Detailed Rationale

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

 

CRISIL Ratings notes that Biocon, through its subsidiary, Biocon Biologics Ltd (BBL; 'CRISIL AA+/Stable'), completed the acquisition of the biosimilar business of US-based Viatris Inc in November 2022 and is progressing well towards integrating the acquired business. The acquisition will result in value addition for BBL, which includes attaining commercialisation and regulatory expertise in the developed markets, and realising higher revenue and associated profits from its partnered products. 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.

 

Earlier, in September 2021, BBL and Serum Institute Life Sciences had announced a strategic alliance as part of which BBL was to get committed access to 100 million doses of vaccines per annum for 15 years. However, in the first quarter of the current fiscal, both companies decided to renege from the agreement and made it void. This will lead to lower-than-expected revenue and profitability for the company.

 

With sizeable debt addition to fund the acquisition as well as subsequent fund-raise through structured debt instrument, total debt outstanding increased to Rs 17,771 crore as on March 31, 2023, and is expected to decline to ~Rs 15,500 by the end of current fiscal, with the company taking initiatives to optimise its working capital. This remains a key monitorable.

 

Biocon’s leverage will continue to remain elevated in the near term, with net debt to earnings before interest, tax and depreciation (Ebitda) expected at ~3.6 times in fiscal 2024, higher than anticipated. The company also has payments of USD 335 million due to shareholders of Viatris in fiscal 2025, which may be part debt funded, keeping debt levels elevated next fiscal as well and resulting in net debt to Ebitda of 3.3-3.5 times in fiscal 2025, despite step-up in business operations. Nevertheless, back-ended repayments for acquisition-related debt and no immediate debt obligation for the structured debt provide some comfort. Deleveraging plans, including fund raise from private equity investors and initial public offering (IPO) at BBL towards end of fiscal 2025/early fiscal 2026 (delay of 12-18 months from initial expectations given the ongoing integration of the acquired Viatris business), will be critical to bring down leverage to comfortable levels and will also remain monitorable.

 

Consolidated revenue growth of 37% in fiscal 2023 was driven by healthy growth in the base biosimilars business of the company and addition of four months’ revenue from the acquired business of Viatris, coupled with a double-digit growth in its generics and contract research segment. Revenue growth is expected to remain high over the medium term with market share gains in existing molecules, launch of few biosimilars and complex generics (subject to regulatory approvals) and healthy order visibility in the contract research segment. Operating margin declined to 23.1% in fiscal 2023 (from 25.1% in fiscal 2022) due to increased spend on research and development (R&D), higher raw material cost and adverse impact of foreign exchange movement. While revenue growth remained high in the first half of fiscal 2024 following addition of revenue from the acquired Viatris business, margin was affected by one-off impact of higher rebates for select customers. With increased revenue contribution from the biosimilars and contract research segments, margin should improve to 24-25% over the medium term.

 

The ratings continue to reflect the established position of Biocon in the biopharmaceutical (biopharma) segment, diversified revenue streams and healthy pipeline of products. These strengths are partially offset by uncertainty regarding payoffs in the 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

CRISIL Ratings has combined the business and financial risk profiles of Biocon and its 26 subsidiaries and step-down subsidiaries as all the companies, collectively referred to as the Biocon group, primarily operate in the biopharma sector and are under a common management. The associates and joint ventures have been moderately consolidated to extent of shareholding.

 

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

 

The compulsorily convertible preference shares (CCPS) issued to Viatris Inc and compulsorily convertible debentures issued to Edelweiss Alternate Asset Advisors Ltd (Edelweiss) have been treated as quasi equity while the optionally convertible debentures (OCD) issued to Goldman Sachs India AIF Scheme-1, non-convertible debenture issued to Kotak Investment Advisors Ltd and OCD issued to Edelweiss have been treated as debt. Barring CCPS, the remaining structured instruments mentioned 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 and diversified revenue streams

Revenue is diversified across generics (24% of revenue in fiscal 2023), biosimilars (50%) and contract research services (29%); while intersegment revenue accounts for negative 3%. Turnover is expected to tilt more towards the biosimilar segment in fiscal 2024, which is the first full year of operations after the Viatris acquisition.

 

The generics segment revived with double-digit revenue growth in fiscal 2023 on low base of fiscal 2022, driven by ramp-up in API (active pharmaceuticals ingredients) sales and healthy performance of formulations in the US. 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. Moderate growth is expected in this segment over the medium term.

 

BBL is a leader in biosimilars with several products in the regulated and semi-regulated markets. As on September 30, 2023, the company had seven approved biosimilar products in Europe and four in the US. 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 also received the European Commission’s approval for Abevmy® (biosimilar bevacizumab) and Kixelle® (biosimilar insulin aspart) in fiscal 2021, while approval for these biosimilars in the US is still pending. The company has multiple products in the pipeline and will continue to launch these products in the regulated and semi-regulated markets. Also, with the 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 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. With commercialisation of the ongoing capital expenditure (capex) and ramp-up of operations, Syngene is expected to sustain its operating performance and revenue contribution over the medium term.

 

Biocon’s long-term growth potential will be led by its biosimilar segment. While this will require large investment for R&D and capital expenditure (capex), it would be supported by steady cash flow from its existing businesses.

 

Healthy pipeline of biosimilar products

The Biocon group has strong R&D capability and several biosimilars and novel biologic products in development in the diabetes, oncology and autoimmune therapeutic segments. The biosimilar assets of Biocon have received approvals from various regulators, and have been launched in regulated and semi-regulated markets. The scaling up of revenue and market share of key biosimilar assets (trastuzumab, pegfilgrastim and insulin glargine) in the US and Europe, and timely launches and contracting of the products in pipeline will be key monitorable.

 

Healthy operating capabilities

Biocon group has over four decades of operational track record and is currently among the leading biopharma companies in India. Through BBL, it is among the few domestic companies to have launched biosimilar products in the regulated markets of US and Europe. The company has also grown to be a reputed global player in statins and immunosuppressants in the generics space. Over the years, Biocon has set up and expanded manufacturing facilities at multiple locations in India and Malaysia with healthy utilisation levels. Operating margin has remained high at 23-26% over the past few fiscals. While margin could be impacted in the current fiscal by expenses related to ongoing integration, with expected increase in revenue contribution from the high-margin biosimilars and contract research segments, margin should improve to 24-25% over the medium-term.

 

Above-average financial risk profile

Acquisition of the biosimilar business of Viatris through a combination of debt and fresh equity issuance at BBL substantially augmented networth for the Biocon group. Hence, adjusted gearing was comfortable at 0.8 time as on March 31, 2023, and is likely to remain below 1 time over the medium term with healthy expected accrual. With sizeable debt addition of USD 1.2 billion at BBL to fund the acquisition and subsequent fund raise through structured debt instrument from Kotak Investment Advisors Ltd and Edelweiss Alternate Asset Advisors Ltd, debt protection metrics moderated; with net debt to Ebitda ratio expected at ~3.6 times in fiscal 2024.

 

The group plans to undertake large annual organic capex of ~ USD 300 million across its different business segments – generics segment capex plan includes commercialising its greenfield immunosuppressants facility in Visakhapatnam, non-immuno fermentation, injectables, synthetic API and peptide facility in Bengaluru; BBL’s capex plans include expansion of its insulin facility in Malaysia; while Syngene will increase capacity of its research centres and API manufacturing facilities. Syngene also recently acquired a biologics manufacturing facility in Bengaluru from Stelis Biopharma Ltd on a slump sale basis for a gross consideration of Rs 702 crore. Capex is expected to be majorly funded through strong cash accrual and available liquid surplus with low reliance on external borrowings.

 

However, the group has an obligation to pay deferred consideration of USD 335 million to Viatris in fiscal 2025, part funding of which could be through additional fund-raise at BBL; sizeable debt addition for this will remain monitorable. Nonetheless, with ramp-up of operations and improved working capital management, net debt to Ebitda ratio is expected to improve to 3.3-3.5 times in fiscal 2025. CRISIL Ratings notes that the debt metrics may show sharp improvement once the equity fund-raise through the planned IPO at BBL gets completed towards end of fiscals 2025/early fiscal 2026.

 

Weaknesses:

Uncertainty regarding payoffs in the R&D-driven model in the biosimilars, especially for regulated markets

The group will continue to spend extensively on R&D for developing new molecules and biosimilars, particularly for the US and European 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 14% of revenue (excluding Syngene) for fiscal 2023 (11% in fiscal 2022). 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 10-12%. 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 the past 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 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 group 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 the Drug Price Control Order impact product pricing and profitability.

Liquidity: Strong

Expected cash accrual of over Rs 2,250 crore in fiscal 2024 will comfortably cover term debt obligation of less than Rs 200 crore (including Syngene and BBL) and partly fund the capex. Financial flexibility is high with unencumbered liquid surplus of Rs 4,386 crore as on March 31, 2023, built-up through fund raising through structured instrument as well as through ~15% stake sale in Syngene in two tranches. With Biocon’s stake in Syngene down to ~54.5% as on September 30, 2023, flexibility to raise additional funds though further stake sale in Syngene remains moderate. Liquidity is expected to moderate over the medium term as the Biocon group uses part of the cash surplus to fund its capex as well as repay/prepay debt and also partly for meeting deferred payment obligation to Viatris. Overall, the group is expected to maintain cash surpluses of at least Rs 2,000 crore on a steady state basis. Debt obligation will be moderate at Rs 850-900 crore in fiscal 2025 and will be serviced from accrual. However, debt obligation will be sizeable at ~Rs 5,000 crore in fiscal 2026, once repayment of the acquisition debt raised at BBL commences, which will require part refinancing as accrual will not suffice, unless debt is lowered from equity proceeds. The company is taking initiatives to optimise the working capital cycle in the near term which, if it materialises, will add to the liquidity cushion.

 

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

• Biocon (standalone) and BBL together increased the share of renewable power in its total energy consumption to over 50% in fiscal 2023. The companies also achieved over 40,000 tonne carbon dioxide equivalent (or over 22% on-year) reduction in greenhouse gas emissions during the year.
• Biocon (standalone) and BBL have deployed water management practices, and recycled/reused 78% of wastewater in fiscal 2023. All manufacturing units are zero liquid discharge facilities.
• It has implemented gender diversity and inclusion policy, human rights policy, suppliers code of conduct, prevention of sexual harassment policy as well as zero tolerance for child labour. Gender diversity in Biocon is better than industry peers, with women employees comprising about 20% of the workforce.
• Biocon has adequate governance structure, with half of its board comprising independent directors, presence of investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.
• Biocon also has board-level ESG committee to provide oversight and direction, and to 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

Biocon will build upon its healthy market position in the biopharma sector and make efforts to improve its financial risk profile over the medium term through equity fund raising and large cash accrual.

Rating Sensitivity Factors

Upward factors

• High double-digit revenue growth and improvement in profitability to over 27-29% on a sustained basis, leading to healthy annual cash accrual
• Faster-than-anticipated improvement in debt protection metrics supported by healthier accrual and equity raising at BBL

 

Downward factors

• Delay in business integration of the acquired biosimilars business of Viatris resulting in lower-than-expected revenue growth and drop in operating margin to below 20-22% on a sustained basis, thereby impacting cash generation
• Material delay in correction of debt protection metrics (for instance, net debt to Ebitda ratio remaining above 3.5-3.6 times in the near term) due to further debt-funded capex/acquisitions, or working capital cycle not improving in line with expectations
• Any adverse US FDA regulatory action

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 biosimilars (including branded formulations), contract research, and small molecules and APIs. As on September 30, 2023, the promoters held 60.64% stake in Biocon, mutual funds held 8.26%, foreign portfolio investors held 7.96%, and the balance was held by individuals and others.

 

In the first-half of fiscal 2024, at a consolidated level, Biocon reported revenue of Rs 6,885 crore (Rs 4,459 crore in the corresponding period of fiscal 2023) and unadjusted net profit of Rs 322 crore (Rs 249 crore).

Key Financial Indicators

As on/for the period ended March 31		2023	2022
Operating income	Rs.Crore	11174	8184
Adjusted profit after tax (APAT)*	Rs.Crore	263	640
APAT margin	%	2.4	7.8
Adjusted debt/adjusted networth*	Times	0.83	0.55
Adjusted interest coverage	Times	6.52	32.27

*Adjusted for amortisation of goodwill and intangibles

Any other information: Not Applicable