remainder USD 1.2 billion will be funded by debt raised at BBL from banks. Biocon shall infuse USD 650 million in BBL through a combination of the funds raised through stake sale in its subsidiary, Syngene International Ltd (Syngene, rated ‘CRISIL AA+/Stable/CRISIL A1+’), available cash reserves and bridge-financing loans of USD 420 million loans, including funds raised through commercial papers (CPs) of USD 275 million. Biocon plans to refinance the bridge-debt over next few months through a non-convertible debenture (NCD; up to USD 250 million), equity funding from private equity (in lieu of BBL’s stake) and by the monetisation of Biocon’s equity stake in Syngene on a need basis.
Earlier, in September 2021, BBL and 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 awaits other regulatory approvals. Nonetheless, the alliance will be effective from October 1, 2022 and will generate committed revenue for BBL. 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.
Consolidated operating revenue growth of 24% in first half of fiscal 2023 was driven by healthy growth in the biosimilars business of the company, coupled with a double-digit growth in its generics and contract research segment. Operating margin moderated to 19.5% in first half of fiscal 2023 from 24.1% in fiscal 2022 due to increased spend on research and development (R&D), higher other expenses including adverse impact of foreign exchange movement. With increased revenue from the biosimilars business going forward, the operating margin should improve and remain healthy.
The ratings continue to reflect the established position of Biocon in the biopharmaceutical (biopharma) segment, diversified revenue and healthy pipeline of biosimilar products. The rating also reflects the company’s healthy financial risk profile, and large surpluses, which support its liquidity. 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 to extent of shareholding
CRISIL Ratings has amortised existing goodwill on acquisition and intangibles (including products under development) over five years and expected goodwill and intangibles from the ongoing acquisition has been amortised over a longer period.
The compulsorily convertible preference shares to be issued to Viatris Inc has also been treated as quasi equity, the optionally convertible debentures issued to Goldman Sachs India AIF Scheme-1 has been treated as debt.
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: Established position in the biopharma segment Biocon is a leading biopharma company in India and has 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. The company has strong brands across its biosimilars and novel biologics 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 active pharmaceutical ingredients (APIs) across the cardiovascular, anti-obesity and immuno-suppressant therapeutic areas.
Strong and diversified revenue streams Revenue is diversified primarily across generics (27% of revenue in the first half of fiscal 2023), biosimilars (44%) and research services (32%), and intersegment revenue accounts for negative 3%.
The generics segment reported 18% revenue growth in the first half of fiscal 2023, on low base of fiscal 2022 owing to the impact of Covid-19, driven by ramp up in API sales and healthy performance of recently launched formulations. 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 will be led by its biosimilar and novel biologics segments in 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.
BBL is a leader in biosimilars with several products in the regulated and semi-regulated markets. As on September 30, 2022, the company had five approved biosimilar products in Europe (excluding two products in-licenced by Viatris) and three in the US (excluding one product in-licenced by Viatris) in partnership with Viatris Inc. Semglee® (biosimilar insulin glargine) was launched in the US in August 2020 and was Biocon’s third launch in that market after 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. The company has multiple products in pipeline and will continue to launch these products in regulated and semi-regulated markets. Also, with acquisition of the biosimilar business of Viatris, BBL will now be well-placed to commercialise these upcoming products by itself and realise the entire gains.
Syngene is a leading contract research and manufacturing services (CRAMS) organisation in India. It offers integrated services across drug discovery and development value chain and provides research services in medicinal chemistry and biology to innovator pharmaceutical companies. Syngene enhances revenue diversity with sustained healthy growth and profitability. In fiscal 2022, Syngene accounted for one-third of the consolidated revenue and operating profit of Biocon. With commercialisation of the ongoing capex and ramp-up of operations, Syngene is expected to sustain its operating performance and revenue contribution over the medium term.
Healthy pipeline of biosimilar products 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 timely launches and contracting of the products in pipeline will be key monitorables.
Healthy financial risk profile, moderation in debt metrics seen with large debt addition 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 raised Rs 1220 crore through sale of 5.4% stake in Syngene in September 2022 resulting in healthy cash and liquid investments of over Rs 4000 crore as on September 30, 2022, which will be utilised to partly fund the equity portion of the ongoing acquisition. Additionally, 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, biologics and API manufacturing facilities.
Upon completion of the acquisition of biosimilar business of Viatris, the debt protection metrics will moderate due to sizable debt addition of USD 1.2 billion at BBL and USD 420 million at Biocon The ratio of net debt/EBITDA is expected to improve from existing levels in fiscal 2024, as per CRISIL Ratings. However, debt metrics may show improvement given various deleveraging plans of the company including an IPO at BBL over the next 18 months.
Weakness: Uncertainty regarding payoffs in the R&D-driven model in biosimilars and novel biologic segments, especially for regulated markets 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 16% and 14%, respectively, of operating revenue, excluding Syngene, for first half of fiscal 2023 (13% and 11%, respectively, in fiscal 2022). The absolute 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.
Susceptibility to regulatory uncertainties and intense competition 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 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 Expected cash accrual of over Rs 3,000 crore in fiscal 2023 will comfortably cover term debt obligation of less than Rs 100 crore (including Syngene and BBL) and part fund the capex. Biocon, BBL and Syngene are expected to undertake large annual capex of USD 80-100 million each over the medium term, which is likely to be funded through a prudent mix of cash accrual and debt. Financial flexibility is high with unencumbered cash and marketable securities of over Rs 4,000 crore as on September 30, 2022, which includes Rs 1,220 crore raised through stake sale in Syngene. Liquidity expected to moderate going forward as Biocon uses part of the cash surplus to infuse funds into BBL for the acquisition of the biosimilars business of Viatris, but will remain healthy. Overall, the group is expected to maintain cash surpluses of atleast Rs. 2000 crore on a steady state basis. Debt obligation will be sizeable once repayment of the acquisition debt raised at BBL commences, and will be serviced mainly from accruals. Near-term liquidity pressures will also be avoided with moratorium of two years on the acquisition debt raised at BBL. Biocon will also have flexibility to monetise some stake in Syngene, should additional funding needs arise.
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. |
Outlook: Stable CRISIL Ratings believes Biocon will maintain its strong financial risk profile over the medium term supported by large cash accrual and robust liquidity. |
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 September 30, 2022, the promoters held 60.64% stake in Biocon, foreign portfolio investors held 15.79%, and the balance was held by the public and others.
In the first half of fiscal 2023, at a consolidated level, Biocon reported revenue of Rs 4,459 crore (Rs 3,601 crore in the corresponding period of fiscal 2022) and adjusted net profit of Rs 191 crore (Rs 223 crore). |
Key Financial Indicators
*Adjusted for amortisation of goodwill and intangibles | ||||||||||||||||||||||||
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure - List of Entities Consolidated
*Post the implementation of partnership with SILS, acquisition of Viatris’ biosimilars business and allotment of shares for the equity infusion of $800 million, the expected shareholding will stand at ~68%. |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||
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This Annexure has been updated on 30-Nov-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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