Thu 05/05/2022 10:52 AM
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Relevant Items:
Primary Analysis
Historical Financials on Aggredium
EMEA Covenant Analysis

Reorg has produced a comprehensive financial and legal analysis of Biofarma’s 2029 €345 million senior secured floating rate notes issuance HERE. Full historical financials can be found on Aggredium by Reorg HERE. To request a trial, please email

Italian nutraceutical contract development and manufacturing organization (CDMO) Biofarma is looking to issue €345 million 2029 senior secured floating-rate notes, with proceeds to be used to refinance bridge facilities entered into to fund the acquisition of the group by Victoria (a holding company ultimately controlled by the chairman and one of the founders of the Biofarma Group, Germano Scarpa, and Gabriella Tavasani) and private equity firm Ardian.

We think the bonds will need to yield about 6% for the issuance to be considered attractive on a relative value basis. However, the margin may be lower if the notes are issued at a discount, which may be likely in the current primary market. B+ rated Miller homes priced its six-year floating-rate notes last week at Euribor+5.25% at an OID of 97 (to yield 5.85%).

The notes should offer a premium to comparable issuances in order to compensate investors for the company’s relatively small size, geographic and customer concentration, high opening net leverage, potential future M&A activity, weaker B- credit rating compared to other pharmaceutical-related issuances, and the fact that this is a debut issuance coming in a weak primary market. In addition, we think the group’s deleveraging will be limited in the near term given the current margins, growth capex requirements, and the realization of substantial cost base synergies which are not expected to occur until 2023 and carry execution risks. In addition, interest on the €37.5 million shareholder loan and €106 million PIK loan would further limit deleveraging.

Having said that, we think the issuance is supported by the resilience of the nutraceutical industry and strong growth prospects across the sector (5% CAGR expected across 2021 to 2025). Biofarma’s organic growth has exceeded industry rates in recent years and we expect continued growth to allow for modest deleveraging to occur in the medium term through levered free cash flow generation and higher EBITDA.

However, in the near term, we don't expect the business to meaningfully delever. Management does not expect to realize a significant amount of EBITDA addbacks until 2023 (cost base synergies from recent acquisitions) and additional interest on the shareholder loan and PIK notes will further constrain deleveraging. While we expect the group to negotiate pass-through agreements with customers to offset raw material price inflation, a delay or failure to do so could further constrain free cash flow in the near term.

Relatively better-rated floating rate notes of pharma companies such as Doc Generici and Recordati yield about 4.2% and floating rate term loans of Advanz Pharma, Cheplapharm and CeramTec yield between 4% and 5%. It should be noted, however, that most of these peers are speciality producers with far greater margins and/or business sizes.

Comparable debt issuances and relevant figures are below:

The company’s pro forma capital structure is below:
Key Credit Considerations
  • Near-term deleveraging unlikely, though modest FCF generation and topline growth could drive deleveraging over medium term: Biofarma could generate about €18 million of levered free cash flow excluding interest on shareholder loans and PIK notes (5% of pro forma net debt) in the near term assuming the new issuance prices at E+5.5% with a OID of 97 (interest of €19 million) and taking into account management’s estimate of €11 million growth capex. However, deleveraging from the 5.1x marketed net leverage figure is unlikely in the near term as it will take management time to continue executing on synergistic addbacks to EBITDA from recent acquisitions (expected 2023). In addition, interest on the €37.5 million shareholder loan and €106 million PIK loan would further limit deleveraging. The group is also experiencing raw material price inflation, which could also negatively impact EBITDA in the near term if there are delays in securing pass-through agreements or if management fails to completely pass through these costs to customers. While short-term deleveraging is subject to several constraints, organic growth over the medium term could drive some net debt reduction through a combination of higher EBITDA and free cash flow. For example, assuming conservative organic topline growth of 5% annually and a constant adjusted EBITDA margin of 25%, Biofarma could delever around 0.3x to 0.5x per year in the medium to long term (more details in Cash Conversion section).
  • Resilient industry with strong underlying growth: The nutraceutical market has been generally resilient through the Covid-19 pandemic (with a CAGR growth of 6% between 2019 and 2021). We note that Biofarma experienced organic revenue growth of 8.5% in 2020, followed by 12.6% in 2021. The company said it expects the nutraceuticals industry to grow at a CAGR of 5% across its key markets from 2021 to 2025 (the industry grew at a CAGR of 6% from 2019 to 2021).
  • Material equity cushion: Pro forma net leverage of 5.1x based on Biofarma’s €64 million structuring EBITDA and an implied transaction EV multiple of around 18.3x implies a sizable equity cushion. We note that peers including Catalent and Fine Foods trade at an EV/EBITDA multiple of around 19.6x and 15.4x, respectively.
  • Substantial EBITDA Add Backs: Marketed net leverage of 5.1x is based on structuring EBITDA which includes significant addbacks including for non-recurring costs (€4.3 million), rent saving adjustments (€4 million), and unachieved synergies expected to be realized by 2023 (€6.7 million). Net leverage is moderately higher at 5.7x based on 2021 pro forma adjusted EBITDA of €57.3 million and rises to 6.8x based on reported adjusted EBITDA of €48.6 million.
  • Diversified product range, somewhat non-cyclical: Biofarma is relatively diversified across its business units and generates around 56% of its net revenue and income from products manufactured using innovative and patent protected technologies, pro forma for the IHS acquisition for the year ended Dec. 31, 2021. Across some of its product range it experiences a limited degree of seasonal fluctuation in demand, with exceptions for items such as sun cream and anti-flu products. As a result, sales are generally slightly higher in the first half of the financial year.
  • Ample liquidity: On a pro forma basis, there will be an undrawn €60 million super senior RCF above the notes which will mature six months before them and pay E+300 bps. We assess that the group’s liquidity position is sufficient given the undrawn RCF, €16.5 million of pro forma cash and future prospects for cash generation (see point A above for more info on the company’s cash generation prospects).
  • High barriers to entry: The nutraceuticals contract development and manufacturing organization, or CDMO, market is characterized by high barriers to entry due to infrastructural barriers related to R&D capabilities, manufacturing complexity and sizable capital expenditure requirements, high client stickiness, and regulatory expertise required.
  • Capital intensive business, low capacity utilization: Biofarma operates in an industry which has a high degree of upfront capital intensity required to support production and quality requirements, with capex amounting to 7% of the topline in 2021 and 11% in 2020. We note that it has seemingly low saturation rates across its four manufacturing facilities, which indicates it has room for additional topline growth. For example, at Gallarate, its most saturated facility, saturation rates are 53% for upstream and 74% for downstream. However, Biofarma says 30% additional capacity can be unlocked across its facilities by adopting a 3x7 (three shifts per day for seven days a week) shift pattern compared with its current 3x5 model.
  • Fragmented market, potential for further industry consolidation: The European nutraceutical CDMO market is highly fragmented, with no player having yet emerged as a global leader. Given the level of fragmentation, we think there is scope for further consolidation within the industry. Furthermore, a number of its customers are participants in markets that are undergoing consolidation. Thus, it could lose individual customers to competitors if they are acquired by, or consolidate with, other companies that have relationships with Bifoarma’s competitors. In addition, ongoing consolidation in various industries continues to create individual customers with greater purchasing power and competitors with greater financial and other resources.
Key Risks
  • Small business with high degree of customer and geographic concentration: Biofarma is small compared to other similarly rated high yield issuers, with revenue of €206.6 million in 2021. We note there is a high degree of customer concentration as its top three clients make up 28% of revenue, with Alfasigma driving 14% alone. However, there are generally high switching costs for clients due to a high cost of technical transfer and significant time required for ramp-up of new CDMO providers (assuming high quality standards are maintained). Further, Biofarma experiences negligible churn, with a 97% retention rate over the last three years with only one small client lost over this period. In addition to some customer concentration, Biofarma’s sales are primarily generated in Italy (55%) and other European countries (36%). In addition, we note that all of the group’s manufacturing facilities are located in Italy, with the Mereto di Tomba plant appearing to be the dominant facility in terms of size and the number of personnel.
  • Raw material price inflation pass-through ability subject to negotiation: The group is currently experiencing raw material price inflation which could negatively impact margins and free cash flow in the near-term if it is unable to secure pass-through agreements with customers or if there are significant timing delays before pass-through is achieved. The group took several questions on an investor call regarding its ability to pass on these costs to customers. Management noted that there are no automatic pass through clauses, and that pass-throughs are based on negotiation on a contract-by-contract basis. It noted that it was seeing significant raw material cost rises, though it suggested that it was able to more or less completely offset these through price increases. The company says that in the last six months it has closed price increases for more than 85% of its product portfolio and highlights that pass-through agreements are the norm across the industry.
  • High opening net leverage: As mentioned above, net leverage at issue is high at 5.1x, based on structuring EBITDA of €64 million. Net leverage is 5.7x when excluding unrealized synergies, which is higher than other peers assessed by Reorg. Further, when including the PIK notes and shareholder loans net leverage jumps to 7.4x its structuring EBITDA.
  • Execution risk regarding synergy realization: The group’s marketed EBITDA is based on a large amount of adjustments primarily consisting of nonrecurring costs (€4.3 million), rent saving adjustments (€4 million), the inclusion of €8.7 million EBITDA of IHS, and a further €6.7 million of unrealized cost base synergies (expects to realize in 2023).
  • Potential for debt funded acquisitions: Biofarma has grown aggressively since 2017 through a combination of organic growth and acquisitions, which include Nutrilinea, Pharcoterm, Claire, and IHS. An appetite for acquisitions, in combination with a highly fragmented industry results in a high likelihood of further M&A activity in future, which in turn raises further execution risks and a potential for these investments to be debt funded. We note that the group has capacity under the bond documentation to issue additional super senior debt and structurally senior debt which would rank above the bonds.
  • Regulatory risks: The process of seeking regulatory approval of certain new products (especially relating to the medical devices business unit) and production processes can be time-consuming and subject to unanticipated and significant delays, and some approvals may ultimately not be granted at all. This can adversely affect the group’s ability to introduce new products, to continue distributing existing products, and to generate revenue from those products, which could have a material adverse effect on financial performance. Some of Biofarma’s product portfolio across its health supplements, medical devices and cosmetics business units are not currently subject to stringent regulation. However, Biofarma said that within five to seven years new regulation is expected to be implemented at the EU level, which will likely toughen manufacturing practices and bring quality and production standards closer to pharmaceutical-grade products.
  • Potential for value leakage through dividends: We note that Ardian may look to pay itself and other shareholders dividends over the life of the bonds, which could constrain the group’s ability to delever. We calculate the group has capacity to make shareholder payments of €29 million from day one of issuance.


Biofarma operates in the nutraceutical and the cosmetics markets, with Reorg’s selected peer group of Labomar, Aenova, Fine Foods, Catalent and Lonza operating in either one or both of the markets. Biofarma competes with other players such as Fareva, Aminolabs, and SIIT which have not been included due to non-public financial information.

The nutraceutical market can be split into two categories of competitors, innovation-driven competitors such as Labomar, SIIT, Fareva and Aenova and manufacturing-driven competitors such as FineFoods, Catalent, Lonza and Aminolabs.

Italian innovative contract development and manufacturing organizations, or CDMOs, such as Labomar and SIIT have good innovation capabilities and certain differentiated technologies, but have a lower scale compared to Biofarma. Labomar and SIIT have approximately 20 R&D and regulatory and 35 R&D department full-time employees, respectively, compared to Biofarma’s approximately 64 R&D and regulatory department full-time employees pro froma the IHS acquisition of Dec. 31, 2021.

Diversified international players such as Fareva and Aenova do not primarily focus on nutraceuticals, Fareva is also engaged in pharmaceuticals and cosmetics, and Aenova is mostly focused on pharmaceuticals. However, they have innovation capabilities with adequate scale, making them direct competitors at a European level.

Manufacturing-driven players focus on high-volume production at competitive prices, driven by production efficiencies. Such players also include large diversified pharmaceutical CDMOs, such as Lonza and Catalent, who are not direct competitors of Biofarma as they prioritize the biotech, oncology and rare disease areas in their strategy, leaving nutraceuticals as a second priority, and with respect to nutraceuticals, are focused on the production of large volumes, while pure-play nutraceuticals players, such as Biofarma, adopt a more flexible manufacturing process that offers clients the option of small-batch manufacturing.

Among manufacturing-driven players, there is also the Italian player Fine Foods. Fine Foods is a manufacturing-orientated company focused on pharmaceuticals, which accounted for approximately 20% of its revenue in 2021, but it does not have significant innovation capabilities, as indicated by the absence of trademarks and product patent rights and by the significantly lower EBITDA margin of around 10% at year-end 2021.

Within the cosmetics market it competes with companies such as Fareva and Intercos. Despite Fareva being significantly larger in size with around €1.8 billion of revenue in the year ended Dec. 31, 2021, Biofarma highlighted that Fareva can be identified as the most similar player in terms of product portfolio. Intercos, who generated around €600 million of revenue in the year ended Dec. 31, 2020, has a different product portfolio compared to Biofarma, with only 19% of its revenue coming from skin care, and the remaining represented by make-up products and hair and body products, which Biofarma does not offer.

Diversified pharma CDMOs such as Lonza and Catalent, have limited operations in the cosmetics field and only operate in specific segments, with Catalent offering primarily beauty products. Overall, the cosmetics market is very fragmented, with many players competing in different sub-sectors, thus reducing competitive pressure.

Biofarma’s adjusted EBITDA margin of 23.5% was in line with that of Catalent’s 23.2% and Lonza’s 25.2%, although we note the pro forma structuring EBITDA of €64 million results in a margin of about 31%. Its reported unlevered free cash flow margin of around 9% is in line with 8.5% for Labomar, which had a slightly lower level of capex at 5% of sales. Bioforma’s 5.1x pro forma net leverage is roughly in line with Labomar’s 5.5x and Fine Foods’ 4.5x. However, we note the various addbacks to pro forma structuring EBITDA impact Biofarma’s margins and net leverage.

The implied EV/EBITDA from the Biofarma transaction of around 18.3x compares to Fine Foods’ 15.4x and Catelent’s 19.6x.

A financial summary for select peers is below:

Full Analysis
(For the full financial and legal analysis, click HERE.)
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