Detailed Rationale

CRISIL Ratings has placed its rating on the long-term bank facilities of Mylan Laboratories Limited (Mylan Labs)  on “Rating Watch with Developing Implications'.

 

The rating action follows the announcement made by the company on October 2, 2023, regarding decision to sell its Indian active pharmaceutical ingredients (API) business and women’s healthcare business (WHC) for an ~$1.2 billion as part of a global exercise to exit non-core businesses. The company has entered into an agreement with IQuest Enterprises, a local pharmaceutical firm owned by the founder of Matrix Laboratories, Mr Nimmagadda Prasad, to sell its API business. The women’s healthcare business, which primarily relates to oral and injectable contraceptives, shall be sold to Insud Pharma, a leading Spanish multinational pharmaceutical company.

 

The API business in India includes six manufacturing sites & a research lab in Hyderabad. The company will retain some research and development (R&D) capabilities in API. The women’s healthcare business, which specialises in oral and injectable contraceptives, includes two manufacturing facilities in Gujarat, one each in Ahmedabad and Sarigam. Both transactions, subject to regulatory approvals, are expected to close in the first quarter of 2024.

 

Viatris Inc (parent of Mylan Labs) is expected to utilise the sale proceeds for debt paydown at the ultimate parent level to meet its overall commitment of gross leverage target of 3 times by the first half of 2024. Further, the company is also in process of increasing focus on areas with the greatest potential to accelerate growth, patient impact and shareholder value.

 

Mylan Labs is awaiting regulatory and statutory approvals for the transaction, which is expected to be received in the next few months. While these two businesses contributed ~23% to the total revenue in fiscal 2023, the likely impact of this divesture on the financials of Mylan Labs is yet to be ascertained. The watch shall be resolved on completion of the sale process and/ or on receipt of complete clarity regarding likely impact of the same on the credit risk profile of Mylan Labs.

 

The rating continues to reflect the strong business risk profile of the company, supported by its established market position; presence in various therapeutic segments, including leadership position in the anti-retro viral (ARV) division; and geographical diversity. The rating also factors in the strong financial risk profile because of large networth, comfortable capital structure, and healthy cash accrual; and ongoing support from its parent, Viatris Inc (Viatris). These strengths are partially offset by large working capital requirement and exposure to increasing regulatory scrutiny and pricing pressure due to competition in the global generics market.

 

Revenue for fiscal 2023 declined by ~7% on-year to Rs 10,714 crore from Rs 11,543 crore due to fall in realisations in the ARV segment, which account for 60-65% of the overall revenue. Intense pricing competition in semi-regulated markets such as Africa/LATAM and rest of the world (ROW) countries (where the company has 35-40% market share) led to moderation in realisations; these are expected to remain constrained even this fiscal, thereby further moderating revenue. To mitigate this risk, the company is developing new molecules, which may start contributing to overall revenue over the medium term.

 

Operating margin fell to 17.1% in fiscal 2023 from 18.7% last fiscal owing to drop in operating leverage as revenue declined. Furthermore, R&D expenses increased to Rs 1,093 crore from Rs 907 crore (R&D expenses formed 10.2% of sales for fiscal 2023 vis-a-vis 7.9% in fiscal 2022). Over the medium term, margins are expected to moderate following divestment of higher margin women healthcare business.

 

Financial risk profile remained robust. Outstanding debt reduced to Rs 1,494 crore as on March 31, 2023, from Rs 2,299 crore a year ago, due to prepayment of non-convertible bonds (NCBs), besides scheduled repayment. This, coupled with steady accretion to reserve, improved gearing to 0.12 time from 0.19 time. Interest coverage ratio remained steady at 7.66 times in fiscal 2023 against 3.87 times last fiscal. Interest coverage might moderate owing to reduction in earnings before interest, taxes, depreciation, and amortisation (Ebitda) post divestment of API/WHC businesses. while cash accrual may also  moderate but shall still remain sufficient for future debt and interest obligations.

Analytical Approach

• CRISIL Ratings has factored in the business and financial support Mylan Labs receives from Viatris
• CRISIL Ratings has treated the compulsorily convertible debentures issued to Mylan Labs for the acquisition of Agila as part of networth as the debentures are compulsorily convertible into equity.
• Goodwill arising from the Agila and Jai Pharma Ltd (JPL) acquisitions has been amortised over five years from the date of the respective acquisition. The amortisation for Agila ended in fiscal 2019, while that for JPL ended in fiscal 2021.

Key Rating Drivers & Detailed Description

Strengths:

Established market position supported by diverse revenue streams

One of the largest manufacturers and suppliers of APIs in the world, Mylan Labs caters to a variety of therapeutic categories and has a diverse product profile oriented towards difficult-to-manufacture and complex products. It sells products in the regulated markets through the parent, while sales in the semi-regulated markets are institutional and hence tender-based. Around 65% of the revenue comes from the ARV segment, mostly through contracts. In this segment, the company caters to ~33% of the patients globally and ~40% in developing markets. Top customers include the health ministries of developing countries such as India, South Africa, Zimbabwe.

 

Improving financial risk profile

Financial risk profile continues to be robust, with the company further reducing debt in fiscal 2023 by way of scheduled repayments and prepayment of NCBs aided by healthy cash flow. Overall debt reduced to Rs 1,494 crore in fiscal 2023 from Rs 2,299 crore in the previous fiscal. This coupled with accretion to reserve improved gearing to 0.12 time as on March 31, 2023 from 0.19 time as on March 31, 2022. Interest coverage ratio remained steady at 7.66 times in fiscal 2023 as against 3.87 times last fiscal. There may be some impact of reduction in Ebitda owing to the divestitures on the interest coverage ratio from fiscal 2025 onwards. Currently, the entire debt of ~Rs. 1,100 crore is from related parties

 

Support from the parent

Mylan Labs benefits from the operational and technical support of Viatris, which is among the top five generics players globally. The company is important to the parent on account of its strong R&D capability and low cost of manufacturing. The parent has provided financial support in the past through external commercial borrowing to partly fund capital expenditure or working capital requirement. Past acquisitions have also been fully funded by the parent through debt and equity. Furthermore, fund outflow from Mylan Labs to Viatris has been restricted only to the extent of interest and principal payments on borrowings availed of from the parent.

 

Weaknesses:

Large working capital requirement

The working capital cycle may remain stretched because of sizeable institutional sales. Gross current assets (GCAs) were 328 days as on March 31, 2023 (291 days a year ago), driven by receivables of 135 days and inventory of 223 days. GCAs will likely remain large over the medium term as well. Inventory is sizeable owing to increase in manufacture of finished dosage form (FDF) products over the past two fiscals.

 

Payment cycles are longer as a large proportion of sales are to government agencies through the tender route in ROW countries. Any further stretch in receivables may increase working capital requirement and will hence be a key monitorable.

 

Exposure to increasing competition and pricing pressure in the global generics market

Around 56% of the revenue in fiscal 2023 was from the regulated markets. Aggressive tactics by innovator companies through the introduction of authorised generics, and healthcare cost containment measures by the US government have intensified competition. Players, such as Mylan Labs, in the US and Europe are vulnerable to pricing pressure because of the entry of several cost-competitive Indian players and increased bargaining power of distribution channels owing to consolidation. With rising competition, substantial investments in infrastructure and R&D may impact profitability.

Liquidity: Strong

Post divestment of API and the women’s healthcare business, cash accruals shall moderate but still remain sufficient, against repayment obligations due to related parties. The fund-based limit of Rs 805 crore remains minimally unutilised over the past year, supporting liquidity.

Rating Sensitivity Factors

Upward factors

• Upgrade in the rating of the parent, Viatris Inc, by S&P Global Ratings
• Sustained revenue growth of 10-12% per annum while maintaining healthy profitability
• Significant improvement in return on capital employed driven by higher-than-expected ramp-up in operations of acquired entities

 

Downward factors

• Moderation in revenue with sustained decline in operating margin below 15-16%
• Weakening of debt protection metrics owing to large, debt-funded capex or acquisition, or significant stretch in working capital cycle

About the Company

Mylan Labs, incorporated in 1984 as Matrix Laboratories Ltd, commenced operations by manufacturing APIs for Acquired Immune Deficiency Syndrome (AIDS) drugs for large generic players. The company got its present name after it was acquired by Mylan NV in 2007.

 

Mylan Labs is a 100% subsidiary of Viatris, a global pharmaceutical major formed by the merger of Mylan NV and Upjohn in November 2020. Product portfolio of Viatris consists of branded generic and over-the-counter drugs. The entity generated revenue of over $17.9 billion in 2021 spread over North America (25% of revenue), Europe (33%), China (11%), and rest of the world (30%). Major brands of Viatris include Lipitor, Norvasc, Lyrica, and Viagra.

 

Mylan Labs is one of the largest API manufacturers globally. It produces APIs for its products and for third parties in a wide range of categories, including anti-bacterial, central nervous system agents, antihistamine/anti-asthmatics, cardio-vasculars, antivirals, anti-diabetics, anti-fungals, proton pump inhibitors and pain management drugs.

 

Over the last few years, the company has increased focus on making formulations, primarily FDFs of ARVs (anti-AIDS). Viatris is the largest manufacturer of ARVs in the world. It caters to 2 million of the total 6 million human immunodeficiency virus patients being treated (one-third of the market share) globally, and nearly 50% of patients in developing world.

 

Mylan Labs has 21 facilities in India: six for APIs, eight for oral solid dosage and seven for injectables. Of these, 16 facilities, including six API facilities, are approved by the US Food and Drug Administration. The company also has R&D sites in Hyderabad, Bengaluru and Ahmedabad. The key markets served from India include Australia, Canada, Europe, Japan, New Zealand, the US and ROW, including Africa.

 

On December 5, 2013, Mylan Labs completed the acquisition of Agila’s injectables business from Strides Arcolab Ltd for nearly $1.75 billion. Agila is a leading global manufacturer of speciality injectables focused on oncolytics, penems, penicillin, cephalosporins and ophthalmics, with manufacturing facilities across India. Mylan Labs completed the acquisition of the female healthcare business of the erstwhile Famy Care Ltd (JPL) on November 21, 2015, after receipt of regulatory approvals.

Key Financial Indicators*

Particulars	Unit	2023	2022
Revenue	Rs.Crore	10,714	11,543
Profit After Tax (PAT)	Rs.Crore	480	643
PAT Margin	%	4.5	5.6
Adjusted debt/adjusted networth	times	0.12	0.19
Adjusted interest coverage	times	7.66	3.87

*CRISIL Ratings-adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	620.9	NA	CRISIL AA-/Watch Developing
NA	Cash Credit^	NA	NA	NA	175	NA	CRISIL AA-/Watch Developing
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	9.1	NA	CRISIL AA-/Watch Developing

*Interchangeable with working capital demand loan/packing credit/bill discounting/letter of credit/bank guarantee

^Interchangeable with overdraft