Detailed Rationale

CRISIL Ratings’ rating on the long term bank facilities of Biocon Ltd (Biocon) continue 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 by certain existing investors including Biocon and Serum Institute of India 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 market position of Biocon in the biopharmaceutical (biopharma) segment, its diversified revenue profile and healthy pipeline of biosimilar products. The ratings also factor in 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 and susceptibility to regulatory uncertainties and intense competition.

Analytical Approach

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, operate in the biopharma sector and have 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 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 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 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 quarter of fiscal 2023), biosimilars (46%) and research services (30%), and intersegment revenue accounts for negative 3%.

 

The generics segment reported revenue growth in the first quarter 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. Earlier, post a muted performance in the first half of last fiscal, the segment had witnessed recovery in the last quarter of fiscal 2022; 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 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. As on June 30, 2022, the company had five approved biosimilar products in Europe and three in the US 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. Furthermore, the United States Food and Drug Administration (US FDA) intimation is awaited for site inspection of facilities for the 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 continue to launch products in other key geographies.

 

Syngene International Ltd (Syngene, subsidiary of Biocon) 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 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 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. Increase in the revenue and market share of key biosimilar assets (trastuzumab, pegfilgrastin and insulin glargine) in the US and Europe and successful launch of the biosimilars bevacizumab and insulin aspart will be key monitorables.

 

• Strong financial risk profile

Adjusted gearing was healthy at ~0.6 time as on March 31, 2022. 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 3,217 crore as on March 31, 2022, which will be utilised to partly fund capex and R&D. Biocon, BBL and Syngene are expected to undertake large annual capex of USD 80-100 million each over the medium term. Biocon is planning to operationalise 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. Because of 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 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

• 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 vulnerable to long gestation period and uncertainty regarding timing and return on investments on new molecules, given the nature of the drug discovery model. Gross R&D and net R&D (net of capitalisation) were 15% and 13%, respectively, of the operating revenue, excluding Syngene, in the first quarter of fiscal 2023 (13% and 11%, respectively, in fiscal 2022). 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 expose 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, European Medical Agency and those in Asia and Latin America.

 

The company faces intense competition in regulated markets, which are 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 the list under Drug Price Control Order impact product pricing and profitability.

Liquidity: Strong

Expected cash accrual of over Rs 2,000 crore in fiscal 2023 will comfortably cover term debt obligation of around Rs 100 crore (including Syngene and BBL). Financial flexibility is high because of unencumbered cash and marketable securities of Rs 3,217 crore as on March 31, 2022. 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. Liquidity may moderate should Biocon use the cash surplus to infuse funds into BBL for the acquisition of the biosimilars business of Viatris, but will remain healthy. Debt obligation will be sizeable over the medium term, post raising of loans by BBL, but will be serviced through accrual.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes Biocon’s ESG profile supports its 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 increased the share of green power in its total energy consumption by its Indian operations to over 58% in fiscal 2022. Company also achieved over 117,000 tonnes of carbon dioxide equivalent (tCO2) reductions during the year. Its Scope 1 and Scope 2 emissions increased marginally by 1% in fiscal 2022 on account of higher production.
• The company has deployed water management practices and recycled 100% of wastewater in fiscal 2022. 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 in line with industry peers, with women employees comprising over 12% of the 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 board-level ESG committee to provide oversight, 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.

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, leading to healthy annual cash accruals
• Faster-than-anticipated improvement in debt protection metrics, post the acquisition of Viatris’ biosimilar business by BBL, supported by healthier accrual and equity raising at BBL

Downward factors

• Decline in revenue growth and drop in operating margin to below 20% on a sustained basis
• Delayed correction in debt protection metrics, due to further debt-funded capex or acquisitions or weaker cash generation; for instance, debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio remaining above 2.5 times in fiscal 2024
• 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 June 30, 2022, the promoters held 60.64% stake in Biocon, foreign portfolio investors held 16.31%, and the balance was held by the public and others.

Key Financial Indicators

As on / for the period ended March 31		2022	2021
Revenue	Rs crore	8184	7106
Adjusted profit after tax (PAT)*	Rs crore	772	846
Adjusted PAT margin	%	7.8	10.1
Adjusted debt / adjusted networth	Times	0.55	0.56
Adjusted interest coverage	Times	32.3	30.1

*Adjusted for amortisation of goodwill and intangibles

Any other information: Not applicable