Detailed Rationale

CRISIL Ratings has continued its rating on the long-term bank facilities of Syngene International Limited (Syngene) on ‘Rating Watch with Developing Implications' and has reaffirmed the 'CRISIL A1+' rating on the short term bank facilities.

 

CRISIL Ratings had placed the long-term rating on watch with developing implications in March 2022, following the rating action on the long-term debt facilities of Biocon Ltd (Biocon; ‘CRISIL AA+/Watch Developing/CRISIL A1+’), the parent company of Syngene. Biocon Biologics Ltd (BBL, subsidiary of Biocon) had announced 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 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 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. However, this transaction is not expected to have any material impact on Syngene’s standalone credit risk profile as it is not directly involved in the transaction. However, both BBL and Syngene’s credit risk profile, draw support from that of Biocon.

 

The ratings factor in the sustained improvement in the operating performance of the company, driven by healthy revenue growth and operating profitability. In fiscal 2022, the company registered revenue growth of 19% backed by growth in discovery services and dedicated centres. Growth was also supported by increase in sales from existing clients and acquisition of new clients. Also, the operating margin stood at 30.6% for fiscal 2022 and is expected to sustain at 30-31% over the medium term. Addition of clients and increasing scope of existing contracts from established clientele will ensure steady revenue growth of 13-15% over the medium term.

 

The company undertook capital expenditure (capex) of Rs 600-650 crore in fiscal 2022, including execution of ongoing projects brought forward from fiscal 2021 towards expanding and adding new capabilities across core businesses. Going forward, annual capex of Rs. 650-750 crore is expected towards adding new capacities.

 

The ratings continue to reflect Syngene’s established market position in contract research, strong clientele and healthy financial risk profile. The ratings also factor in the benefits derived from being a subsidiary of Biocon, India’s leading biopharmaceutical company. These strengths are partially offset by the risk related to stabilisation and scale-up of recently completed capex, and exposure to intense competition and regulatory risks.

Analytical Approach

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

 

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 market position in contract research

Syngene is a leading contract research and manufacturing services (CRAMS) organisation in India. It offers integrated services across the 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 8 of the top 10 global pharmaceutical majors such as Bristol-Myers Squibb Co (BMS; rated ‘A+/Stable/A1’ by S&P Global Ratings [S&P]), Baxter International Inc (Baxter; ‘BBB/Stable/A2’ by S&P) and Amgen Inc (Amgen; ‘A-/Stable/A2’ by S&P). Syngene has dedicated research and development (R&D) centres for BMS, Amgen and Baxter. Revenue grew 19% in fiscal 2022, driven by strong performance across all businesses and the sustained growth momentum in discovery services and dedicated centres.

 

• Strong parentage

Syngene is a 70.4% subsidiary of Biocon 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. Syngene will continue to account for one-third of the consolidated revenue and profit of Biocon, backed by healthy growth in revenue and higher profitability. Its contribution to the parent’s operating profit was 45% in fiscal 2018 owing to subdued performance of Biocon’s other segments. However, in fiscal 2022, Biocon’s biopharmaceutical sales and profitability improved and Syngene’s revenue contribution fell to 29%.

 

• Healthy financial risk profile

Adjusted gearing was 0.24 time as on March 31, 2022, and should improve over the medium term aided by healthy accretion to reserve. Debt protection metrics were comfortable, reflected in interest coverage of 35.2 times in fiscal 2022. The operating margin is expected to sustain at 30-31% over the medium term, with ramp-up in facilities in Bengaluru and Mangaluru and effective cost-control measures. The financial risk profile will be supported by healthy internal accrual and liquidity.

 

Weaknesses:

• Moderate risks related to stabilisation and scale-up of recently completed capex

Syngene undertook capex of Rs. 600-650 crore in fiscal 2022. With commercialisation of the active pharmaceutical ingredient (API) manufacturing facility in Mangaluru and new research centres in Hyderabad, scaling up of operations and contribution towards revenue and profitability will be key monitorables. APIs will be sold to innovators to meet their commercial requirements for launching new molecules. Syngene will remain exposed to risks related to stabilisation and ramp-up in production and services at the recently commercialised facilities. Any time or cost overruns in capex planned over the medium term will also 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 outsource 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 among others, which may have a broader portfolio of services. Furthermore, competition persists from captive R&D centres and new, smaller entities focussing on a particular therapeutic area. Nevertheless, the company benefits from its wide range of service offerings and strong clientele. Early-mover advantage and long-tenure contracts with customers partially offset the competition.

Liquidity: Strong

Syngene will maintain strong liquidity, driven by expected cash accrual of over Rs 750 crore in fiscal 2023 and healthy cash and equivalent of Rs 1,552 crore as on March 31, 2022, which will sufficiently cover debt obligation, working capital requirement and annual capex of Rs 650-750 crore per annum in fiscals 2023 and 2024. The bank limit is hardly utilised. Syngene will likely maintain liquidity of at least Rs 500 crore on a sustained basis.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes 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 characterized by impact on the health and wellbeing of its consumers on account of its products and on employees and local community on account of its operations.

Key ESG highlights:

• Syngene 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% over the previous fiscal. The company 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; the amount of water conserved increased 61% on-year in fiscal 2022.
• Syngene has focussed efforts on waste reduction and recycling and recycled 92% of the total hazardous and non-hazardous waste generated from its operations in fiscal 2022.
• Syngene has implemented gender diversity and inclusion policy, prevention of sexual harassment policy and CSR policy. The company has better gender diversity compared with industry peers with women employees comprising 27% of its 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.

 

ESG is gaining importance 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.

Rating Sensitivity factors

Upward factors

• Sustained revenue growth of 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 below 25% on a sustained basis
• 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 debt instruments of Biocon or change in stance of financial support in case of any exigency

About the Company

Syngene is one of India’s leading CRAMS organisations. The company offers research services in medicinal chemistry and biology in 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 400 clients in the pharmaceutical, biotechnology, nutrition, animal health, consumer goods and specialty chemicals industries, including 8 of the top 10 global pharmaceuticals. It has a team of over 4,000 scientists.

 

The company is listed on the National Stock Exchange and the Bombay Stock Exchange. As of March 2022, Biocon held 70.4% stake in Syngene.

Key Financial Indicators

As on/for the year ended March 31		2022	2021
Revenue	Rs crore	2604	2184
Profit after tax (PAT)	Rs crore	396	405
PAT margin	%	15.2	18.5
Adjusted debt/adjusted networth	Times	0.24	0.28
Adjusted interest coverage	Times	35.22	26.53

 

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 level	Rating assigned with outlook
NA	Letter of credit & Bank Guarantee	NA	NA	NA	5.0	NA	CRISIL A1+
NA	Overdraft Facility	NA	NA	NA	5.0	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency	NA	NA	NA	130.0	NA	CRISIL A1+
NA	Packing Credit in Foreign Currency*	NA	NA	NA	10.0	NA	CRISIL AA+/Watch Developing
NA	External Commercial Borrowings	NA	NA	NA	150.0	NA	CRISIL AA+/Watch Developing

  *Fully interchangeable with cash credit.

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Syngene USA Inc	100%	Subsidiary