Fitch Ratings has affirmed India-based Glenmark Pharmaceuticals Ltd's Long-Term Issuer Default Rating (IDR) at 'BB'.

The Outlook is Stable.

The affirmation reflects Glenmark's geographic diversification, which mitigates the business risks arising from its small size relative to peers, and adequate product pipeline. This, combined with robust long-term growth prospects in India, limits the impact on profitability from continued pricing pressure in the US generic pharmaceutical market.

The Stable Outlook reflects our expectation that Glenmark will maintain comfortable leverage headroom, despite the working-capital driven increase in debt in the financial year ended March 2023 (FY23) and large drug litigation settlement payments. We expect that the limited immediate impact of adverse regulatory actions in its US business and a measured R&D approach will help to support profitability. Glenmark's stable dividend and capex will enable moderately positive free cash generation before considering drug litigation settlement payments.

We proportionally consolidate the active pharmaceutical ingredient (API) business, held under an 82.8%-owned subsidiary - Glenmark Life Sciences Limited (GLS) - in Glenmark's consolidated financials.

Key Rating Drivers

Comfortable Leverage Headroom: We expect consolidated net debt/EBITDA (after proportional consolidation of GLS) to remain stable, after a rise to 1.5x in FY23, from 1.2x in FY22. The headroom should remain solid against our negative rating threshold of 3.0x. Healthy growth in other markets and lower R&D spending should support profitability, despite sustained pricing pressure in the US, as well as remediation and legal costs.

Positive underlying free cash generation will cover a substantial portion of drug litigation settlement payment over FY24 and FY25 and limit any increase in debt, barring large strategic investments.

Small, Yet Diversified: Glenmark has low revenue and operating EBITDA compared with major global generic drug makers, but this is offset by the company's geographical diversification across pure and branded generic markets, including the US, which accounted for 24% of revenue in FY23, India (31%) and Europe (14%). Scale and diversification help generic drug makers maintain stable margins. Glenmark also has adequate competitive positions in its core dermatology and respiratory therapy segments.

Regulatory and Litigation Risk: Below-peer production-facility diversification exposes Glenmark to above-average risk from adverse regulatory actions that could hurt US sales and product approvals. This follows recent adverse actions by the US Food and Drug Administration at three plants. Glenmark is a defendant in a US price-fixing lawsuit and other antitrust cases after it agreed to settle suits involving generic Zetia for USD87.5 million. We treat this as an event risk, as there is poor visibility over liability. Pricing pressure could rise from changes to laws governing drug price negotiations in the US.

Solid Long-Term Domestic Prospects: The Indian government's focus on boosting mass healthcare access supports pharmaceutical demand. Glenmark's formulation business ranks 14th in India, with a revenue market share of 2.1% in March 2023, according to IQVIA MAT. Stronger shares in dermatology (7.4%), respiratory (5.6%) and cardiovascular (5.2%) underpin Glenmark's position in the fragmented and physician-driven market.

Risks in Novel Drugs: Glenmark faces high inherent risks around novel drug development due to its small scale and limited record. This is despite the approval of Ryaltris, Glenmark's maiden drug application in the US in early 2022. R&D spending weighs on profitability and free cash generation, although Glenmark expects further cuts after reducing R&D spending to 9.5% of sales in FY23, from 14.7% in FY19. We expect Glenmark to take a collaborative approach to R&D spending, in line with its strategy.

The company has signed multiple partnerships for its R&D assets and plans to sell a stake in Ichnos Sciences Inc., a subsidiary holding novel drug assets. Nonetheless, a more aggressive approach may pressure credit metrics and financial flexibility, outweighing the benefits of lower dependence on the highly competitive generic drug business. Glenmark aims to launch or monetise its R&D drugs in advanced stages of development, which could provide significant earnings. However, we do not consider this in our rating case due to the uncertainty and potential delays in the approval process.

Proportional Consolidation of GLS: Glenmark's large stake in GLS underpins its strategic control and API sourcing flexibility. GLS is debt free, but its separate public listing limits Glenmark's access to GLS's cash flow for servicing Glenmark's debt, underscoring our approach of proportional consolidation. GLS accounted for 30% of Glenmark's consolidated EBITDA in FY23, including captive sales, but Glenmark's large stake limits the impact from Fitch's proportional consolidation. We expect GLS to remain debt free, with healthy free cash flow before dividends, despite growth investments.

Derivation Summary

Glenmark has smaller scale and diversification than large generic pharmaceutical companies, such as Viatris Inc. (BBB/Stable) and Teva Pharmaceutical Industries Limited (BB-/Stable). The large peers also have deeper launch pipelines, with a focus on more complex products. This mitigates price-erosion risk, especially in the US. Glenmark is rated three notches below Viatris due to its weaker business profile and profitability, which are partly counterbalanced by Viatris's higher leverage. Glenmark is rated a notch above Teva, as Teva's stronger business profile is offset by higher leverage amid continued pricing pressure on generic drugs in the US and litigation.

Glenmark is rated two notches below Hikma Pharmaceuticals PLC (BBB-/Stable), underscoring Hikma's larger scale and robust market positioning, particularly in the US injectables market. Hikma also has a stronger financial profile, which is characterised by higher profitability and cash generation.

Glenmark is rated at the same level as Grunenthal Pharma GmbH & Co. Kommanditgesellschaft (BB/Stable), which has a similar scale and operational scope. Glenmark has greater product and geographic diversification, but this is counterbalanced by Grunenthal's stronger market position in its core segments, as underscored by its higher profitability and cash generation.

Ache Laboratorios Farmaceuticos S.A.'s (BB/Stable) smaller scale and lower geographical diversification are offset by its strong competitive position in Brazil and a record of low financial leverage. Ache's Foreign-Currency IDR is capped by Brazil's Country Ceiling of 'BB'.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Revenue to increase by mid-single digits annually over FY24-FY25.

EBITDA margin, after proportional consolidation of GLS, of 16%-17% over FY24-FY25 (FY23: 16.2%).

Capex to average between 5% and 6% of sales over FY24-FY25.

Stable annual dividend payouts at below 10% of net income.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

an increase in scale to at least USD2 billion in sales on a sustained basis, while maintaining its current financial profile, and;

sustained positive free cash flow generation; and

financial leverage, measured by consolidated net debt/EBITDA after proportionally including GLS, sustained at below 1.5x (FY23: 1.5x).

Factors that could, individually or collectively, lead to negative rating action/downgrade:

a weaker competitive position or adverse regulatory action by the US Food and Drug Administration;

deterioration in financial leverage to above 3.0x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Comfortable Liquidity: Glenmark had readily available cash, after proportionally consolidating GLS, of INR13.6 billion at end-March 2023. This comfortably covered INR5.0 billion of short-term debt maturing in FY24, including INR3.5 billion in working capital debt that we expect Glenmark to roll over in the normal course of business. Total debt maturities over FY25 and FY26 are manageable, at INR6.6 billion. Glenmark's positive underlying free cash flow will meet a substantial portion of drug litigation settlement payments over FY24 and FY25. We expect Glenmark to proactively manage its refinancing needs in FY27, when more than INR25 billion of debt matures.

Issuer Profile

Glenmark is an India-headquartered pharmaceutical company, focused on the branded and generic formulations, API and novel drug development businesses.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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