Fitch Assigns First-Time 'BB' Rating to Glenmark Pharmaceuticals

Singapore/Mumbai:Fitch Ratings has assigned India-based Glenmark Pharmaceuticals Ltd (Glenmark) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB'. The Outlook is Positive. Fitch has also assigned Glenmark's proposed Reg S notes an expected rating of 'BB(EXP)'.

Glenmark's rating incorporates its geographically diversified profile, a demonstrated track record in regulatory compliance and its healthy product pipeline. Glenmark is smaller than other global generic drug makers, but it has achieved above-market growth rates in the US and India and benefits from its in-house R&D capabilities, which support its novel drug development programme and generic business. Glenmark's key shareholders as of 31 March 2016 include the founding Saldanha family with a 46.5% stake, Singapore's Aranda Investments (a subsidiary of Temasek Holdings (Private) Limited) with 3.99%, Oppenheimer Developing Markets Fund (2.66%) and government of Singapore (1.08%).

The Positive Outlook reflects Fitch's expectation that Glenmark's financial profile will improve over the next one to two years, with healthy growth in revenue and operating income supported by launches of new products, especially the launch of a generic version of Ezetimibe, which is used to treat high cholesterol, in the financial year ending 31 March 2017 (FY17). However, this improvement will depend on the generation of free cash. Free cash generation in the past two fiscal years was constrained due to expansion capex (mostly for a new plant in the US), a larger working capital position and a high level of cash taxes. Fitch believes the improvement in free cash generation will depend on successful new product launches in the US and effective implementation of a tax optimisation strategy.

KEY RATING DRIVERS

Small but Diversified: Glenmark's revenue and operating EBITDAR are small compared with those of global majors, but the risk of its small size is counterbalanced by its good diversification in products and geographies. Scale and diversification are important for generic drug companies to maintain stable and durable margins. The company also enjoys a strong competitive position in its core therapy areas of dermatology and respiratory.

Above-Market Growth: The company's revenue in the US rose by CAGR of 20% in FY12-FY16 while revenue in India increased by CAGR of 24% over the same period. Glenmark's share of total prescriptions filled in the competitive US market increased to 1.4% in FY16 from 0.9% in FY12, reflecting higher growth than the market. In India, sales increased 1.5x faster than the market average over FY12-16.

Robust Domestic Position: Glenmark is the 12th-largest player by prescription share (17th largest by value) in the highly fragmented Indian market, with a market share of 2.1% in FY16. The Indian market is largely physician-driven and focused on branded generics. Pharmaceutical companies tend to compete through focused marketing efforts in certain therapies rather than using a volume-based strategy. Glenmark has strong market positions in its focus areas of dermatology (second largest), respiratory (sixth largest) and cardiovascular (eighth largest). The company has a nation-wide presence with a network of over 3,500 stockists and over 3,700 medical representatives. The company also aims to expand in the over-the-counter (OTC) segment.

Strong Product Pipeline: Glenmark has a good track record, as reflected in the company's robust US growth, of launching new products to augment growth and to provide a wide range of products within each of its targeted therapy categories. The company's R&D unit received 24 abbreviated new drug application (ANDA) approvals (including tentative nods) from the US Food and Drug Administration (FDA) in FY16. The company has nearly 60 ANDAs in various stages of the approval process with the US FDA, 23 of which are Paragraph IV applications (implying with a challenge to existing patents) and several others where it has "first to file" status. Notably, Glenmark expects revenue from generic Ezetimibe, to account for almost 10% of sales in FY17, as it will enjoy a period of exclusivity associated with its "first to file" status following its launch in December 2016. Fitch expects new product launches, particularly in the US, to drive sales growth and support margins in the medium term.

Strong Production Base: Glenmark has a strong record of maintaining compliance - the company has successfully cleared all inspections with major regulatory agencies (such as US FDA and the UK's Medicines and Healthcare products Regulatory Agency) over the years, leading to sustained business operations. This has also enhanced Glenmark's reputation and strengthened its brand equity.

Stable Financial Profile: Glenmark's financial profile is supported by robust growth and moderate diversification in revenue, an average EBITDAR margin of around 19% in the last five fiscal years, moderate financial leverage (net adjusted debt/EBITDAR) of around 2.7x (after excluding INR3bn of cash in Venezuela) and a solid fixed-charge cover of 4.0x. Dividend payout has been modest for the last five years, ranging from 9% to 13% of net income. The company says the annual dividend payout is unlikely to exceed 15% of net income in the medium term.

Capital Management Improves Maturity Profile: Glenmark has embarked on a significant debt refinancing programme to lengthen its existing debt maturity profile through the issuance of USD200m of convertible notes, completed in June 2016, and the proposed Reg S notes. On completion of the proposed Reg S issuance, the majority of the debt will be centralised at the parent company, thus reducing structural subordination risk.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Glenmark include:

- FY17 consolidated revenue to increase by about 24%, driven by generic Ezetimibe sales and growth in key markets

- Average EBITDAR margin of about 24% during FY17-FY19

- Annual capex of INR7bn-8bn in FY17-FY19

- Annual dividend payout in line with Glenmark's guidance of 10%-15% of net income

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Maintaining EBITDAR margin in excess of 21% while achieving the targeted revenue growth of about 24% in FY17

- Sustained positive level of free cash flow

Negative: Future developments that may, individually or collectively, lead to the Outlook being revised to Stable:

- Failure to maintain EBITDAR margin in excess of 21% and/or achieving its revenue growth target of about 24% in FY17

- Failure to generate sustained positive free cash flow

LIQUIDITY

Glenmark has robust liquidity with cash balance at 31 March 2016 of INR5.6bn (excluding INR3.0bn of cash held in Venezuela) and projected cash flow from operations in FY17 of INR9.1bn, which are sufficient to fund capex and dividends in FY17. Further, Glenmark proposes to refinance debt maturing in FY17 and FY18 and fund capex through the issuance of USD200m (INR13.5bn) of convertible bonds due 2022 and proposed issue of Reg S fixed-rate notes. The convertible bonds and Reg S notes would serve to improve the average tenor of Glenmark's debt and enhance its liquidity.