Fitch Ratings has affirmed
The Outlook is Stable.
We believe Glenmark will use most of the net proceeds to repay debt. This and Glenmark's prudent approach to growth investments and shareholder returns will help it maintain negative net debt to EBITDA, which is significantly below the positive rating sensitivity level of 1.5x. Nonetheless, Glenmark's revenue scale and EBITDA margins, which are key metrics Fitch uses to measure the company's business profile, are unlikely to improve to levels commensurate with a higher rating.
The planned disposal is unlikely to affect our assessment of Glenmark's cost competitiveness and market position despite some reduction in margins. The Stable Outlook reflects Glenmark's comfortable leverage headroom and our expectation of positive free cash flow before litigation settlement payments.
Key Rating Drivers
Sale to Boost Leverage Headroom: The stake sale, which is likely to be completed by
Business Profile Intact After Divestment: External sales from GLS contributed 11% of Glenmark's revenue in the financial year ended
GLS generates higher margins than Glenmark's formulation business, underscored by its 30% contribution to consolidated EBITDA in FY23. Nonetheless, Glenmark's strategy to cut R&D spending to around 7%-8% of sales and further ramp up higher-margin sales of Ryaltris, its maiden novel drug, after good progress since the launch will limit the margin reduction to around 14% over FY24 and FY25 - pro forma for the disposal - from around 16% in FY23 after proportionally including GLS. The sale is unlikely to hurt Glenmark's position in its key formulation markets and geographic diversification.
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 adequate geographical diversification across pure and branded generic markets, including the US, which accounted for 27% of revenue in FY23, excluding the API business,
Regulatory, Litigation Risks: Below-peer production-facility diversification exposes Glenmark to above-average risk from adverse regulatory actions that could hurt US sales and product approvals. The
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
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 in the US in early 2022. R&D spending weighs on profitability and free cash generation, although Glenmark expects further cuts after reducing it 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
Derivation Summary
Glenmark has smaller scale and diversification than large generic pharmaceutical companies, such as
Glenmark is rated two notches below
Glenmark is rated at the same level as
Key Assumptions
Fitch's Key Assumptions Within our Rating Case for the Issuer:
Revenue, excluding GLS, to increase by mid-single digits annually over FY24-FY25;
EBITDA margin, excluding GLS, to remain between 14% and 15% over FY24-FY25 (FY23: 13.3%);
Capex, excluding GLS, to average around 5% 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:
Sustained increase in scale to at least
Sustained positive free cash flow generation; and
Financial leverage, measured by consolidated net debt/EBITDA, excluding GLS, sustained at below 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A weaker competitive position or adverse regulatory action by the
Deterioration in financial leverage to above 3.0x.
Liquidity and Debt Structure
Comfortable Liquidity: Glenmark had readily available cash, after excluding GLS, of INR11.6 billion at
Total debt maturities over FY25 and FY26 are manageable, at INR6.6 billion. Reduced capex and interest payments after the stake sale will enable positive free cash generation over FY24 and FY25. This will help meet a substantial portion of drug litigation and antitrust settlement payments over FY24 and FY25. Completion of the GLS stake sale and use of proceeds for debt repayment will further boost Glenmark's liquidity and financial flexibility.
Issuer Profile
Glenmark is an
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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