Detailed Rationale

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

 

The ratings continue to reflect the established market position of Syngene in contract research, its strong clientele and healthy financial risk profile. The ratings also factor in the benefits derived from being a subsidiary of Biocon Ltd (Biocon; ‘CRISIL AA+/Stable/CRISIL A1+’), India’s leading biopharmaceutical company. These strengths are partially offset by the risk related to completion, stabilisation and scale-up of the recently completed and ongoing capital expenditure (capex), and exposure to intense competition and regulatory risks.

 

CRISIL Ratings notes that on July 4, 2023, Syngene announced the acquisition of a biologics manufacturing facility in Bengaluru from Stelis Biopharma Ltd (SBL) on a slump sale basis for a gross value of Rs 702 crore. The facility has 20,000 litre of installed biologics drug substance manufacturing capacity with a potential for future expansion up to a further 20,000 litre. Syngene will further invest up to Rs 100 crore to repurpose and revalidate the facility over the next 6-9 months, for manufacturing monoclonal antibodies. This acquisition is expected to be funded through internal accrual and liquid surplus and will not impact the debt protection metrics of the company. The companies have entered into a binding term sheet and transaction is expected to close within 90 days, subject to customary conditions, including receiving the required lender and regulatory approvals.

 

This acquisition also partly replaces the organic capex plans of the company, wherein the organic capex outlay would now be lower at Rs 500-600 crore annually over next three years mainly towards expanding and adding new capabilities across core businesses.

 

The ratings factor in the sustained healthy operating performance of Syngene, driven by strong revenue growth and operating profitability. The company registered revenue growth of 23% in fiscal 2023 backed by growth in discovery services, development services and dedicated centres. Growth was supported by increase in revenue from existing clients as well as acquisition of new ones. In addition to its existing long-term contracts with Bristol-Myers Squibb Co (BMS), Baxter International Inc (Baxter) and Amgen Inc for its research business, the company also entered into a new 10-year contract with Zoetis Inc for drug substance manufacturing this fiscal. The operating margin was healthy at 29.4% for fiscal 2023 and is expected to sustain at 28-30% this fiscal. However, margins are expected to moderate marginally in fiscal 2025 post operationalisation of the acquired facility before improving back to current levels over the next few years as operations ramp up.

 

With healthy profitability, prudent working capital management and internally funded capex plans, debt protection metrics will remain strong with gearing expected at less than 0.2 time going forward and interest coverage at over 20 times.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the strong operational, financial and managerial support from Biocon, and has combined the business and financial risk profiles of Syngene and its subsidiaries.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established market position in contract research: 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. The company’s established market position is reflected in its large clientele of over 400 companies, including 15 of the top 20 global pharmaceutical majors. Syngene has dedicated research and development (R&D) centres for BMS (rated ‘A+/Stable/A1’ by S&P Global Ratings [S&P]), Amgen Inc (rated ‘BBB+/Negative/A2’ by S&P) and Baxter (rated ‘BBB/Negative/A2’ by S&P). Revenue grew 23% in fiscal 2023, driven by strong performance across businesses, and as the company maintained growth momentum in discovery services and development and manufacturing business.

 

Strong parentage: Syngene is a 54.88% subsidiary of Biocon (post the stake sales in September 2022 and February 2023) and is likely to receive need-based financial support from the parent. Business operations of both the companies differ—Biocon manufactures and markets biopharmaceutical formulations, while Syngene undertakes contract research for pharmaceutical, biotechnology, nutrition, agrochemical, animal health and consumer goods entities. While earlier Syngene accounted for about one-third of the consolidated revenue and operating profit of Biocon, going forward, with higher contribution from the biosmilars segment, the contribution of Syngene to total revenue and profitability is expected to come down. Yet, Syngene will remain critical to Biocon, and hence operational, managerial and financial support, if required, is expected to be forthcoming.

 

Healthy financial risk profile: Adjusted gearing was low at 0.16 time as on March 31, 2023 and should remain less than 0.2 time going forward, aided by healthy cash generation, prudent working capital management and internally funded capex. Debt protection metrics were comfortable, reflected in interest coverage ratio of 22.37 times in fiscal 2023. Organic capex is expected at ~Rs 500-600 crore per annum, funded mainly by accruals. With the recently announced acquisition of biologics manufacturing unit from SBL to be funded from internal accruals and available liquid surplus, debt protection metrics should remain strong going forward as well.

 

Weaknesses:

Moderate risks related to stabilisation and scale-up of recently completed and ongoing capex: Over the past 2-3 years, Syngene has undertaken high capex towards commercialisation of the active pharmaceutical ingredient (API) manufacturing facility in Mangaluru (Karnataka) and new research centres in Hyderabad, amongst others. Scaling up of operations and contribution towards revenue and profitability will be key monitorables. Recently, Syngene announced acquisition of the biologics manufacturing unit from SBL, which is expected to get completed over the next three months. Additionally, company has capex plans of Rs 500-600 crore annually towards adding laboratory space for future expansion of research business and capability additions across other services. Syngene will remain exposed to risks related to stabilisation and ramp-up in production and services at the recently commercialised facilities as well as for the planned capex. However, company’s track record of timely project completion lends cushion. Nonetheless, any time or cost overruns in the planned capex will be key monitorables.

 

Susceptibility to regulatory changes and increasing competition: The contract research industry is highly competitive on account of low entry barriers. Several large global pharmaceutical players are outsourcing contract research activities to India. Hence, more contract research organisations (CROs) may enter the fray, increasing competition and constraining pricing flexibility of established players such as Syngene. Additionally, the company faces competition from CROs in China and Eastern Europe, amongst others, which may have a broader portfolio of services. Furthermore, competition persists from captive R&D centres and new, smaller entities focusing on a particular therapeutic area. Nevertheless, the company benefits from its wide range of service offerings and strong clientele, apart from the early-mover advantage and long-tenure contracts with customers, partially offsetting the competition.

Liquidity: Strong

Syngene has strong liquidity, driven by expected cash accrual of over Rs 825 crore in fiscal 2024 and healthy liquid surplus of Rs 1,529 crore as on March 31, 2023. While liquid surplus will reduce post the completion of the ongoing acquisition for a consideration of Rs 702 crore plus additional Rs 100 crore outlay for repurposing the facility, it will still be sufficient to cover debt obligations, working capital requirement and annual organic capex plans of Rs 500-600 crore. The bank limit of Rs 1050 crore is sparingly utilised.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes that Syngene’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 the impact on the health and wellbeing of its consumers on account of its products and on employees and local community due to its operations.

 

Key ESG highlights:

• Syngene has increased the share of power from green-sources in its total energy consumption to 85% for fiscal 2022, thereby reducing carbon dioxide emissions by 26% in fiscal 2022 as compared to previous year. Syngene is accredited with ISO 14001:2015 for its effective Environment Management System.
• Syngene has deployed water management practices to appropriately treat and reuse wastewater within its facilities; amount of water conserved in fiscal 2022 was 61% higher than previous year.
• Syngene has undertaken focussed efforts on waste reduction and recycling and 92% of total hazardous and non-hazardous waste generated from its operations was recycled in fiscal 2022.
• Syngene has implemented gender diversity & inclusion policy, prevention of sexual harassment policy and CSR policy. Gender diversity in Syngene is better than industry peers with women employees comprising 27% of the total workforce in fiscal 2022.
• Syngene’s governance structure is characterized by majority of its board comprising independent directors, presence of investor grievance redressal mechanism and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Syngene’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes Syngene’s business risk profile will benefit from the expansion of its client base and increase in time and scope of existing contracts.

Rating Sensitivity Factors

Upward Factors

• Sustained annual revenue growth of over 20% led by improvement in the discovery and development services, and sustained operating profitability above 35%
• Prudent working capital management and healthy capital structure
• Improvement in long term rating of Biocon by 1 notch

 

Downward Factors

• Lower-than-expected revenue growth with sharp reduction in operating profitability on a sustained basis, impacting cash generation
• Weakening of debt metrics due to stretch in the working capital cycle or large, debt-funded capex or acquisitions
• Moderation in long term rating on bank facilities of Biocon by 1 or more notches or change in stance of financial support from the parent.

About the Company

Syngene is one of India’s leading CRAMS organisation. The company offers research services in medicinal chemistry and biology in the early stages of drug discovery, through process development and contract manufacturing of biotherapeutics for human trials. It offers integrated discovery and development services across multiple technology platforms, including small and large molecules, antibody-drug conjugates and oligonucleotides. It has over 400 clients in the pharmaceutical, biotechnology, nutrition, animal health, consumer goods and specialty chemicals industries, including 15 of the top 20 global pharmaceutical companies. It has a team of over 5,000 scientists.

 

As on March 31, 2023, Biocon held 54.88% stake in Syngene, foreign portfolio investors held 23.29%, mutual funds held 8.35% and balance was held by public and others. The company is listed on the National Stock Exchange and the Bombay Stock Exchange.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Letter of credit & bank guarantee	NA	NA	NA	5	NA	CRISIL A1+
NA	Overdraft facility	NA	NA	NA	5	NA	CRISIL A1+
NA	Packing credit in foreign currency	NA	NA	NA	130	NA	CRISIL A1+
NA	Packing credit in foreign currency*	NA	NA	NA	10	NA	CRISIL AA+/Stable
NA	External commercial borrowings	NA	NA	NA	150	NA	CRISIL AA+/Stable

*Fully interchangeable with cash credit