| Glenmark Pharmaceuticals Limited | ||||||
| Rating outlook revised to 'Positive'; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term bank facilities of Glenmark Pharmaceuticals Ltd (Glenmark) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA-’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.
The outlook revision reflects the continued healthy performance of Glenmark in fiscal 2022, resulting in strong cash generation (over Rs. 1400 crore), which along with proceeds from the initial public offering (IPO) and offer for sale (OFS) of the company’s subsidiary, Glenmark Life Sciences Ltd (GLS), will lead to faster-than-expected improvement in the company’s key debt protection metrics. Using these proceeds, Glenmark paid-off $145 million term loan in the first half of fiscal 2022 resulting in debt declining to Rs 3,588 crore as on September 30, 2021 from Rs. 4,687 crore as on March 31, 2021; debt levels are expected to further reduce by end of fiscal 2022. CRISIL Ratings anticipates Glenmarks’ debt to earnings before interest, tax, depreciation, and amortisation (EBITDA) ratio to improve to ~1.5 times in fiscal 2022 from 2.2 times in fiscal 2021.
Glenmark’s operating performance has remained healthy, with revenue growth of 15.4% on-year in the first half of fiscal 2022, on a lower base of corresponding period last fiscal. Revenue is likely to grow 8-10% over the medium term, backed by expected domestic formulations sales growth of 10-15%, healthy growth in Europe and rest of the world markets, and modest growth in the US market subject to regulatory approvals for specialty products. Profitability is expected to remain steady at 18-19% over the medium term, amidst rising input costs and revival in marketing expenses this fiscal, post the initial two waves of the pandemic.
The company is expected to continue incurring annual capital expenditure (capex) of Rs. 700-900 crore over the medium term. Due to sizeable exports including to developing nations, Glenmark’s working capital metrics have traditionally remained higher relative to peers, and this is expected to continue over the medium term. Nevertheless, given the expectation of sustained strong operating performance and cash generation, debt metrics are likely to improve over the medium term; gross debt/EBITDA should come down to below 1.4 times in fiscal 2023.
Research and development (R&D) expenses have remained high at 10-13% of sales over the past few years (10.0% in the first half of fiscal 2022, 11.2% in fiscal 2021 and 12.4% in fiscal 2020). The company will continue to be exposed to risks related to R&D in the innovative pipeline wherein investments are high and returns uncertain. Other than intermittent milestone payments, the company has not yet commercialised its innovative pipeline. Glenmark invested Rs 747 crore in Ichnos Sciences Inc (Ichnos) in fiscal 2021 and Rs. 347 crore in first half of fiscal 2022 for innovation in medicine through its transformative treatments in oncology, autoimmune diseases and pain. The divestment in Ichnos is expected to reduce future R&D expenses and also help further deleverage the company’s balance sheet.
The ratings continue to reflect the expanding presence of Glenmark in the international generics market, its strong position in the fast-growing chronic therapeutic segments in India, and above-average and improving financial risk profile. These strengths are partially offset by the large working capital cycle, high R&D expenditure primarily towards new molecules and differentiated generics, and exposure to regulatory risks and intensifying competition in the US generics market. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Glenmark and its 43 subsidiaries. All the entities, collectively referred to as Glenmark, operate in the pharmaceutical segment and have significant operational linkages and a common management. CRISIL Ratings has also amortised goodwill arising from consolidation and intangibles over five years.
Please refer to annexure at the end of the rating rationale, which lists the entities considered and their analytical treatment.. |
Key Rating Drivers & Detailed Description Strengths
Glenmark has a significant presence in the US and Europe, which together accounted for about 40% of total revenue in fiscal 2021. US revenue growth remained flat in fiscal 2021 and the first half of fiscal 2022 due to pricing pressure and lower contribution from certain top products. The company had 47 abbreviated new drug applications (ANDAs) pending approval as on September 30, 2021. Furthermore, launch of specialty product, Ryaltris, will provide traction in branded generics in the regulated markets. The new facility at Monroe (US) will also contribute to revenue growth as it has received a few ANDA approvals over the past 12 months. Moreover, Glenmark has an established position in the semi-regulated markets of Africa, Asia, Commonwealth of Independent States, Latin America, and Central and Eastern Europe.
In the domestic formulations market, Glenmark is ranked 13th as per IQVIA MAT (moving annual total) September 2021. It had 10 brands in the top 300 as on September 30, 2021. The domestic market accounted for 32% of total revenue in fiscal 2021. Turnover grew 10% in fiscal 2021 and is expected to grow at about 10-15% over the medium term, led by the company’s strong market position in the chronic therapeutic segments such as anti-virals, dermatology, respiratory and cardiovascular therapy.
Financial risk profile improved sharply in first half of fiscal 2022 and is expected to sustain over the medium term. An elongated working capital cycle and sizeable capex have meant continued high reliance on debt in the past. However, in the first half of fiscal 2022, Glenmark paid-off $145 million of foreign exchange debt using proceeds from the IPO of GLS and healthy internal accrual. With decline in gross debt to Rs 3,588 crore as on September 30, 2021 from Rs 4,687 crore as on March 31, 2021 and continued healthy profitability at 19% in the first half of fiscal 2022, the gross debt/EBITDA improved to 1.54 times as on September 30, 2021 from 2.2 times as on March 31, 2021 and is likely to improve further to below 1.4 times in fiscal 2023. Other debt metrics too have benefitted from the reduction in borrowings.
Notwithstanding high R&D expense, annual cash accrual is expected at Rs 1,400 crore over the medium term, which will be sufficient to meet term debt obligation and working capital requirement; annual capex is expected to remain moderate at Rs 700-900 crore. The divestment plans in Ichnos and other non-core assets are expected to help further deleverage the balance sheet over the medium term, and will remain a monitorable. Anti-trust law suits have also been filed against the company in the US, and any material settlement amount and funding for the same, will also remain a monitorable.
Weaknesses
Working capital cycle is elongated, including relative to peers, due to significant presence in emerging economies. Despite improvement from 300 days as on March 31, 2015, gross current assets (GCAs) remained high at 242 days as on March 31, 2021. The GCAs will remain sizeable given the large working capital requirement in the US and semi-regulated markets. Moderate payables and short-term bank borrowings help meet working capital requirement.
R&D expenditure has been higher than peers because of focus on new molecules and differentiated generics. The company has signed out-licensing deals and received cumulative revenue of more than USD 200 million since 2004. Excluding non-core R&D assets, Glenmark had a pipeline of 6 NMEs and specialty generics as of March 2021. Also, Ryaltris was launched in a few countries in Europe in October 2021 and is near approval in the US, as the company is resolving the issues raised by the US FDA (United States Food and Drug Administration). R&D expense stood at Rs 613 crore in the first half of fiscal 2022 and Rs 1,221 crore in fiscal 2021 vis-à-vis Rs 1,320 crore in fiscal 2020. Uncertainty regarding revenue visibility and R&D leads to investment risk. However, focus on out-licensing molecules as it reaches advanced stages will help keep the R&D expenditure at similar levels over the medium term. Furthermore, in fiscal 2020, Glenmark incorporated Ichnos for innovation in medicine through its transformative treatments in oncology, autoimmune disease and pain. In December 2021, Ichnos out-licenced one novel molecule and will receive an upfront amount of Euro 20.8 million and additional milestone-based payment going forward. The company plans to continue to monetise the pipeline over the medium term and utilise the proceeds to reduce debt.
There is intense competition and pricing pressure in the regulated generics markets because of increasingly aggressive defense tactics of innovator companies through introduction of authorised generics, especially for blockbuster drugs going off patent. Furthermore, generic players in the regulated markets are adversely affected by severe price erosion because of the commoditised products, and by intense competition and considerable consolidation in distribution channels. Glenmark is also exposed to regulatory risks in both the domestic and regulated markets. Furthermore, its plant in Baddi, Himachal Pradesh, received a warning letter from the US FDA in October 2019. The company is remediating the observations and expects to complete the process in fiscal 2022. |
Liquidity: Strong Unencumbered cash balance stood at Rs 1,429 crore as on September 30, 2021, and average bank limit utilisation was less than 35% over the 12 months through October 2021, supporting liquidity. Annual cash accrual is expected at over Rs 1400 crore, and should comfortably cover debt obligation in fiscal 2022 and 2023. Successful refinancing of the senior notes in November 2020 and part of the outstanding foreign currency convertible bonds (FCCBs) in April 2021 led to reduced debt obligations in fiscal 2022. Besides the company also prepaid some debt, which will result in debt reduction by over Rs 1000 crore in fiscal 2022. The remaining FCCBs amounting to about $95 million having maturity in June 2022 could also be repaid before maturity. Any significant payout for settlement of claims as per anti-trust ruling may impact liquidity and debt metrics and will be a key monitorable. |
Outlook: Positive Glenmark is expected to sustain its healthy operating performance and growth momentum, thereby further strengthening its debt protection metrics. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company Incorporated in 1977, Glenmark was promoted by the late Mr Gracias Anthony Saldanha. His son, Mr Glenn Saldanha, is now the chairman and managing director. The company manufactures pharmaceutical formulations and active pharmaceutical ingredients, which it markets in India and abroad. It also undertakes R&D on new chemical and biological entities. As on September 30, 2021, the promoters held 46.65% stake in Glenmark, foreign portfolio investors held 25.93%, and the balance was held by the public and others.
In the first half of fiscal 2022, the company reported revenue of Rs 6112 crore (Rs 5297 crore in the corresponding period of fiscal 2021) and net profit of Rs 581 crore (Rs 488 crore). |
Key Financial Indicators
*Adjusted for intangibles and goodwill amortisation |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Not availed |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 23-Dec-2021 in line with the lender-wise facility details as on 19-Aug-2021 received from the rated entity.
Criteria Details
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