Moody's assigns first-time B2 CFR to BIOCAD, outlook positive

Moody's Investors Service ("Moody's") has today assigned a first-time B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) to JSC BIOCAD (BIOCAD), one of Russia's largest vertically integrated pharmaceutical and biotechnology companies. Moody's has also assigned a positive rating outlook to BIOCAD.

RATINGS RATIONALE

The B2 CFR assigned to BIOCAD reflects the company's small scale in the context of the rated pharmaceutical universe and a high level of product and therapeutic concentration with around $370 million revenue in 2019 generated mostly in the therapeutic area of oncology, out of which 65% comes from the company's three biosimilars rituximab, trastuzumab, and bevacizumab. These factors, in particular, expose BIOCAD to a number of credit risks including new competition, product safety issues, pricing pressure, and manufacturing disruptions.

Pricing and regulatory risks, which Moody's considers as social risks under its ESG framework, are, however, partly offset by (1) the government's strategic focus on establishing the competitive domestic pharmaceutical industry, which supports local producers; (2) easier access of VEDs to the market with the state approved therapeutic models largely based on these drugs; and (3) solid market fundamentals, which will likely continue its strong expansion despite the coronavirus pandemic, supported by the respective step-up in spending on products to treat or prevent COVID-19, the disease caused by the coronavirus, as well as growth under the strategic federal programmes. Moreover, to improve its geographic diversity, BIOCAD is now strategically focused on expanding its presence in international markets, although any major breakthrough is to come only starting 2024, when the company expects to enter the lucrative Chinese and the EU markets. At the same time, despite its small scale, the rating positively reflects BIOCAD's longstanding market leadership particularly in the hospital purchases of oncology drugs, underpinned by the company's (1) expertise in development and manufacturing of complex and expensive provider-administrated biotech drugs (accounted for more than 80% of the company's 2019 revenue) that tend to benefit from limited competition and fairly strong barriers to entry compared with more commodity-like products; (2) full-cycle business model with all the assets located in Russia, which provides a good level of cost control and operating flexibility and allows to offer attractive contract prices; (3) focus on the less marketing-intensive public procurement, where pricing is one of the key criteria for tenders; (4) diversification into a range of lower-margin generics as concomitants to main biosimilar products, which allows to cover the whole complex of therapy under one contracts; and (5) preferential treatment by the government given the country's strategic priority to boost local manufacturing.

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For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com.