Detailed Rationale

CRISIL Ratings has removed its long-term rating on the bank facilities of Mylan Laboratories Ltd (MLL) from ‘Rating Watch with Developing Implications’ and reaffirmed its rating at 'CRISIL AA-' while assigning a ‘Stable’ outlook.

 

The rating action follows the completion of divestment of the active pharmaceutical ingredients (API) and women healthcare business to Tainish Laboratories Ltd (Tainish), held by Iquest Enterprises (part of Matrix Labs Pvt Ltd) and Sendador Laboratories Pvt Ltd (Senador); held by Insud Pharma, respectively, and complete understanding received from the management on the residual business and its financials.

 

On October 11, 2023, CRISIL Ratings had placed the rating of MLL on ‘watch with developing implications’ after Viatris Inc’s (Viatris; rated BBB-/Negative by S&P Global Ratings; , parent of MLL) announcement on October 2, 2023 regarding the sale of MLL’s API and women healthcare business (Famy Care Ltd) for $1.2 billion as part of a global exercise to exit non-core businesses. Both the divisions were demerged into two new entities viz. Senador for women healthcare business and Tianish for API business. The entire demerger was effective from February 2024 and concluded recently, post receipt of funds from the buyers.

 

The rating continues to reflect the comfortable business risk profile of the company, supported by its sizeable scale of operations driven by established presence in various therapeutic segments, including leadership position in the anti-retro viral (ARV) division and significant geographical diversity. The rating also factors in a healthy financial risk profile because of large networth, comfortable capital structure and healthy cash accrual; and healthy synergies with the parent, Viatris. These strengths are partially offset by large working capital requirement and exposure to increasing regulatory scrutiny and pricing pressure due to competition in the global generics market.

 

Revenue for fiscal 2024 grew ~13% y-o-y to Rs. 12,154 crore (Fiscal 2023: Rs. 10,714 crore) primarily due to growth in the non-ARV segment. Post the de-merger of the API and women healthcare business (for fiscal 2025 revenues are expected to be in the range of about Rs 9000-9500 crores with non-ARV segment accounting for ~50-55%, ARV segment accounting for ~40% and balance from injectable division.

 

Over the near to medium term, the revenues are expected to grow at low to mid single digits largely driven by growth in the non-ARV segment which consists of manufacturing products for the parent at fixed transfer pricing mechanism despite some sluggishness expected in the ARV business. Further, company is planning sizeable capex in the injectable division which would further aid revenue growth over the medium term.

 

Operating margins for the fiscal 2024 declined to 15.1% from 17.1% a year earlier primarily owing to increase in overheads and lower realizations in the ARV segment. Post the de-merger the margins are expected to be lower than previous years and sustain at about 14-15% supported by fixed transfer pricing agreement with parent for the non-ARV segment and healthy margin profile of the injectable segment. Nonetheless, sustenance of margins would be a key monitorable.

 

Financial risk profile continues to remain robust with a strong capital structure and healthy debt protection metrics. Overall debt reduced to Rs. 1336 crore in fiscal 2024 from Rs. 1494 crore previous fiscal. This debt is entirely from the group companies/related parties.

 

Networth stood at Rs 8204 crores as on March 31, 2024 as against Rs 12133 crores a year earlier. This coupled with accretion to reserves resulted in gearing of 0.16 times for fiscal 2024. Debt protection metrics are healthy with interest coverage and net cash accrual to total debt at 4.41 times and 1.07 times respectively for fiscal 2024 against 7.65 times and 1.09 times respectively for fiscal 2023. With progressive debt repayment and accretion to reserves, gearing is expected to remain below 0.2 times over the medium term.

Analytical Approach

• CRISIL Ratings has treated the compulsorily convertible debentures issued to MLL for the acquisition of Agila as part of networth as the debentures are compulsorily convertible into equity.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position supported by diverse revenue streams: The company has established presence both in the regulated and semi-regulated markets. In the regulated market, products are sold mainly through the parent, whereas sales in semi-regulated markets are institutional (primarily sales of ARVs) and hence, based on tenders. Around 40-45% of the revenue is expected to come from the ARV segment. MLL is the world’s largest manufacturer of ARVs and has a sizeable market share in this segment, The sales of ARVs are either through contract manufacturing for the parent or comprise institutional sales in domestic and semi-regulated markets through tenders. The top customers include the health ministries of developing countries such as India, South Africa and Zimbabwe

 

It has a strong presence in Africa (especially South Africa) in the tender business and caters to the US and Europe through contract manufacturing of FDFs for its parent.

 

• Improving financial risk profile: Financial risk profile continues to be robust, with the company further reducing debt in fiscal 2024. Overall debt reduced to Rs 1,336 crore in fiscal 2024 from Rs 1,494 crore previous fiscal. This debt is from the related parties which provides comfort to the overall financial risk profile. This coupled with accretion to reserve resulted in gearing of 0.16 time for fiscal 2024. Interest coverage ratio declined to 4.4 times for fiscal 2024 (from 7.7 times last fiscal). Interest cover was higher previous fiscal due to one time adjustment with respect to interest rates differential, in line with the advance ruling agreement signed between the company and the tax officials. Capital expenditure (capex) is expected at Rs 400-500 crore per annum, which will be funded from cash accrual expected in excess of Rs 800 crore annually. With progressive debt repayment and accretion to reserve, gearing is expected to remain below 0.2 time over the next two fiscals whereas interest coverage ratio should remain adequate at 5-7 times.

 

•    Synergies with the parent Viatris Inc: The company benefits from the operational and technical synergies with Viatris, which is among the top five generics players globally. MLL is important to the parent owing to its strong research and development (R&D) capability and low cost of manufacturing. The parent has provided financial support in the past through external commercial borrowing to partly fund capex or working capital requirement. Past acquisitions have also been fully funded by the parent through debt and equity. Furthermore, fund outflow from MLL to Viatris has been restricted only to the extent of interest and principal payments on borrowings availed of from the parent.

 

Weaknesses:

• Large working capital requirement: Working capital cycle may remain stretched because of sizeable institutional sales. Gross current assets (GCAs) were 221 days as on March 31, 2024 (328 days a year ago), driven by receivables of 105 days and inventory of 117 days. Working capital is expected to be elongated owing to change in product mix and government tenders which are expected to affect the working capital cycle. ARV business has higher debtors as it involves business with government, however there is no bad debt risk. Also since non ARV is with parent they can realize their debtors from parent faster if the need arises. From net working capital cycle perspective, it is expected to remain comfortable at about 140-150 days

 

• Exposure to increasing competition and pricing pressure in the global generics market: Around 56% of the revenue in fiscal 2024 was from the regulated markets. Aggressive tactics by innovator companies through the introduction of authorised generics and healthcare cost containment measures by the US government have intensified competition. Players such as MLL are vulnerable to pricing pressure in the US and Europe because of the entry of several cost-competitive Indian players and increased bargaining power of distribution channels owing to consolidation. With rising competition, substantial investments in infrastructure and R&D may impact profitability.

Liquidity: Strong

Accruals of Rs 850-900 crores per annum over next 2 years is expected to be sufficient to meet capex requirements totaling ~ Rs 400-500 crore per fiscal and repayment obligations of ~Rs 320 crore with nil repayments till December 2025   Capex would entirely be towards development of new products under the injectable division and balance towards routine maintenance. The fund-based limit of Rs 805 crore remained minimally unutilized during the 12 months through March 2024.

Outlook: Stable

Operating performance is expected to sustain over the medium term, driven by stable revenue profile and stable profitability. Financial risk profile will remain comfortable, supported by healthy capital structure and comfortable debt protection metrics.

Rating Sensitivity factors

Upward factors:

• Sustained revenue growth of 10-12% per annum while maintaining healthy profitability of over 20%
• Significant improvement in operational efficiencies resulting in higher return on capital employed 

 

Downward factors:

• Moderation in revenue with sustained decline in operating margin to below 14%
• Weakening of debt protection metrics owing to large, debt-funded capex or acquisition, or significant stretch in working capital cycle

About the Company

Incorporated in 1984 as Matrix Laboratories Ltd, the company commenced operations by manufacturing APIs for Acquired Immune Deficiency Syndrome (AIDS) drugs for large generic players. The company got its present name after it was acquired by Mylan NV in 2007.

 

MLL is a 100% subsidiary of Viatris, a global pharmaceuticals major formed by the merger of Mylan NV and Upjohn in November 2020. Product portfolio of Viatris consists of branded generic and over-the-counter drugs. The product portfolio of Viatris consists of branded generic, over-the-counter, and biosimilar drugs. Viatris operates across developed markets (59%), Greater China (14.9%), JANZ (8.7%), Emerging markets (17.14%)

 

Over the past few years, the company has increased focus on making formulations, primarily FDFs of ARVs (anti-AIDS). Viatris is the largest manufacturer of ARVs in the world. It caters to 2 million of the total 6 million human immunodeficiency virus patients being treated (one-third of the market share) globally and nearly 50% of patients in the developing world.

 

On December 5, 2013, MLL completed the acquisition of Agila’s injectables business from Strides Arcolab Ltd for nearly $1.75 billion. Agila is a leading global manufacturer of speciality injectables focused on oncolytics, penems, penicillin, cephalosporins and ophthalmics, with manufacturing facilities across India. MLL completed the acquisition of the female healthcare business of the erstwhile Famy Care Ltd (JPL) on November 21, 2015, after receipt of regulatory approvals.

 

Further, in fiscal 2024 the company sold the Indian active pharmaceutical ingredients (API) business and women’s healthcare business (WHC) for an ~$1.2 billion as part of a global exercise to exit non-core businesses. The company entered into an agreement with IQuest Enterprises, a local pharmaceutical firm owned by the founder of Matrix Laboratories, Mr Nimmagadda Prasad, to sell its API business. The women’s healthcare business, which primarily relates to oral and injectable contraceptives, was sold to Insud Pharma, a leading Spanish multinational pharmaceutical company.

Key Financial Indicators*

Particulars	Unit	2024	2023
Revenue	Rs crore	12,154	10,714
Profit after tax (PAT)	Rs crore	390	480
PAT margin	%	3.2	4.5
Adjusted debt/adjusted networth	times	0.16	0.12
Adjusted interest coverage	times	4.41	7.66

*CRISIL Ratings-adjusted numbers

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit*	NA	NA	NA	575.9	NA	CRISIL AA-/Stable
NA	Cash credit^	NA	NA	NA	100	NA	CRISIL AA-/Stable
NA	Cash credit!	NA	NA	NA	75	NA	CRISIL AA-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	54.1	NA	CRISIL AA-/Stable

* Interchangeable with working capital demand loan/packing credit/bill discounting/letter of credit/bank guarantee

^ Interchangeable with overdraft

! Interchangeable with overdraft/ working capital demand loan/packing credit/ letter of credit/bank guarantee