Biocon Biologics' Debt-Funded Viatris Deal Spooks Investors
Shares tumbled after Monday's announcement and closed more than 11.6% lower, the biggest decline in 13 months.
Biocon Ltd.'s global foray via its mega buyout through a subsidiary left investors spooked. The reason: debt.
The $3.34-billion (about Rs 26,079 crore) acquisition of its partner Viatris Inc.'s biosimilar business will be funded largely through debt, apart from cash and stock.
While the company said the rationale behind the acquisition was to have a commercial front-end in the developed markets, investors were worried. Shares tumbled after Monday's announcement and closed more than 11.6% lower, the biggest decline in 13 months.
The Leveraged Deal
The deal makes Biocon Biologics Ltd. one of the largest companies in the global markets. In the multi-step transaction:
Biocon Biologics Ltd. will pay $2 billion in cash upfront.
It will issue $1 billion worth of compulsorily convertible preference shares, equivalent to at least 12.9% stake, to Viatris, on a fully diluted basis.
It will also pay up to $335 million in 2024, including $175 million for acquiring another biosimilar product Aflibercept injection (to treat age-related blurred vision and blindness).
Of the upfront cash payment of $2 billion, $1.2 billion will be funded by debt, according to the company. The remaining $800 million will come as an equity infusion from the parent Biocon.
Debt Surge
Biocon Biologics reported a revenue of Rs 2,797 crore and a profit after tax of Rs 132 crore in FY21. It contributes 40% of parent's consolidated revenue and profits. So any impact on its profitability will hurt Biocon.
The Viatris portfolio will add $1.1 billion (nearly Rs 8,500 crore) in revenue, and $250 million in operating income in calendar year 2023, Kiran Mazumdar-Shaw, executive chairperson at Biocon, said in a media interaction. The full synergies of the business will be reflected only from fiscal 2024, she said.
Still, debt goes up immediately.
Biocon Biologics had a debt of $300 million before the deal. This will surge to $1.5 billion, Mazumdar-Shaw said. That's a fivefold jump.
On its own, the parent's consolidated borrowing as of September 2021 stood at Rs 4,621.4 crore.
According to a September 2021 report of Crisil Ratings Ltd., Biocon Biologic's cash accrual is expected at more than Rs 900 crore in fiscal 2022. While it will comfortably cover annual debt obligation (as of September) but its annual capex requirement of Rs 700-750 crore will require a mix of debt and internal accruals, it said.
Meaning, a large part of the cash generated by the combined entity will be used to service its now-increased debt.
Mazumdar-Shaw, in her emailed statement to BloombergQuint, however, maintained that the debt assumed in this transaction will be supported by a larger Ebitda base, a combination of Biocon Biologics, Viatris and vaccines income streams, and future equity infusion from existing shareholders.
Lack of Clarity
Biocon Biologics will raise $800 million in equity infusion from the parent Biocon.
The fresh fund-raising will come at a premium valuation, Mazumdar-Shaw said without divulging details.
In the last two years, Biocon Biologics has raised equity from True North, Tata Capital, ADQ, Goldman Sachs. Last year, it sold 15% stake to Serum Institute of India at a valuation of $4.9 billion. Its' valuation jumped to close to $8 billion based on the CCPS being issued to Viatris.
Still, Biocon will own close to 65% of its subsidiary on a fully diluted basis and will have bear a higher burden of the equity funding if all shareholders participate proportionately to their holding.
The parent plans to part-fund equity infusion via debt.
The fund-raising will be undertaken by Biocon and existing shareholders of Biocon Biologics, said Mazumdar-Shaw. And Biocon will use some its cash and raise some debt to participate in the equity round of Biocon Biologics, she said.
“Biocon is very comfortable with the debt taken on,” Mazumdar-Shaw said. And the company intends to repay it in five years, she said.
Mazumdar-Shaw, however, gave no details of debt financing except that it has commitments of $1.8 billion from lenders.
The new debt raising will require Biocon to provide financial support including corporate guarantees for the bank facilities. It has provided letter of comfort and corporate guarantees for its subsidiary existing bank facilities.
The IPO Option
One option that will be available to repay debt will be selling a stake in the biosimilar arm. Biocon Biologics is expected to file for an initial public offering in the next 18-24 months, said Mazumdar-Shaw.
The IPO could be a deleveraging exercise for the group. But Mazumdar-Shaw did not clarify if the IPO will be sufficient to reduce nearly $1.5 billion debt on the consolidated balance sheet of the parent.