Detailed Rationale

Crisil Ratings has revised its outlook on the long-term bank facilities of Mylan Laboratories Limited (MLL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘Crisil AA-’.

 

The revision in outlook reflects the expected deterioration in the business risk profile of the company, with weaker-than-expected revenue and further decline in operating profitability. For the first nine months of fiscal 2025, the company registered revenue of ~Rs 5,600 crore with revenue for the full fiscal expected ~Rs 7,000 crore. This is below the previous expectation and down from Rs 9,714 crore (post divestment of the active pharmaceutical ingredient [API] and women healthcare business) in fiscal 2024, with particular decline in the non-anti-retro viral (ARV) division. Given the warning letter for one of the company’s manufacturing facilities in December 2024, the subdued performance may continue into fiscal 2026. The operating profitability is expected to remain muted this fiscal and the next, with loss of operating leverage. That said, the company does not have any external bank borrowings which supports the balance sheet.

 

The US Food and Drug Administration (FDA) recently issued a warning letter to Viatris Inc (Viatris; rated ‘BB+/Stable’ by S&P Global Ratings), the parent company of MLL, citing multiple production deficiencies at its Pithampur plant in Madhya Pradesh. The concerns included quality issues and manufacturing errors. Following an inspection, the FDA issued a Form 483 with six observations, culminating in the warning letter in December 2024. Consequently, imports of 11 products into the US were restricted. However, MLL has stated that four of these products were exempted from the ban due to demand-supply imbalances. The timely resolution of the FDA-related concerns will remain a key area of focus. Additionally, the impact of the recent USAID funding cuts on clinics distributing ARV drugs — accounting for ~40% of sales — warrants close monitoring, as reduced funding could lead to lower procurement volume from these clinics, potentially affecting revenue streams and demand stability for MLL’s products.

 

The rating continues to reflect the comfortable business risk profile of MLL, supported by its sizeable scale of operations driven by established presence in various therapeutic segments, including leadership position in the ARV division, and significant geographical diversity. The rating also factors in the company’s healthy financial risk profile because of large networth, comfortable capital structure and low external debt, 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.

 

Over the near to medium term, the revenue is expected to grow in low-to-mid single digit, driven by growth in the non-ARV segment, which consists of manufacturing products for the parent at fixed transfer pricing mechanism, despite some sluggishness likely in the ARV business. The company plans sizeable capital expenditure (capex) in the injectable division which would aid revenue growth over the medium term. While the operating margin is expected to be muted this fiscal and the next with loss of operating leverage, it shall sustain at 14-15% over the medium term, supported by fixed transfer pricing agreement with the parent for the non-ARV segment and healthy margin profile of the injectable segment. Nonetheless, recovery of profitability will be monitorable..

 

The financial risk profile remains healthy, driven by strong capital structure aided by nil external debt and networth of over Rs 7,000 crore as on March 31, 2024. Debt was ~Rs 1,334 crore as on March 31, 2024, and was largely similar as on December 31, 2024. This debt is entirely from group companies/related parties. While debt protection metrics were affected this fiscal due to weak operating profitability, recovery is monitorable.

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. Crisil Ratings has applied its standalone approach in the assessment of MLL.

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. MLL is the world’s largest manufacturer of ARVs with a sizeable market share in this segment, which is expected to account for 40-45% of the company’s revenue. The sales of ARVs are either through contract manufacturing for the parent or institutional sales in the domestic and semi-regulated markets through tenders. The top customers include the health ministries of developing countries such as India, South Africa and Zimbabwe.

 

MLL has a strong presence in Africa (especially South Africa) in the tender business and caters to the US and Europe through contract manufacturing of finished dosage forms (FDFs) for its parent. The injectibles division, which contributes ~20% to the topline, also provides benefits of diversification to the revenue profile.

 

Synergies with the parent Viatris Inc

MLL 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.

 

Healthy financial risk profile aided by strong capital structure and nil external debt

The financial risk profile remains healthy driven by a strong capital structure aided by nil external debt and networth of over Rs 7,000 crore as on March 31, 2024. Debt stood at ~Rs 1,334 crore as on March 31, 2024, and was broadly similar as on December 31, 2024. This debt is entirely from group companies/related parties. While debt protection metrics remain impacted this fiscal due to weak operating profitability, the company has received ~Rs 1,000 crore non-refundable license fee for its complex injectable products from Mylan Ireland, supporting its requirement. Nonetheless, recovery of the debt protection metrics to the previous levels remains monitorable.

 

Weaknesses:

Large working capital requirement

Working capital cycle may remain stretched because of sizeable institutional sales. Gross current assets (GCAs) were 279 days as on March 31, 2024, driven by receivables of 137 days and inventory of 149 days. The working capital cycle is expected to be stretched owing to change in the product mix for government tenders as well as build-up of inventory as the company continues to stock up even as US FDA issues linger. The ARV business has higher receivables as it involves business with governments, however there is no bad debt risk. Also, as the non ARV business is with the parent, receivables from the parent can be realised faster if needed. The net working capital cycle is expected to remain moderate at 130-140 days.

 

Exposure to increasing competition and pricing pressure in the global generics market

Around 70% 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

Accrual is expected to remain moderate amid operational challenges, while capex for the development of new injectable products, along with routine maintenance, is estimated at ~Rs 400 crore per fiscal. Obligations for related-party debt, amounting to Rs 320 crore, have no scheduled repayment until December 2025. These commitments are expected to be partially funded through internal accrual. Historically, the company has received financial support from its parent in the form of equity or debt, as needed. In fiscal 2025, MLL secured a non-refundable license fee of ~Rs 1,000 crore from Mylan Ireland for its complex injectable products, bolstering its financial position. Additionally, with most debtors being group entities, MLL has the flexibility to recall funds if required, further supporting its liquidity profile. MLL also has access to a fund-based limit of Rs 954 crore, which was utilised negligibly over the 12 months through December 2024.

Outlook: Negative

Crisil Ratings believes the operating performance of MLL could be materially impacted if the company continues to operate at sub-optimal capacities and if US FDA related issues remain unresolved, resulting in operational losses. This could have an adverse impact on the financial risk profile. However, access to timely promoter support and unutilised bank lines in case of financial exigencies will continue to support the liquidity profile of the company.

Rating Sensitivity Factors

Upward factors

• Sustained revenue growth with healthy operating profitability of 14-16%
• 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 9-10%
• Weakening of debt protection metrics owing to large, debt-funded capex or acquisition, or significant stretch in the working capital cycle

About the Company

MLL was incorporated in 1984 as Matrix Laboratories Ltd and 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. The product portfolio of Viatris consists of branded generic and over-the-counter and biosimilar drugs. Viatris operates across developed markets (61%), Greater China (15%), Japan, Australia, and New Zealand (JANZ; 9%) and emerging markets (15%)

 

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 (HIV) 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.

 

In fiscal 2024, the company sold the Indian API business and women’s healthcare business (WHC) for ~$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	9,712	10,714
Profit After Tax (PAT)	Rs crore	260	480
PAT Margin	%	2.7	4.5
Adjusted debt/adjusted networth	times	0.17	0.12
Adjusted interest coverage	times	3.79	7.66

*Crisil Ratings-adjusted numbers; 2024 numbers are post-divestment and not comparable with 2023

Any other information: Not Applicable