Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities of Biocon Limited (Biocon).

 

The ratings continue to reflect 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 low gearing and 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.

 

Biocon has strong presence in the biopharma sector, with diversified revenue streams spanning generics (includes formulations and active pharmaceutical ingredients [APIs]), biosimilars (including branded formulations), and research services. Operating income rose 9% in the first nine months of fiscal 2022 to Rs 5,775 crore, led by healthy growth in the biosimilars and research divisions even as Biocon witnessed degrowth in the generics segment. Revenue growth is expected to remain healthy over the medium term, backed by diversified revenue streams, strong growth in research services (under Syngene International Ltd [Syngene]; ‘CRISIL AA+/Stable/CRISIL A1+’) and launch of new biosimilars in the regulated and semi-regulated markets (under Biocon Biologics Ltd [BBL], ‘CRISIL AA+/Stable’). Biocon’s operating margin remained moderate at 23.9% in the first nine months of fiscal 2022 owing to higher raw material costs and continued investment in R&D. Improvement and sustainability of the operating margin over 25% will be a monitorable, given the large R&D expenditure.

 

On September 16, 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 is subject to regulatory approval and will lead to expansion of product portfolio for BBL and incremental operating profits, if implemented. 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 financial risk profile remains strong, backed by robust capital structure, healthy debt protection metrics and ample liquidity. Gearing was healthy at ~0.6 time as on December 31, 2021, and is expected below 0.50 time over the medium term. The company continues to undertake sizeable capital expenditure (capex) in the generics, biosimilars and research services segments, which will be funded through debt and internal accrual. Ramp-up of operations post the ongoing capex in the generics and research business segments, and successful launch of biosimilars backed by healthy product pipeline will remain key monitorables.

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

Established position in the biopharma segment

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.

 

Strong and diversified revenue streams

Revenue is diversified primarily across generics (28% of revenue in first nine months of fiscal 2022), biosimilars (43%), research services (32%), including the inter segment revenue (-4%).

 

Generics segment degrew by 9% in first nine months of fiscal 2022, due to a muted performance in the first half of the fiscal on account of operational and supply challenges posed by the pandemic, continued pricing pressure in the US for the formulations portfolio as well as a slower than expected ramp up of demand for APIs. Biocon has consolidated its position in this segment through its portfolio of differentiated API 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 capex, the company is supported by steady cash flow from all its established business segments – generics, biosimilars and research services. As on December 31, 2021, the company had five approved biosimilar products in Europe and three in 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 European Commission 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. For the first nine months of 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.

 

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, 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 the key biosimilar assets (trastuzumab, pegfilgrastin and insulin glargine) in the US and Europe and successful launch of biosimilars bevacizumab and insulin aspart will be the key monitorables.

 

Strong financial risk profile

Adjusted gearing was healthy at ~0.6 time as on December 31, 2021, and interest coverage and net cash accrual to total debt ratios were healthy at 26.7 times and 0.3 time, respectively, for the first nine months of 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 3,197 crore as on December 31, 2021, 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; Syngene will increase capacity of its research and API manufacturing facilities. Given the consolidated net cash accrual of over Rs 1,500 crore per fiscal, strong liquidity, and part funding of capex in biosimilars by Viatris, the financial risk profile will likely remain strong over the medium term.

 

Weaknesses

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 12% and 10%, respectively, of operating revenue excluding Syngene, for the first nine months of 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, 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, 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 the cash accruals for Biocon at over Rs 1,500 crore against term debt obligation of around Rs 800 crore (including Syngene and BBL) for fiscal 2022. Financial flexibility is high because of unencumbered cash and marketable securities of Rs 3,197 crore as on December 31, 2021. Biocon, BBL and Syngene plan large annual capex of USD 80-100 million each over the medium term, likely to be funded in a prudent mix of cash accrual and debt.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes that 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

§      Biocon has increased the share of green-power in its total energy consumption to over 50% for fiscal 2021. It has also achieved 18% reduction in absolute Scope 1 and Scope 2 emissions in fiscal 2021.

§      Biocon has deployed water management practices and has recycled 100% of wastewater in fiscal 2021. All manufacturing sites are Zero Liquid Discharge facilities.

§      Biocon has implemented gender diversity & inclusion policy, prevention of sexual harassment policy as well as zero tolerance for child labour. Gender diversity in Biocon is in line with industry peers with women employees comprising over 17% of the total workforce.

§      Biocon’s corporate social responsibility is focused on primary healthcare, environmental sustainability, rural development and Covid-19 Relief.

§      Biocon has adequate governance structure, with majority of its board comprising independent directors, presence of investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

§      Biocon also has a Board level ESG committee to provide oversight, direction and monitor the ESG strategy and action plans. 

 

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

• Significantly high revenue growth driven by increased market share, and improvement in profitability above 28%-30% on a sustained basis
• Continued healthy capital structure, with gearing below 0.5 time on a sustained basis

 

Downward Factors

• Decline in revenue growth and drop in operating margin below 20% on a sustained basis
• Considerable weakening of the financial risk profile because of larger-than-expected, debt-funded capex or acquisition
• Any adverse US FDA regulatory action materially impacting the operating performance

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 December 31, 2021, the promoters held 60.64% stake in Biocon, foreign portfolio investors held 16.00%, and the balance was held by the public and others.

Key Financial Indicators

As on/for the period ended March 31		2021	2020
Revenue	Rs.Crore	7106	6301
Adjusted profit after tax (PAT)*	Rs.Crore	718	718
Adjusted PAT margin	%	10.1	11.4
Adjusted debt/adjusted networth	Times	0.56	0.37
Adjusted interest coverage	Times	30.1	26.7

*Adjusted for amortisation of goodwill and intangibles

Any other information: Not applicable