Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable' rating on the long-term bank facilities and non-convertible bonds of Mylan Laboratories Ltd (Mylan Labs).

 

The rating continues to reflect the company’s strong business risk profile supported by its established market position, presence in various therapeutic segments including leadership position in anti-retro viral (ARV) segment and geographic diversity. The rating also factors in a strong financial risk profile driven by a strong net-worth, comfortable capital structure, healthy cash accruals and operational and financial support from parent, Viatris Inc (Viatris). These strengths are partially offset by working capital-intensive operations and exposure to increasing regulatory scrutiny and pricing pressure due to competition in the global generics market.

 

Revenue from operations for fiscal 2022 reduced by 10.9% to Rs.11,543 crore (PY: Rs.12,958 crore) owing to 12.7% de-growth in export revenue to Rs. 9,943 crores (PY: Rs. 11,384 crore) partly offset by 1.6% higher domestic revenues at Rs. 1,601 crores (PY: Rs 1574 Crore).  Decline in export revenue is primarily attributable to lower realizations from Anti retro-viral (ARV) drugs (60-65% of overall revenues) which registered a de-growth of 10-12% and lower revenue contribution from remdesivir and black fungus medication which was higher during fiscal 2021 as it was extensively used as a treatment during the COVID-19 pandemic. ARV business is primarily done through tender based contracts in Africa/LATAM/Asia and other semi-regulated markets. The top customers include the health ministries of developing countries such as South Africa, Zimbabwe, Kenya and India. Owing to intense competition in this segment, realizations came down by 10-12% in this segment resulting in revenue de-growth although volumes largely remained stable. Although realizations are expected to further moderate this fiscal, impact on volume offtake is not envisaged. Owing to the same, the company might witness mid to high single digit revenue de-growth in fiscal 2023.  The company is currently developing new molecules in non-ARV segment to counter the intense competition being faced in ARV segment which will start contributing to top line over the medium term.

 

Owing to decline in realizations in ARV segment, gross margins got impacted by ~240 bps during the fiscal and stood at 47.5%. Further, owing to decline in revenues, there was a loss in operating leverage further impacting the margins. Overall, operating margins stood at 18.7% during fiscal 2022 as against 23.5% in fiscal 2021. Margins are expected to remain in the range of 17-19% over the medium term.

 

Financial risk profile continues to remain robust with company reducing debt further in fiscal 2022 by way of scheduled repayments and part prepayment of non convertible bonds aided by healthy cash flows. Overall debt reduced to Rs. 2,299 crore in fiscal 2022 from Rs. 3,682 crore previous fiscal. This coupled with accretion to reserves resulted in improvement in gearing to 0.19 times in fiscal 2022 from 0.32 times in fiscal 2021. Interest coverage remained steady at 3.87 times in fiscal 2022 as against 4.10 times previous fiscal. With progressive debt repayment and accretion to reserves, gearing is expected to reduce below 0.15 times over next 2 fiscals whereas interest coverage should remain adequate at 4-5 times. Net Cash Accruals to Total Debt (NCATD) should sustain at over 0.6 times over the medium term

Analytical Approach

• CRISIL Ratings has factored in the business and financial support from Viatris for arriving at the rating on Mylan Labs.
• 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.
• Debt is entirely from Viatris and interest on the same is in line with market rate. It is to be repaid after seven years from the date of drawdown.

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. Products are sold in the regulated markets through the parent, and sales in the semi-regulated markets are institutional, and hence, tender-based. Around 65% of the revenue comes from ARV segment, mostly through contracts. In this segment, the company caters to 33% and ~40% of the patients globally and in the developing markets, respectively. Its top customers include the health ministries of developing countries such as India, South Africa, Zimbabwe and Kenya.

 

Improving financial risk profile: Gearing and total outside liabilities to tangible net worth ratio were 0.19 and 0.46 time, respectively, as on March 31, 2022, supported by strong net worth of Rs.11,964 crore and limited external debt of Rs. 2,299 crore. Healthy cash generation resulting in progressive debt repayments and limiting reliance on external debt for capex is expected to lead to an improvement in the key debt protection metrics over the medium term. Pre-payment of non-convertible bonds of Rs 650 crore (Outstanding of Rs 480.34 Crore as on 31st March 2022)  in fiscal 2022 lead to an improvement in net cash accrual to adjusted debt ratios to 0.76 times (PY: 0.66 times). Despite large acquisitions, leverage has remained moderate owing to parental support. Compulsory convertible debentures (treated as equity) of Rs 5,027 crore subscribed by group entities of Mylan NV now known as Viatris in fiscal 2014 was utilized for funding the Agila acquisition and equity infusion of Rs 2,476 crore in fiscal 2016 was used to fund the JPL acquisition. Although, these acquisitions faced regulatory hurdles initially resulting in modest returns, same are now improving with resolution of regulatory issues and ramp up in operations.

 

Strong financial and operational support from the parent: Mylan Labs benefits from its strong operational and financial linkages with Viatris, which is among the top five generics players globally. The company is important to the parent on account of its strong research and development (R&D) capability and low cost of manufacturing. The parent provides financial support through external commercial borrowing to partly fund capex or working capital requirement. Past acquisitions have also been fully funded by the parent through debt and equity.

 

Weaknesses:

Working capital-intensive operations: Working capital requirement remains large because of sizeable institutional sales. Gross current assets (GCAs) were 291 days as on March 31, 2022 (296 days as on March 31, 2021), driven by receivables and inventory of 127 and 191 days, respectively, and will likely remain large over the medium term. Inventory is sizeable on account of increase in manufacture of finished dosage form (FDF) products over the past two fiscals.

 

Payment cycles are longer for domestic tender sales. Hence, with an increase in proportion of domestic sales, receivables are expected to remain high. Also, expansion in the emerging markets is likely to stretch receivables because of repatriation issues. Any further stretch in receivables may increase the working capital requirement, and hence, will be a key monitorable.

 

Exposure to increasing competition and pricing pressure in the global generics market: Around 56% of the revenue in fiscal 2022 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 increasing competition, substantial investments in infrastructure and R&D may impact the profitability.

Liquidity: Strong

Healthy cash accruals expected at over Rs 1400 crore per annum is expected to be sufficient to meet capex requirements of ~ Rs.700-800 crore and scheduled repayment obligations of ~Rs 120 crore and ~Rs.760 crore in fiscals 2023 and fiscal 2024 respectively . Company is expected to bring down its debt levels further by utilizing the excess accrual. Presence of bank limits of Rs. 805 crore which was sparingly utilised over the 12 months ending September 2022 provides additional cushion.

Outlook: Stable

The operating performance of Mylan Labs is expected to be sustained over the medium term, driven by steady revenue growth and healthy profitability. The financial risk profile will continue to improve from already comfortable levels supported by healthy cash generation and progressive debt repayment. The expectation of financial and operational support from the parent in case of any exigencies or large acquisition lends further comfort. Any change in the credit risk profile of the parent is likely to have an impact on the rating of Mylan Labs.

Rating Sensitivity Factors

Upward factors

• Upgrade in the rating of the parent, Viatris, by S&P by one or more notches could result in similar rating action in the company
• Sustained revenue growth of 10-12% per annum while maintaining healthy profitability levels
• Better-than-anticipated cash generation resulting in faster deleveraging and improvement in key debt protection metrics; Improvement in RoCE driven by realisation of acquisition benefits

 

Downward factors

• Weakening in the credit risk profile of the parent or change in stance of support
•    Sustained decline in operating margin to below 15-16%
• Deterioration of debt protection metrics owing to large, debt-funded capex or acquisition, or stretched working capital cycle
• Change in outlook to ‘Negative’ or further downgrade in rating of parent, Viatris, by S&P Global Ratings by one or more notches may result in similar rating action for the company

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.

 

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

 

Mylan Labs is currently 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- FDFs of Anti-Retro Virals (ARVs – anti AIDS) primarily. Viatris is the largest manufacturer of ARVs in the world. It caters to 2 million of the total 6 million HIV patients being treated (1/3rd of the market share) globally and nearly 50% of patients in developing world.

 

Mylan Labs has 21 facilities in India: 6 for APIs, 8 for oral solid dosage and 7 for injectables. Of these, 16 facilities, including 6 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 rest of the world, including Africa.

 

On December 5, 2013, Mylan Labs completed the acquisition of Agila’s injectables business from Strides Arcolab Ltd for nearly USD 1.75 billion. Agila is a leading global manufacturer of speciality injectables focused on oncolytics, penems, penicillin, cephalosporins and ophthalmics, with nine manufacturing facilities across India, Poland and Brazil. 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	2022	2021
Revenue	Rs.Crore	11,543	12958
Profit After Tax (PAT)	Rs.Crore	643	1112
PAT Margin	%	5.6	8.6
Adjusted debt/adjusted networth	times	0.19	0.32
Adjusted interest coverage	times	3.87	4.10

*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
INE604D08010	Non Convertible Bonds	10-Nov-15	10.25%	10-Nov-25	1130.34	Complex	CRISIL AA-/Stable
NA	Cash Credit*	NA	NA	NA	620.90	NA	CRISIL AA-/Stable
NA	Cash Credit^	NA	NA	NA	175	NA	CRISIL AA-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	9.1	NA	CRISIL AA-/Stable

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

^Interchangeable with overdraft