Detailed Rationale

CRISIL Ratings has continued its rating on long term bank facilities and debt programme of Biocon Biologics Ltd (BBL) continues on ‘Rating Watch with Developing Implications'.

 

CRISIL Ratings had placed the long-term ratings 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 remaining 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 any developments in this regard.

 

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

Key Rating Drivers & Detailed Description

Strengths

Strong business risk profile, supported by healthy operating performance and strong product pipeline

BBL is a leader in biosimilars with several products in the regulated and semi-regulated markets. As on December 31, 2021, BBL had five approved biosimilars in Europe and three in the US in partnership with Viatris, which are manufactured by BBL. The brand Semglee (the biosimilar Insulin glargine) was launched in the US in August 2020, and the European Commission's approval for the brands Abevmy (Bevacizumab) and Kixelle (Insulin Aspart) was received in the second half of fiscal 2021. In July 2021, US Food and Drug Administration (US FDA) approved Semglee as the first interchangeable biosimilar product under the 351(k) regulatory pathway. This approval allows substitution of Semglee for the reference innovator product and has been the key driver for revenue growth of 24% for BBL in fiscal 2022. With healthy revenue growth, the operating margin is estimated to have improved to ~30% in fiscal 2022 from 26.5% in fiscal 2021, inpite of continued investment in R&D.

 

BBL has strong R&D capabilities and several biosimilars under development across diabetes, oncology and autoimmune therapeutic segments. The company benefits from partnerships with global players such as Viatris and Sandoz for the development, marketing and distribution of products in regulated markets. The partnerships are on cost and profit sharing basis, and provide wide geographical reach. Steady product launches will support the company’s growth momentum and lead to improvement in the operating margin over the medium term. The scaling up of revenue from key biosimilar assets and improvement in profitability will be key monitorables.

 

Strong parentage

Biocon holds 93.5% stake in BBL, and hence, is likely to provide operational and need-based financial support to the subsidiary. While post the implementation of the partnership with SILS and completion of the acquisition of Viatris’ biosimilars business, Biocon’s shareholding in BBL is expected to come down, it will continue to be a majority shareholder. Furthermore, BBL has strong operational linkages with Biocon. The biosimilar and domestic branded formulations business complements small molecule business of Biocon. BBL will continue to contribute ~40% of consolidated revenue and profit of Biocon, 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, Biocon has also provided letter of comfort and corporate guarantee for the bank facilities of BBL.

 

Healthy financial risk profile despite large working capital requirement

BBL will maintain its healthy financial risk profile while it expands its operations. Ramp up in the biosimilar segment will necessitate capital expenditure (capex) of Rs 1000-1200 crore per annum over the next two to three years. The company plans to fund the capex through a prudent mix of debt and internal accrual, which will help to sustain its financial risk profile over the medium term. The company completed a series of fund-raising over fiscals 2020 and 2021, and has built up healthy cash and liquid investments of Rs 797 crore as on March 31, 2021, which will be utilised to partly fund the capex.

 

Adjusted gearing was 1.37 times as on March 31, 2021, and the interest coverage ratio was 20.1 times in fiscal 2021. R&D spend remains at 12-13% of sales on account of continued investment in building strong product pipeline. The working capital requirement is likely to increase with ramp up in sales and product launches in various regulated and semi-regulated markets. Adjusted gearing will not be materially impacted by the debt raised for the acquisition of biosimilar business of Viatris, due to equity funding as well. However, other key debt metrics such as debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) are seen rising to about 2.5-3 times in fiscal 2024, and even higher in fiscal 2023, due to large debt addition expected. Also, interest coverage will remain healthy, due to low cost debt proposed to be raised. The company’s management has indicated that an IPO is likely in two years’ time subject to favourable market conditions; this will remain a monitorable.

 

Weaknesses

Uncertainty in payoffs from a high R&D-driven model in biosimilars

The company will continue to spend extensively on R&D for developing biosimilars, particularly for the US and European markets. It is exposed to uncertainty of timing and return on investment on biosimilars because of the inherent nature of the drug discovery model. R&D expenditure stood at 12-13% of sales in fiscal 2021, driven by expenses on clinical trials and other R&D activities. These expenses will remain high in the near term as the company is developing a product pipeline. CRISIL Ratings notes that the company has achieved critical milestones with approvals for several biosimilars from the US FDA, European Commission and Therapeutic Goods Administration, Australia. Increase in the operating profit and cash flows will be key monitorables.  

Exposure to regulatory risks

The company is susceptible to increasing scrutiny and inspections by regulatory authorities, including the US FDA, European Medical Agency and others, in Asia and Latin America. Biosimilars require market-specific approvals for product launches. Any delay in approvals can lead to loss of opportunity. In the branded formulations segment, additions to the Drug Price Control Order impact product pricing, and hence, profitability.

Liquidity: Strong

Cash accrual, expected at more than Rs 1000 crore annually, will comfortably cover the debt obligation and partly fund the capex. Expected capex of Rs 1000-1200 crore per annum will be funded through a mix of debt and internal accrual. Cash and equivalent were Rs 797 crore as on March 31, 2021. Bank limit utilisation, on a standalone basis (excluding that for the Malaysian entity), was moderate at ~45-55% over the 12 months through December 2021. Debt repayments will rise from fiscal 2023, post raising of the acquisition related debt, but should be largely serviceable from accruals.

Rating Sensitivity factors

Upward factors

• Healthy double-digit revenue growth and operating margin sustaining at ~30-32%, leading to healthy annual cash generation 
• Faster-than-anticipated correction in financial profile and debt protection metrics, supported by higher equity raise, leading to faster correction in debt/Ebitda ratio (to below 2 times by fiscal 2024).

 

Downward factors

• Lower-than-expected revenue growth or decline in operating margin below 25% on a sustained basis 
• Further sizeable debt funded acquisitions or elongation of working capital cycle, weakening the debt protection metrics; debt/Ebitda increasing to over 3.25-3.5 times on steady state basis

About the Company

Biocon transferred its biologics and domestic branded formulations business to BBL in fiscal 2020. BBL derives its revenue from manufacturing and commercialisation of biosimilars and domestic formulations with presence in domestic as well as global markets. The company undertakes in-house development of biosimilars and has partnered with Viatris for developing and commercialising 11 biosimilars. It also has a partnership with Sandoz for several undisclosed products in the biosimilar segment.

 

In January 2020, True North Fund had invested USD 75 million in BBL for 2.44% stake; in August 2020, Tata Capital Growth Fund had invested USD 30 million for 0.85% stake; and in January 2021, ADQ invested USD 75 million for 1.87% stake. Currently, 93.5% of the stake continues to be with Biocon. Additionally, Goldman Sachs India AIF Scheme-1 invested USD 150 million as optionally convertible debentures (OCD) in BBL in November 2020 which has a tenor of 61 months.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Revenue	Rs crore	2797	2306
Profit after tax (PAT)*	Rs crore	132	156
PAT margin	%	4.7	6.7
Adjusted debt / adjusted networth#	Times	1.37	0.72
Adjusted interest coverage	Times	20.10	9.29

*adjusted for amortisation of intangible assets; #considering the OCD from Goldman Sachs as debt

Any other information: Not applicable