| Zydus Hospira Oncology Private Limited | ||||||
| Ratings reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Zydus Hospira Oncology Private Limited (ZHOPL).
The ratings continue to reflect the strong financial risk profile of ZHOPL, as reflected by its healthy capital structure and debt metrics, driven by low debt. Business risk profile is moderate, supported by the captive, low-cost manufacturing unit for niche oncology products;. These strengths are partially offset by susceptibility to intense competition and pricing pressure in the regulated generics market and product concentration in revenue.
The business risk profile remains constrained due to inherent price erosion in existing products and slow ramp-up of new products. The flagship Foundation 6 (F6) products account for more than 80% of revenue, but have faced increasing competition in regulated markets. Drop in realisations on these products has led to a slight moderation in revenue to Rs 238 crore in fiscal 2022. In the first half of fiscal 2022, shutdown of the plant for maintenance purposes for few months led to loss of production and decline in revenue and profitability. While revenue growth could remain moderate in fiscal 2023, it is expected to increase steeply in fiscal 2024, driven by addition of new higher-value products to the portfolio of ZHOPL by Pfizer Inc (which holds a 50% stake in the company). Operating margin stood at 17.5% in fiscal 2022, and will moderate to 9-10% going forward, as contribution of F6 products in overall revenue is expected to decline sharply, and lower true-up profit may be available as part of the revenue sharing arrangement with Pfizer Inc.
ZHOPL remains debt-free with incremental working capital expenses being funded internally. While the company could draw working capital debt going forward, financial risk profile should remain strong with gearing under 0.5 time over the medium term. |
Analytical Approach To arrive at the ratings, CRISIL Ratings has taken a standalone view of the business and financial risk profiles of ZHOPL. |
Key Rating Drivers & Detailed Description Strengths: Cost-efficient manufacturing capability in niche oncology-based formulations: ZHOPL has a dedicated facility, compliant with the World Health Organization Good Manufacturing Practices, for a defined range of oncology formulations—cytotoxic injectable. Strong parentage (the company is a joint venture [JV] between Zydus Lifesciences Ltd (CRISIL AA+/Positive/A1+) and Pfizer Inc) ensures that ZHOPL receives a fixed operating margin over the cost of production. This insulates the company from any fluctuation in the final selling price achieved by partners. The arrangement also provides for sharing of any revenue upside, depending on the price at which partners sell products in their respective territories, thereby ensuring healthy revenue growth and profitability in the past. However, the revenue upside is limited to the F6 products wherein competition has intensified, and the balance products are sold on a cost-plus margin basis.
Strong financial risk profile: Capital structure is robust marked by nil debt as on March 31, 2022. The company is likely to raise short-term debt from fiscal 2024 onwards to fund the incremental working capital expenses. Cash accrual will suffice to meet the capital expenditure (capex) and moderate working capital requirement in the near term. Capex of Rs 10-15 crore is likely to be incurred annually. The company has a policy of distributing dividend after factoring in its capex and working capital requirement. Though it had a liquid surplus of about Rs 72 crore as on March 31, 2022, the company disburses nearly its entire profit to its JV partners, thereby limiting build-up of networth. Financial risk profile will remain strong over the medium term, driven by healthy networth, the moderate operating margin and absence of debt-funded capex. Even with working capital debt, gearing should remain below 0.5 time.
Weaknesses: Exposure to intense competition and pricing pressure in the regulated generics market: Bulk of revenue is derived from off-patent products in the regulated generics market. Although these products are niche and difficult to manufacture, they are vulnerable to price erosion, especially in key markets of US and Europe, given their commoditised nature. Earnings before interest, tax, depreciation, and amortisation (EBITDA) margin declined to 17.5% in fiscal 2022 from around 24.4% in fiscal 2021. This is because of intense competition in the generics market, following aggressive defence tactics employed by innovator companies, through the introduction of authorised generics, and healthcare cost-containment measures enforced by the US government. Furthermore, there is increasing scrutiny by regulators such as the US Food and Drug Administration. While the company has not had any adverse audit observations in the past, it remains exposed to regulatory risk.
Product concentration in revenue: About 81% of revenue comes from F6 products (oncology injectable), which have faced increasing competition in regulated markets. Temporary suspension of a product, following quality concerns, led to a sharp decline in revenue in fiscal 2019. While revenue uptick was witnessed in these flagship products in fiscal 2021, sustainability remains a key monitorable. Despite volume growth, price erosion and limited revenue upside on new products led to a fall in operating margin. The margin could moderate even further over the medium term. Integration and ramp up of new products from Pfizer Inc from fiscal 2024 onwards will be a key monitorable. |
Liquidity: Adequate Liquidity is supported by absence of any debt obligation, nil bank limit utilisation and liquid surplus of Rs 72 crore as on March 31, 2022. Expected net cash accrual of Rs 30-40 crore per fiscal (before dividend payout) should suffice to cover the annual capex and incremental working capital requirement. |
Outlook: Stable CRISIL Ratings believes ZHOPL will continue to benefit from its ability to manufacture niche oncology products in a cost-efficient manner and will maintain a strong capital structure. |
Rating Sensitivity factors Upward factors * Healthy double-digit revenue growth with operating margin improving to 17-19% on a sustained basis * Diversification of turnover from various products * Sustenance of strong financial risk profile
Downward factors * Any sharp decline in revenue and profitability or higher-than-expected dividend outflow impacting cash accrual * Any large capex or borrowings weakening the capital structure, for instance gearing exceeding 0.7-0.8 time * Any change in JV partnership |
About the Company ZHOPL was set up in 2005, as a JV between Cadila and Mayne Pharma Ltd (acquired by Hospira in February 2007) to manufacture oncology injectables. Hospira and Cadila have rights to market these products. On September 3, 2015, Pfizer Inc (rated ‘A+/Stable’ by S&P Global Ratings) completed the acquisition of Hospira, which continues as a subsidiary of Pfizer. |
Key Financial Indicators
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
@Sub-limit of Rs 30 crore overdraft; interchangeable with pre-shipment credit (PC), letter of credit, and bank guarantee **Interchangeable with PC, packing credit in foreign currency (PCFC), bill purchase (BP), foreign bill purchase (FBP), bill discounting (BD), foreign bill discounting (FBD), post-shipment demand loan (PSDL), letter of credit, and bank guarantee |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||
|
Criteria Details
|