Detailed Rationale

CRISIL Ratings has continued its ‘CRISIL AA-' rating on the long-term bank facilities of Glenmark Pharmaceuticals Ltd (Glenmark) on 'Rating Watch with Positive Implications'; the short-term rating has been reaffirmed at 'CRISIL A1+'.

 

CRISIL Ratings placed the long-term rating on watch positive on September 28, 2023, on account of expected improvement in the company’s financial risk profile after completion of the stake sale in its subsidiary. On September 21, 2023, Glenmark announced sale of 75% stake in Glenmark Life Sciences Ltd (GLS) for Rs 5,651.5 crore, subject to closing adjustments; Glenmark will own 7.84% in GLS after the divestment. In November-December 2023, Glenmark secured the necessary approvals from its shareholders and lenders and the Competition Commission of India also approved the transaction. Furthermore, Nirma has also rolled out the open offer. The transaction is expected to conclude by the fourth quarter of fiscal 2024.

 

Proceeds from the sale are expected to be utilised to pay off a substantial portion of debt, thereby improving the debt protection metrics. The extent of reduction in debt using the sale proceeds will be monitorable. CRISIL Ratings notes that the business risk profile of Glenmark could be marginally impacted in the near term, with expected moderation in revenue and operating profit, given that GLS contributed to about 11% and 25% of consolidated revenue (after adjusting for inter-company transactions) and operating profit, respectively. CRISIL Ratings will continue to monitor progress on the transaction and will remove the rating from watch and take a final rating action after the conclusion of the transaction, receipt of funds and higher certainty on debt reduction plans.

 

CRISIL Ratings also notes that on February 14, 2024, Glenmark announced its financial results for the third quarter of fiscal 2024, which reported sharp reduction in sales and profitability in its domestic business due to a one-time restructuring of the distribution network that included consolidation of stock points and rationalisation of channel inventories. While this will lead to lower-than-expected margins in the current fiscal impacting the leverage and coverage metrics, revenue and profitability from the domestic market is expected to revert to its earlier levels over the medium term. This restructuring is also expected to result in improved operational efficiency and a reduction in working capital requirement.

 

The ratings continue to reflect the expanding presence of Glenmark in the international generics market, strong position in the fast-growing chronic therapeutic segments in India and adequate financial risk profile. These strengths are partially offset by large working capital requirement, high research and development (R&D) expenditure for new molecules and differentiated generics, intensifying competition in the US generics market and adverse regulatory outcomes of the US Food and Drug Administration (USFDA) inspections.

 

Revenue grew moderately by 6% on-year in fiscal 2023 on a higher base, driven by sales of Covid-related products. In the first nine months of fiscal 2024, the company registered modest growth of 3% on-year on account of the sharp reduction in domestic sales (to Rs 262 crore in third quarter of fiscal 2024 from Rs 1,074 crore in the corresponding quarter previous fiscal) due to the one-time restructuring of its distribution network. The operations, however, continue to be supported by healthy growth in Europe and the rest of the world, even as growth in the US market remains modest. Sales growth in the US may remain average over the next couple of quarters amid fewer product launches (given the regulatory issues related to three of the five manufacturing facilities supplying to the US) along with continued price erosion issues. The impact of the said restructuring and foreign exchange (forex) losses in the third quarter has weakened operating profitability to 12.4% in the first nine months of fiscal 2024 from 19.2% in fiscal 2023.

 

Glenmark’s leverage profile is high because of high working capital utilisation and refinancing of foreign currency convertible bond (FCCB) last year. Debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio increased to 1.7 times as on March 31, 2023, from 1.5 times a year earlier. The ratio is expected to moderate to more than 2.2 times (not factoring the consummation of GLS stake sale) as on March 31, 2024, on account of lower operating profitability this fiscal. Annual capital expenditure (capex) is expected to reduce to Rs 550-650 crore after the stake sale in GLS, from Rs 700-800 crore currently. On account of sizeable exports, including to developing nations, the working capital metrics of Glenmark have traditionally remained higher than peers, though given the recent restructuring this is expected to improve and ease out over the medium term.

 

The R&D expenses remained high at 11-13% of sales in the 3-5 fiscal periods till 2023. However, the company has re-evaluated its R&D requirement with such spending declining in fiscal 2023 and is expected at 8-9% of sales over the medium term. The company will remain exposed to risks related to R&D in the innovative pipeline, wherein investments are high and returns uncertain. Glenmark invested Rs 683 crore in Ichnos Sciences Inc (Ichnos) in fiscal 2023 (Rs 663 crore in fiscal 2022) for transformative treatments in oncology and autoimmune diseases. Any out-licensing opportunities or divestment in Ichnos will likely reduce R&D expenses and help deleverage the balance sheet of Glenmark.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Glenmark and its 44 subsidiaries and stepdown 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 Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Diversified presence in the international market

Glenmark has a significant presence in the US and Europe, which together accounted for about 38% of the total revenue in fiscal 2023. Revenue from the US market has remained impacted over the past few fiscals due to pricing pressure and lower contribution from certain top products. The company had 51 abbreviated new drug applications pending approval as on December 31, 2023. 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. Launch of a speciality product, Ryaltris, in 31 countries with filings in 39 additional countries as on December 31, 2023, will provide traction in revenue growth across geographies.

 

• Strong position in the chronic therapeutic segment in the domestic market

In the domestic formulations market, Glenmark is ranked 14th with a market share of 2.13%; nine of its brands were in the top 300 as per IQVIA MAT (moving annual total) as of December 2023. Contribution of the domestic market to overall sales has been increasing over the past few years and accounted for 32% of the total revenue in fiscal 2023. Revenue in the domestic market, however, declined significantly, in the third quarter on account of the one-time restructuring of the company’s distribution system. While domestic revenue is expected to remain low in fiscal 2024 due to this, growth is expected at 10-11% over the medium term, led by the strong market position in the chronic therapeutic segments such as antivirals, dermatology, respiratory and cardiovascular therapy.

 

• Adequate financial risk profile

Financial risk profile improved in the first half of fiscal 2022 with the company paying off significant forex debt using proceeds from the initial public offering (IPO) of GLS. However, gross debt increased to Rs 4,953 crore as on December 31, 2023, from Rs 4,348 crore as on March 31, 2023, amid higher working capital utilisation and adverse impact of currency movement. Coupled with moderation in operating profitability, debt/OPBDIT (operating profit before depreciation, interest and tax) increased to 1.7 times in fiscal 2023 and ~2 times in the first half of fiscal 2024. The same is expected to moderate to over 2.2 times (not factoring the consummation of GLS stake sale) as on March 31, 2024 on account of lower operating profitability in this fiscal. With large addition to networth from the IPO of GLS, adjusted gearing remained healthy at 0.5 time as on March 31, 2023.

 

Annual cash accrual in fiscal 2024 is expected at Rs 1,000-1,100 crore (not factoring in the provision towards settlement of the lawsuits, payment of which is expected over the next couple of years). In the current fiscal, Glenmark made a provision of $30 million towards the settlement of all its court proceedings with the US Department of Justice, Antitrust Division (DOJ), involving historical pricing practices relating to the generic drug pravastatin. Glenmark also provided for $87.5 million in fiscal 2023 towards settlement of the lawsuits in connection with generic version of Zetia in the US. Other antitrust lawsuits have also been filed against the company in the US, and any material settlement amount and funding will remain monitorable. Nonetheless, cash accrual will be sufficient to meet debt obligation, incremental working capital requirement and annual capex spend.

 

The announced divestment of majority stake in GLS, if concluded successfully, will boost the company’s liquidity, and allow it to substantially deleverage its balance sheet in fiscal 2025 so as to become net cash positive and will remain monitorable.

 

Weaknesses

• Working capital-intensive operations

Working capital cycle is stretched, including relative to peers, due to the significant presence of the company in emerging economies. Gross current assets remained high at 273 days as on March 31, 2023, and will remain sizeable given the large working capital requirement in the US and semi-regulated markets. However, moderate payables and short-term bank borrowing help meet working capital requirement.

 

• High R&D expenditure towards new molecule entities and differentiated generics

The 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 $200 million since 2004. Also, Ryaltris has been successfully launched in several geographies, including the US and a few countries in Europe. R&D expense stood at Rs 1,250 crore (9.6% of sales) in fiscal 2023 against 11-14% of sales incurred in the past. The company has re-evaluated its R&D requirement, and R&D spend is expected to remain at 8-9% of sales over the medium term. 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 absolute 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 the oncology and autoimmune disease segments. The company plans to continue to monetise the pipeline over the medium term.

 

• Exposure to intensifying competition and regulatory risks

There is intense competition and pricing pressure in the regulated generics markets because of increasingly aggressive defence tactics of innovator companies through the introduction of authorised generics, especially for blockbuster drugs going off patent. Furthermore, generic players in 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 the domestic and regulated markets. Its plant in Goa received a warning letter from the USFDA in November 2022. Furthermore, its plant at Baddi, Himachal Pradesh, received an import alert from the USFDA in October 2022. Additionally, in August 2022, the USFDA inspection at the company’s plant at Monroe, USA, was classified as Official Action Initiated. The company is working towards remediating these observations.

Liquidity: Strong

Unencumbered cash balance stood at Rs 1,430 as on December 31, 2023, and average bank limit utilisation was less than 60% over the 12 months through November 2023. Cash accrual is expected at Rs 1,000-1,100 crore in fiscal 2024 (not factoring in the provision towards settlement of the lawsuits, payment of which is expected over next the couple of years) and over 1,600 crore per annum after that (excluding the gain from stake-sale in GLS), which should comfortably cover yearly debt obligation over the medium term. Successful refinancing of the FCCB in fiscal 2023 through a term loan with back-ended repayments has reduced debt obligation to Rs 150 crore each in fiscals 2024 and 2025. Liquidity is expected to be boosted significantly on the consummation of the announced stake sale in GLS. While funding needs for legal settlements already announced are expected to be managed, any sizeable payout for settlement of other ongoing litigations as per the anti-trust ruling may impact liquidity and debt metrics and will be monitorable.

 

Environment, social and governance (ESG) profile

The ESG profile of Glenmark supports its already strong credit risk profile.

 

The pharmaceutical sector can have a significant impact on the environment on account of greenhouse gas emissions, water use and waste generation. The social impact is characterised by impact on the health and wellbeing of its consumers, employees, and local community on account of its products and operations.

 

Key ESG highlights:

• Glenmark intends to maximise energy consumption from renewable sources. In fiscal 2023, about 61% of the energy requirements at the R&D sites of Glenmark are met by renewable energy sources and ~6% of the total energy consumed by the company was from renewable sources. By adopting initiatives such as effluent recycling, the company strives to reduce water withdrawal and net consumption.
• The company’s gender diversity remained better than industry peers, with women employees forming 13% of the total workforce in fiscal 2023. It focusses on upskilling of manpower through training.
• The governance structure is adequate, with the majority of the board comprising independent directors. The group also has in place an investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Glenmark’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors.

Rating Sensitivity factors

Upward factors

• Better-than-expected revenue growth, with operating profitability sustaining at 18-20%, resulting in strong cash generation
• Improved working capital management and prudent funding of capex leading to sustained improvement in debt metrics; for instance, gross debt to Ebitda of 1.3-1.5 times
• Maintenance of healthy liquid surplus

 

Downward factors

• Sluggish business performance and decline in operating profitability below 13-15% impacting cash generation
• Further stretch in working capital cycle or large, debt-funded capex or acquisitions impacting debt metrics; for instance, gross debt to Ebitda more than 2.5-2.7 times
• Significant payouts for settlement of claims as per anti-trust ruling impacting liquidity and debt metrics

About the Company

Glenmark was incorporated in 1977 by the late Mr Gracias Anthony Saldanha. His son, Mr Glenn Saldanha, is now the chairperson 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. The company has 16 manufacturing facilities and seven R&D centres spread across India, the USA and a few other countries. As on December 31, 2023, the promoters held 46.65% stake in Glenmark, foreign portfolio investors held 23.71%, mutual funds held 8.59%, while the remaining was held by the public and others.

 

In the first nine months of fiscal 2024, the company reported revenue of Rs 9,989 crore (Rs 9,616 crore in the corresponding period of fiscal 2023) and net loss of Rs 219 crore (net profit of Rs 780 crore in the corresponding period of fiscal 2023).

Key Financial Indicators

Particulars	Unit	2023	2022
Revenue	Rs crore	12,990	12,305
Adjusted profit after tax (APAT)*	Rs crore	121	855
APAT margin*	%	0.9	6.9
Adjusted debt/adjusted networth*	Times	0.50	0.43
Interest coverage	Times	7.42	8.34

*Adjusted for intangibles and goodwill amortisation

Any other information: Not applicable