Detailed Rationale

CRISIL Ratings has removed its rating on the long-term bank facilities of Syngene International Ltd (Syngene) from 'Rating Watch with Developing Implications' and has reaffirmed the rating at 'CRISIL AA+' and assigned a 'Stable' outlook. CRISIL Ratings has also reaffirmed its 'CRISIL A1+' rating on the short-term bank facilities.

 

The rating action follows similar rating action on the long-term debt facilities of its parent, Biocon Ltd (Biocon; ‘CRISIL AA+/Stable/CRISIL A1+’) following the completion of the acquisition of the biosimilar business of US-based Viatris Inc. by Biocon Biologics Ltd (BBL, subsidiary of Biocon).

 

CRISIL Ratings notes that BBL is now in final stages of raising/drawing the funds to make the payment and has completed the acquisition. The ‘stable’ outlook signifies that the acquisition will result in value addition for BBL which include attaining commercialisation and regulatory expertise in the developed markets, realizing higher revenue and associated profits from its partnered products. As per BBL’s management, the acquired business from Viatris is expected to generate additional revenue of ~USD 1.1 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of USD 250 million in fiscal 2024. 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.

 

While company’s debt protection metrics will moderate in the near-term due to the large debt taken for the acquisition, it is expected to show rapid improvement through various deleveraging plans of the company including an initial public offering (IPO) at BBL over next 18 months.

 

As per the agreement, BBL will pay a total consideration of USD 3.335 billion, including cash up to USD 2.335 billion (of which 335 million will be deferred consideration to be paid in fiscal 2025) and compulsorily convertible preference shares (CCPS) in BBL of USD 1 billion. The upfront cash payment of USD 2 billion will be funded through equity infusion in BBL by Biocon (USD 650 million) and by Serum Institute Life Sciences (SILS, USD 150 million), totalling USD 800 million and the remainder USD 1.2 billion will be funded by debt raised at BBL from banks. Biocon shall infuse USD 650 million in BBL through a combination of the funds raised through stake sale in its subsidiary, Syngene International Ltd (Syngene, rated ‘CRISIL AA+/Stable/CRISIL A1+’), available cash reserves and bridge-financing loans of USD 420 million loans, including funds raised through commercial papers (CPs) of USD 275 million. Biocon plans to refinance the bridge-debt over next few months through a non-convertible debenture (NCD; up to USD 250 million), equity funding from private equity (in lieu of BBL’s stake) and by the monetisation of Biocon’s equity stake in Syngene on a need basis.

 

CRISIL Ratings notes that 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, Syngene’s credit risk profile, draw support from that of Biocon.

 

The ratings factor in the sustained improvement in the operating performance of Syngene driven by healthy revenue growth and operating profitability. The company registered revenue growth of 19% in fiscal 2022 and 17% in first half of fiscal 2023 backed by growth in discovery services, development services and dedicated centres. Growth was also supported by increase in sales from existing clients and acquisition of new clients. The operating margin was healthy at 30.6% for fiscal 2022 and is expected to sustain at 29-30% 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.

 

Syngene 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 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 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 and 17% in first half of fiscal 2023, driven by strong performance across all businesses, and the company maintained the growth momentum in discovery services and dedicated centres.

 

• Strong parentage: Syngene is a 64.56% subsidiary of Biocon (post the 5.4% stake sale in September 2022) 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 continue to account for about one-third of the consolidated revenue and operating profit of Biocon, backed by healthy growth in revenue and higher profitability. However, 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 0.24 time as on March 31, 2022 and should improve over the medium term aided by healthy cash generation.  Debt protection metrics were comfortable, reflected in interest coverage ratio of 35.2 times in fiscal 2022. The operating margin is expected to sustain at around 29-30% over the medium term, with ramp up in facilities in Bengaluru and Mangaluru and effective cost-control measures, ensuring healthy cash generation.  Capex is expected at ~Rs.650-750 crore per annum, and will be funded mainly by accruals, reflecting in continued healthy debt protection metrics.

 

Weaknesses

• Moderate risks related to stabilisation and scale-up of recently completed capex: Syngene has completed and commercialised capex in fiscals 2021 and 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 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, among 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 750 crore in fiscal 2023 and healthy cash and equivalent of Rs 1,234 crore as on September 30, 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 sparingly utilised. Syngene is expected to maintain healthy liquidity over the medium term.

 

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 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 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 expansion of its client base and increase in time and scope of existing contracts.

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 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 in from the parent

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 5,200 scientists.

 

As of September 30, 2022, Biocon held 64.56% of the shareholding of Syngene, foreign portfolio investors held 16.77% and balance was held by public and others. The company is listed on the National Stock Exchange and the Bombay Stock Exchange.

 

In the first half of fiscal 2023, at a consolidated level, Syngene reported revenue of Rs 1,413 crore (Rs 1,205 crore in the corresponding period of fiscal 2022) and unadjusted net profit of Rs 176 crore (Rs 144 crore).

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	5.0	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+/Stable
NA	External Commercial Borrowings	NA	NA	NA	150.0	NA	CRISIL AA+/Stable

   *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
Syngene Manufacturing Solutions Ltd	100%	Subsidiary
Syngene Scientific Solutions Ltd	100%	Subsidiary