OREANDA-NEWS. Fitch Ratings has assigned India-based Glenmark Pharmaceuticals Ltd's (Glenmark, BB/Positive) USD200m 4.50% senior unsecured notes due in 2021 a final rating of 'BB'. The final rating is in line with the expected rating assigned on 18 July 2016, and follows the receipt of final documents conforming to information already received.

Glenmark will use the proceeds to repay debt at its wholly owned overseas subsidiaries. The notes represent direct, unconditional, unsecured and unsubordinated obligations of the company.

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 (financial year ended 31 March) 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's debt maturity profile has lengthened following the issuance of USD200m of convertible notes in June 2016 and USD200m of senior unsecured notes in July 2016. The company will use most of the proceeds to repay existing debt at its wholly owned overseas subsidiaries. As a result, 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 repay debt maturing in FY17 and FY18 and fund capex through the issuance of USD200m (INR13.5bn) of convertible bonds due 2022 and USD200m (INR13.5bn) of senior unsecured notes due 2021. These issuances have helped to improve the average tenor of Glenmark's debt and enhance its liquidity.