By Ankit Bhembre

India Ratings and Research (Ind-Ra) has revised Glenmark Pharmaceuticals Ltd.’s (Glenmark) Outlook to Stable from Positive while affirming its Long-Term Issuer Rating at ‘IND AA-’. The instrument-wise ratings actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR3,500

IND AA-/Stable

Rating affirmed; Outlook revised to Stable from Positive

Fund-based working capital demand loans

-

-

-

INR3,500

IND AA-/Stable

Rating affirmed; Outlook revised to Stable from Positive

Non-fund-based limits

-

-

-

INR1,100

IND A1+

Affirmed

Proposed fund-based limits*

-

-

-

INR9,400

Provisional IND AA-/Stable

Rating affirmed; Outlook revised to Stable from Positive

Proposed term loans*

-

-

-

INR1,000

Provisional IND AA-/Stable

Rating affirmed; Outlook revised to Stable from Positive

 *The ratings are provisional and shall be confirmed upon the sanction and execution of loan documents for the above facilities by Glenmark to the satisfaction of Ind-Ra.

KEY RATING DRIVERS

Elevated Net Leverage: The Outlook revision reflects Glenmark’s lower-than-expected deleveraging through FY18 and Ind-Ra’s expectation of net adjusted leverage (net adjusted debt/operating EBITDA) to remain above 2x over FY19-FY20. At FYE18, Glenmark’s total debt stood at INR46.4 billion (FY17: INR47.47 billion) and net adjusted leverage at 2.1x (FY17: 1.8x). In line with its peers, Glenmark experienced low double-digit pricing erosion in its base portfolio in the US generic market, which resulted in over 35% yoy decline in the US revenue to INR14.4 billion during 2HFY18, thus stressing EBITDA generation. Consequently, operating EBITDA margins declined to 17.7% in FY18 (FY17: 23.2%, FY16: 19.2%). During 2HFY18, the company reported operating EBITDA margin of about 15%. Further, a sustained investment into working capital and moderate capex outflows are likely to keep free cash flow generation modest.

Strong Business Risk Profile: The affirmation continues to reflect the company’s large and well diversified scale of operations and robust product pipeline. However, revenue remained stable at INR91.0 billion in FY18 (FY17: INR90.7 billion). Continued new product launches enabled the company to maintain its top line, despite the sharp fall in revenue in the US. In FY18, the domestic markets (contributed 28% of revenue) reported a revenue growth of 9.1% yoy (FY17: 9.2% yoy), while the European and rest of the world markets reported growth of 11.2% yoy and 27.6% yoy, respectively. In terms of therapeutic segments, the company maintains a strong focus on dermatology, while increasing its focus on the respiratory segments. As per IMS Health’s moving annual total for March 2018, Glenmark is the 13th largest pharmaceutical manufacturer and dominates dermatology therapy (market share of 9.2%), respiratory therapy (4.75%) and cardiology therapy (4.26%) markets. At FYE18, it had a pipeline of 63 abbreviated new drug approvals (ANDAs), including 26 Para IV filings. During FY18, Glenmark filed for 16 ANDAs and received approval for 21. Given the elevated pricing pressure environment in its key market, Ind-Ra expects revenue growth to remain muted over FY19-FY20.

New Molecule Development on Track, Monetisation Key: Glenmark’s new molecule development programme consists of seven new molecular entities, which include two new chemical entities, four new biological entities and a biosimilar candidate, in various stages of clinical development. The pipeline has exhibited healthy progress with submission of one respiratory new drug application to the US Food and Drug Administration for approval during the current fiscal. During FY17-FY18, the company’s research and development (R&D) expenditure increased 11%-12% of net sales (FY16: 9.5%), attributed to movement of R&D assets into phase II and phase III trials. While monetisation in likely to begin FY20 onwards, Ind-Ra expects R&D expenditure to remain at the current level. The company is actively seeking partners to out-license certain R&D assets for conducting incremental research, which if materialises can moderate R&D spends and support operating profitability in the medium term.

Adequate Liquidity:
Glenmark sparingly utilised its INR8 billion fund-based working capital limits during the 12 months ended April 2018. Cash flow from operations remained positive at INR4.4 billion in FY17 (FY16: INR3.5 billion), however, free cash flow remained depressed due to large capex. The company is likely to spend 8%-10% of its top line for adding capacity over FY19-FY20. It refinanced a part of its long-term debt in 1QFY19, leading to a decline in FY19 repayment obligation to INR2.0 billion. Furthermore, Glenmark had healthy cash and liquid investments of INR12.35 billion at FYE18. With INR13.8 billion repayment obligations over FY20-FY21, higher-than-expected delays in improving free cash flow generation are likely to elevate refinancing risks. 

Concentration Risk: Glenmark derives more than 50% of its revenue and profitability from the US and domestic markets. However, the concentration risk in the domestic markets is partly offset by the strong competitive position in chronic therapies.

Regulatory Risk: Glenmark is exposed to regulatory risks as it derives about 50% of its revenue from regulated markets. All of company’s facilities are compliant with various regulatory requirements as on date. As per management, nearly 50% of its US revenue is concentrated towards the Goa plant and the balance is spread across the formulation facilities at Indore and Baddi. Any adverse impact on EBITDA generation due to adverse regulatory actions can result in a sustained increase in the leverage. However, with the commissioning of the facility of Monroe in the US (2HFY19), certain high value speciality product ANDA filings are likely to be filed. With commercialisation of more products from the new facility, Ind-Ra expects manufacturing facility level concentration to ease in the medium term.
 


RATING SENSITIVITIES

Positive: A substantial improvement in operating EBITDA generation leading to a sustained improvement in free cash flow, resulting in the net adjusted leverage reducing below 1.5x on a sustained basis could lead to a positive rating action.

Negative:
An increase in net debt levels due to unplanned capex/acquisition or a decline in operating EBITDA margins resulting in the net adjusted leverage increasing above 2.5x on a sustained basis could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 1977, Glenmark is an Indian pharmaceuticals company, producing branded and generic formulations, active pharmaceutical intermediates with presence in over 60 countries globally. Glenmark has 18 facilities across formulations and APIs in six countries. Its generics pipeline for the US business is focussed on filings in immediate release, dermatology, hormones and injectables.

 

FINANCIAL SUMMARY

 

Particulars

FY18

FY17

Revenue (INR million)

91,031

90,794

EBITDAR (INR million)

16,154

21,054

EBITDAR margin (%)

17.7

23.2

Total adjusted debt (INR million)

46,390

47,469

Net adjusted leverage (x)

2.1

1.8

Source: Glenmark, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Current

15 March 2017

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Positive

Fund-based working capital limits

Long-term

INR16,400

IND AA-/Stable

IND AA-/Positive

Non-fund-based limits

Short-term

INR1,100

IND A1+

IND A1+

Proposed term loan

Long-term

INR1,000

Provisional IND AA-/Stable

 Provisional IND AA-/Positive


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Ankit Bhembre

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356197

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121