By Ankit Bhembre

India Ratings and Research (Ind-Ra) has affirmed Glenmark Pharmaceuticals Ltd.’s Long-Term Issuer Rating at ‘IND AA-’. The Outlook is Stable. 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

-

-

-

INR4,500 (increased from INR3,500)

IND AA-/Stable

Affirmed

Fund-based working capital demand loans

-

-

-

INR3,500

WD

Withdrawn (paid in full)

Non-fund-based limits

-

-

-

INR4,400 (increased from INR1,100)

IND A1+

Affirmed

Proposed fund-based limits*

-

-

-

INR7,500 (reduced from INR9,400)

Provisional IND AA-/Stable

Affirmed

Proposed term loans

-

-

-

INR1,000

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Proposed non-fund-based limits*

-

-

-

INR2,100

Provisional IND A1+

Assigned

*The rating is 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.

Analytical Approach: The agency continues to take a consolidated view of Glenmark and its subsidiaries while arriving at the ratings since the subsidiaries are engaged in the manufacturing and sales of formulations and active pharmaceutical ingredients (API). 

KEY RATING DRIVERS

Stable Credit Metrics: The affirmation reflects Glenmark’s ability to maintain its credit metrics in line with the agency’s expectations for FY19 despite a fall in operating EBITDA and margins. Glenmark reported net debt/operating EBITDA of 2.2x in FY19 (FY18: 2.1x) owing to a decline in debt (FY19: INR44.48 billion; FY18: INR46.64 billion). Glenmark’s revenue increased to INR98.7 billion in FY19 (FY18: INR90.7 billion), supported by modest growth across operating geographies. However, the operating EBITDA declined to INR15.85 billion (FY18: INR16.17 billion) and the operating margin fell to 16.1% (FY18: 17.8 %), mainly because of an increase in the research and development (R&D) expenses (FY19: 13.2%, FY18: 12.3%) incurred on clinical trials of late stage R&D assets, increase in marketing expenses for certain India-focused product launches and other one-offs. Consequently, Glenmark’s operating EBITDA/interest expense moderated to 4.7x (FY18: 5.7x). The agency expect Glenmark’s revenue and operating profitability to improve modestly in FY20; this along with stable debt levels will lead to stable credit metrics in FY20.

 

US Concerns to Ease From FY21 Onwards: In FY19, the decline in Glenmark’s US business (FY19: 32.4%, FY18: 35.6%) was restricted to 2.1% (FY18: 13.3% decline), supported by the moderation in pricing pressure to high single-digits (double-digits in FY18) as well as consistent product launches (21 launches from 25 approvals in FY19), consisting of a mix of semi-solid preparations, delayed- and immediate-release oral solids, and hormone products.  At end-FY19, Glenmark has 53 ANDAs pending approval, including 28 para-iv applications with a sizable market size and revenue visibility, though this would depend upon the pricing environment and competition at the time of approval/launch. In FY19, Glenmark also acquired seven products from Exeltis USA, Inc. and forayed into the branded dermatology business. The company has identified two products that, along with in-house innovative and in-licensed products, will bolster the company’s revenue and operating profitability in FY21. The agency has factored in cash outflows of a similar quantum towards acquisitions or in-licensing deals over FY20-FY21 to fortify its US and European businesses.  

 

Adequate Liquidity: Glenmark utilised 23.8% (average month-end) of its fund-based working capital limits during the 12 months ended June 2019. The cash flow from operations, which had strengthened to INR13.4 billion in FY18 (FY17: INR5.5 billion), is likely to have remained positive in FY19 on account of an improvement in working capital cycle due to lower receivables. The free cash flow turned positive in FY18 and is likely to have remained positive in FY19 despite lower profitability and pay-outs of in-licensed products (additions to intangibles). The company had cash balances of INR9.36 billion at end-March 2019. This coupled with adequate cash flow generation shall enable the servicing of repayment obligations in FY20-FY21. The company has identified INR5.0 billion in maintenance capex and an additional INR3.0 billion for pay-outs for in-licensed products in FY20. Glenmark’s ability to raise funds from divestments of non-core products and stake sale in API/innovative business may cushion large debt repayments in FY22. Higher-than-expected delays in improving free cash flow generation are likely to elevate refinancing risks.

 

In FY19, Glenmark divested its non-core pain management portfolio in the domestic market and utilised a portion of the proceeds for deleveraging. Glenmark has also transferred its high-margin API business to a newly formed subsidiary and has also initiated the transfer of its innovative business to a new entity with a view to raise capital to fund R&D expenses and support its commercial strategy post approval. According to the agency, if the fund-raising is successful, it would aid Glenmark’s liquidity and subsequent deleveraging over the medium-to-long term.

 

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. During FY18-FY19, the company’s R&D expenditure increased to 12%-13% of net sales (FY16: 11.7%), attributed to the movement of R&D assets into phase II and phase III trials. While monetisation in likely to begin FY20-FY21 onwards, Ind-Ra expects R&D expenditure to reduce modestly from FY19 levels. Glenmark is actively seeking partners to out-license certain R&D assets for conducting incremental research; if the plan materialises, it would help moderate R&D spends and support the company’s operating profitability in the medium term. The agency notes that innovative pipelines are subject to acceptance from regulatory authorities, and approvals may get delayed in the event of deficiencies in the product or infrastructure or additional requirements leading to delays in the targeted commercial launch.

 

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. In March 2019, Glenmark ranked 14th in the domestic markets, with a market share of 2.18% as per IQVIA.

 

Standalone Credit Profile: Glenmark reported a revenue of INR63.04 billion in FY19 (FY18: INR55.44 billion) and operating EBITDA margins of 21.1% (19.9%). The company’s net debt/operating EBITDA was 2.2x in FY19 (FY18: 2.6x) and operating EBITDA/interest expense was 5.9x (5.8x).

 


RATING SENSITIVITIES

Positive: A substantial improvement in operating EBITDA generation, resulting from the successful commercialisation of R&D assets, 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, APIs 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 (Consolidated)

 

Particulars

FY19

FY18

Revenue (INR billion)

98.7

90.7

EBITDA (INR billion)

15.9

16.2

EBITDA margin (%)

16.1

17.8

Net financial leverage (x)

2.2

2.1

Total adjusted debt (INR billion)

44.5

46.6

Cash & cash equivalents including liquid current investments (INR billion)

9.4

12.3

Source: Glenmark, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

21 June 2018

15 March 2017

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

IND AA-/Positive

Fund-based cash credit limits

Long-term

INR12,000

IND AA-/Stable

IND AA-/Stable

IND AA-/Positive

Non-fund-based limits

Short-term

INR6,500

IND A1+

IND A1+

IND A1+

Proposed term loans

Long-term

INR1,000

WD

Provisional IND AA-/Stable

Provisional IND AA-/Positive


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels 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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

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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, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356197

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121