| Glenmark Pharmaceuticals Limited | ||||||
| Rating outlook revised to 'Stable'; ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has revised its outlook on the long-term bank facilities of Glenmark Pharmaceuticals Limited (Glenmark) to 'Stable' from 'Negative' and reaffirmed the 'CRISIL AA-' rating and has reaffirmed its 'CRISIL A1+' rating on the short-term facilities. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Glenmark and its 42 subsidiaries. All the entities, together referred to herein as Glenmark, operate in the pharmaceutical segment, and have significant operational linkages and a common management. CRISIL has also amortised goodwill arising from consolidation and intangibles over five years. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Growing presence in the international generics market Glenmark has a growing presence in the US and Europe, which together accounted for about 44% of the company's revenue in fiscal 2018 and in the first nine months of fiscal 2019. The US revenue grew 50% to Rs 3,701 crore in fiscal 2017 backed by marketing exclusivity period on Ezetimibe from December 2017. It declined in fiscal 2018 because of the large base of fiscal 2017 and pricing pressures. The segment recovered in the second and third quarters of fiscal 2019. Launch of products and healthy pipeline will support growth momentum over the medium term. Glenmark has an established position in the semi-regulated markets, with marketing front-ends in Africa, Asia, Commonwealth of Independent States (CIS), Latin America, and Central and Eastern Europe. * Strong position in the chronic-therapeutic segments In the domestic formulations market, Glenmark is ranked 14th as per IQVIA MAT (moving annual total) December 2018. It has 9 brands in the top 300 brands as on December 31, 2018. The domestic market accounted for 28% of revenue in fiscal 2018 and 29% in the first nine months of fiscal 2019. Revenue grew 11% in the first nine months of fiscal 2019 and is expected to grow 12% over the medium term led by the company's strong position in chronic therapeutic segments such as dermatology, respiratory, diabetes, and cardiovascular therapy. * Moderate financial risk profile The financial risk profile is expected to improve over the medium term. Stretched working capital cycle and sizeable capital expenditure (capex) have meant continued high reliance on debt. The capital structure is, therefore, leveraged compared to other pharmaceutical players. However, because of steady accretion to reserves and no incremental addition to gross debt, the gearing is expected to improve to 0.7 time over the medium term. Notwithstanding high R&D expense of 11-12%, annual cash accrual is expected at Rs 1,300-1,500 crore over the medium term, which will be sufficient to meet term debt obligation and working capital requirement. Glenmark plans moderate annual capex of Rs 800-900 crore. The financial risk profile is supported by adequate debt protection metrics, with interest coverage ratio expected at 6 times for fiscal 2019. Weaknesses: * Large working capital requirement Glenmark's working capital cycle is stretched due to a significant presence in emerging economies. Gross current assets (GCA) were high and are expected at 276 days as on March 31, 2019. Though GCAs have reduced from 300 days as on March 31, 2015, they exceed those of other large Indian pharmaceutical companies. GCAs will remain large, given the large working capital requirement of the US and semi-regulated markets. Other than short-term bank borrowings, large incremental working capital requirement is being met through extended credit from suppliers. * High R&D expenditure, primarily towards new molecule entities (NMEs) and differentiated generics R&D expenditure has been higher than that of many peers because of focus on new molecules and differentiated generics. The company has signed out-licensing deals and has received cumulative revenue of more than USD 200 million since 2004. Excluding non-core R&D assets, Glenmark had a pipeline of 9 NMEs and specialty generics/biosimilars as of December 2018. Of this, Ryaltris is accepted by US Food and Drug Administration (US FDA) and is expected to be launched in the near term. R&D expense has increased in recent years as a few molecules have progressed to the advanced clinical trials stage. Uncertainty regarding revenue visibility and R&D leads to investment risk. However, the company's strategy and focus on out-licensing molecules as it reaches advanced stages will help maintain R&D expenditure at 11-12% of sales over the medium term. Additionally, the company plans to monetize the pipeline over the medium term and utilize the proceeds towards debt reduction. * Exposure to intensifying competition and regulatory risks There is intense competition and pricing pressure in regulated generics markets because of increasingly aggressive defence 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 domestic and regulated markets. |
| Liquidity |
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Liquidity is healthy, driven by adequate cash accrual to meet debt obligation and healthy cash surplus. The cash accrual is expected over Rs 1,400 crore in fiscals 2020 and 2021 against annual debt obligation of Rs 600-700 crore. The company plans annual capex of Rs 800-900 crore. Back-ended repayment on bonds in fiscals 2022 and 2023 is expected to be refinanced. Working capital requirement will remain large, with GCAs expected around 270 days over the medium term. Bank limits were utilised moderately, at an average of 35% over the 12 months through October 2018. |
| Outlook: Stable |
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CRISIL believes Glenmark's capital structure will continue to deleverage over the medium term led by healthy growth momentum and sustained profitability. |
| About the Company |
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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 in the international market. It also undertakes R&D on new chemical and biological entities. As on December 31, 2018, the promoters held 46.54% stake in Glenmark, foreign portfolio investors held 32.3%, and the balance was held by the public and others. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
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| 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 various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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