| Glenmark Pharmaceuticals Limited | ||||||
| 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 reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities of Glenmark Pharmaceuticals Limited (Glenmark). |
| Analytical Approach |
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For arriving at the ratings, CRISIL 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 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 40% of the company's revenue in the first nine months of fiscal 2020. The generics segment revenues are estimated to have remained flat in fiscal 2020 due to pricing pressure and lower contribution from certain top products. However, the launch of new products and healthy pipeline is expected to support growth over the medium term. Further, the new facility at Monroe (US) will also contribute to revenue growth as the facility has received its first ANDA approval in May 2020. Glenmark has an established position in the semi-regulated markets of 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 2019. It has 9 brands in the top 300 as on December 31, 2019. The domestic market accounted for 30% of total revenues in the first nine months of fiscal 2020. Revenue grew 16% during the period and is expected to grow 8-10% over the medium term led by the company's strong market position in the 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 capex have meant continued high reliance on debt. The capital structure is, therefore, leveraged as compared to other pharmaceutical players. However, because of steady accretion to reserve and no incremental addition to gross debt, gearing is expected to improve to 0.7 time over the medium term. Notwithstanding high R&D expense of 12-13%, annual cash accrual is expected at Rs 1,100-1,200 crore over the medium term, which will be sufficient to meet term debt obligation and working capital requirement. Further, the divestment of V-Wash brand in fiscal 2020 will also provide additional cash surplus. Annual capex is moderate at Rs 800-900 crore. The financial risk profile is supported by adequate debt protection metrics, with interest coverage ratio estimated at 4.8 times for fiscal 2020. The divestment plans in Ichnos and other non-core assets is expected to help deleverage the company's balance sheet over the medium term. Weaknesses * Large working capital requirement Glenmark's working capital cycle is stretched due to significant presence in emerging economies. Gross current assets (GCA) remained high at an estimated 256 days as on March 31, 2020. Though GCAs have reduced from 300 days as on March 31, 2015, they are higher than domestic peers. GCAs will remain sizeable, given the large working capital requirement in the US and semi-regulated markets. Moderate payables and short-term bank borrowings cover working capital requirement. * 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 received cumulative revenue of more than USD 200 million since 2004. Excluding non-core R&D assets, Glenmark had a pipeline of 5 NMEs and specialty generics/biosimilars as of December 2019. Further Ryaltris is near approval in the US, as the company is resolving the issues raised by USFDA 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 12-13% of sales over the medium term. Further in fiscal 2020 company has incorporated Ichnos for innovation in medicine through its transformative treatments in oncology, autoimmune disease and pain. 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 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 domestic and regulated markets. Further, the company's plant at Baddi (Himachal Pradesh) has received a warning letter from US FDA in October 2019. The company is remediating the observations and expects to complete the process in fiscal 2021. |
| Liquidity Strong |
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Cash accrual, expected at Rs 1,100 crore in fiscal 2021 should comfortably cover annual debt obligation of Rs 350-450 crore. Annual capex stands at Rs 800-900 crore. Back-ended repayment on bonds in fiscals 2022 and 2023 are expected to be refinanced. Working capital requirement will remain large, with GCAs expected to be over 250 days over the medium term. Bank limit utilisation was modest at 35% on average over the 12 months through March 2020. |
| 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. |
| Rating Sensitivity factors |
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Upward Factors * Decline in gearing and ratio of gross debt to EBITDA to below 0.7 time and to 1.5 times, respectively * Larger-than-expected cash flow led by revenue growth or improved operating profitability * Sustained improvement in the working capital cycle Downward Factors * Increase in working capital requirement, any large debt-funded capex, or acquisitions, keep gearing and ratio of gross debt to EBITDA above 1.3 times and 2.8 times, respectively * Lower-than-expected revenue growth and sharp reduction in operating profitability, below 15% impacting cash generation * Significant payouts for settlement of claims as per anti-trust ruling, impacting liquidity and credit metrics. |
| 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 abroad. It also undertakes R&D on new chemical and biological entities. As on March 31, 2020, the promoters held 46.62% stake in Glenmark, foreign portfolio investors held 28.51%, 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. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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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