| Syngene International Limited | ||||||
| Long-term rating placed on ‘Watch Developing’; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has placed its rating on long-term bank facilities of Syngene International Limited (Syngene) on 'Rating Watch with Developing Implications' and reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facilities.
The rating was placed on watch following the rating action on the long term debt facilities of its parent, Biocon Ltd (Biocon; ‘CRISIL AA+/Watch Developing/CRISIL A1+’). On February 28, 2022, Biocon’s subsidiary and Syngene’s associate, Biocon Biologics Ltd (BBL) 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 remaining by debt. 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 the nine months through December 2021, the company registered revenue growth of 21% 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 29.6% for nine months ended December 31, 2021 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 12-15% over the medium term.
The company has planned capital expenditure (capex) of Rs 750-900 crore in fiscal 2022, including execution of ongoing projects brought forward from fiscal 2021 towards expanding and adding new capabilities across core businesses. In the first nine months of fiscal 2022, the company has invested Rs 352 crore and committed Rs 300 crore for execution. However, it is expected that some portion of the plans for the capex will spill over to the next fiscal.
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:
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 8 of the top 10 global pharmaceutical majors such as Bristol-Myers Squibb Co (BMS; rated ‘A+/Negative/A1’ by S&P Global Ratings [S&P]), Baxter International Inc (Baxter; ‘A-/Watch negative/A2’ by S&P) and Amgen Inc (Amgen; rated ‘A-/Stable/A2’ by S&P). Syngene has dedicated research and development (R&D) centres for BMS, Amgen, Baxter and Herbal Life. Revenue grew by 21% in the nine months through December 2021, driven by strong performance across all businesses and maintained the growth momentum in discovery services and dedicated centres.
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 higher at 45% in fiscal 2018 owing to subdued performance of Biocon’s other segments. However, in fiscal 2021, Biocon’s biopharmaceutical sales and profitability improved and Syngene’s contribution fell to 29% of revenue.
Adjusted gearing was 0.29 time as on September 30, 2021, and should remain stable over the medium term. Debt protection metrics were comfortable, reflected in interest coverage ratio of 29.1 times in the nine months through December 2021. The operating margin is expected to sustain at around 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. The capital structure will improve over the medium term aided by healthy accretion to reserve.
Weaknesses:
Syngene has completed and commercialised planned capex in fiscal 2021. 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. The company has planned capex of Rs 750-900 crore for expansion of its research facility in Bengaluru and phase 2 of Hyderabad. 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 the planned capex will be key monitorables.
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 among others, which may have a broader portfolio of services. Furthermore, competition persists from captive R&D centres and new smaller entities with specific focus towards a therapeutic area. Nevertheless, the company benefits from its wide range of service offerings and strong clientele. It also has the early-mover advantage and long-tenure contracts with its customers, partially offsetting the competition. |
Liquidity: Strong Syngene has strong liquidity, driven by expected cash accrual of Rs 670-800 crore per annum in fiscals 2022 and 2023 and healthy cash and equivalent of Rs 1,434 crore as on March 31, 2021, will sufficiently cover debt obligation, working capital requirement and annual capex of Rs 900 crore in fiscal 2022 and Rs 450 crore in fiscals 2023 and 2024. The bank limit is hardly utilised. Syngene is expected to maintain liquidity of at least Rs 500 crore on a sustained basis. |
Rating Sensitivity factors Upward factors
Downward factors
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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.
As of December 2021, Biocon held 70.4% of the shareholding of Syngene. The company is listed on the National Stock Exchange and the Bombay Stock Exchange. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Fully interchangeable with cash credit |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
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This Annexure has been updated on 09-Mar-22 in line with the lender-wise facility details as on 22-Dec-21 received from the rated entity
Criteria Details
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