| Sun Pharmaceutical Industries Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Sun Pharmaceutical Industries Ltd (Sun Pharma).
The ratings continue to reflect the leadership position of Sun Pharma in the domestic formulations segment, ramp-up in the global specialty business, strong presence in the regulated generics markets, expanding share in the rest-of-the-world markets (excluding India and the US), and its robust financial risk profile. These strengths are partially offset by exposure to intense pricing pressure and regulatory risks in the domestic and regulated markets.
CRISIL Ratings notes that on January 19, 2023, Sun Pharma executed a definitive agreement with Concert Pharmaceuticals Inc (Concert), a late-stage biotechnology company, to acquire all the outstanding shares of the latter through a tender offer for an upfront payment of $8 per share totaling to $576 million in equity value. Concert’s stockholders will also receive a non-tradeable contingent value right (CVR) entitling holders to receive upto an additional $3.5 per share, payable upon its patented drug - Deuruxolitinib (for the treatment of alopecia areata) achieving certain net sales milestones within specified periods. The transaction is expected to be completed in the first quarter of 2023 subject to necessary regulatory approvals and successful completion of tender offer. With Phase 3 clinical trials successfully completed, Sun Pharma’s immediate focus would be to adhere to Concert’s timeline of filing the new drug application (NDA) with the US Food and Drug Administration (US FDA) in first half of 2023. Launch of this new drug will complement Sun Pharma’s existing specialty portfolio in the dermatology segment and Sun Pharma is proposing to leverage its global reach to market this new drug. Also, while the company is evaluating various funding options, CRISIL Ratings expects that the acquisition could be funded through a mix of foreign currency debt and available healthy net cash surplus of ~USD 1.6 billion as on September 30, 2022. Even so, CRISIL Ratings expects Sun Pharma will sustain its strong financial risk profile.
Sun Pharma’s consolidated revenues for the first half of fiscal 2023 grew by 12% to Rs 21,714 crore, driven primarily by double-digit growth in the US formulations market led by ramp up in the sale of specialty products, even as growth in domestic and other markets remained subdued on a high base of previous fiscal. The operating margin was healthy at 26.9% for the first half of fiscal 2023 and 27.1% in fiscal 2022 supported by healthy revenue growth, despite increasing marketing costs and continued pricing pressure in the US generics market. Ramp-up in sales of key specialty products including timely launch of Deuruxolitinib will be key for expected high single-digit revenue growth over the medium-term. Also, the operating margin is expected to sustain at 24-26% over the medium term. The margin will, however, be constrained by the expected increase in the research and development (R&D) expenses, lag in the accrual of commensurate returns on the specialty products vis-à-vis its marketing expenses, and exposure to foreign currency risks.
The financial risk profile remains strong, marked by robust adjusted net worth of over Rs 44,000 crore, moderate debt levels, and sizeable gross cash surplus of over Rs 17,000 crore as on September 30, 2022. Sun Pharma’s debt increased to Rs 3,807 crore as on September 30, 2022 for settlement of litigations provided for in previous fiscal. This coupled with CRISIL Rating’s expectation that the company could draw incremental debt for the acquisition of Concert, the Debt/OPBDIT is still expected to remain comfortable at under 0.5-0.6 times going forward. Financial risk profile is expected to remain strong over the medium term with moderate organic capital expenditure (capex) plans of upto USD 200 million annually mainly towards routine maintenance and working capital requirements are likely to be funded entirely through cash accrual and liquid surplus. While the company may undertake strategic acquisitions, any sizeable acquisitions will remain a monitorable. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Sun Pharma and its 106 subsidiaries, joint ventures (JVs) and associates, collectively known as Sun Pharma, as the companies have considerable operational and financial linkages. For JVs and associates, a moderate integration approach is followed; CRISIL Ratings factors in the share of profit from JVs, as also any incremental investments required by them. Furthermore, intangibles (such as brands and trademarks) and goodwill on consolidation have been amortised over five years.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths:
Sun Pharma is the market leader in the domestic formulations segment (contributed 32% of revenue in first half of fiscal 2023), with a market share of about 8.6% as on September 30, 2022 (Source: All India Organisation of Chemists and Druggists MAT Data for Sep-2022). Leading position in the chronic segment is backed by specialisation in technically complex products, strong brand equity and large product portfolio. The company has 32 brands among the top 300 brands in the domestic market. It also ranks among the top 10 consumer healthcare companies in India and enjoys strong brand equity for certain key products such as Revital (vitamin and mineral supplement) and Volini (pain reliever). These brands give it a competitive edge and also create a foundation for establishing a global over-the-counter (OTC) business. Sun Pharma markets its OTC products in over 20 international markets. Its key therapeutic areas in domestic formulations are cardiology, neurology, gastroenterology, anti-infectives and anti-diabetic. The company continues to enjoy a dominant position in these segments.
The US, which contributed 30% of revenue for the first half of fiscal 2023, is among the key geographies for Sun Pharma. The company continues to be among the top 10 generic pharmaceutical companies in the US market. The company has a robust product pipeline in the US and had filed 609 abbreviated new drug applications (ANDAs) and 67 NDAs of which 92 ANDAs and 13 NDAs were pending approvals from the US FDA as on September 30, 2022. With extensive R&D over past several years, Sun Pharma has established a robust pipeline of specialty products in the US and other regulated markets (such as Canada, Japan, etc); its key commercialized products include Ilumya, Cequa, Winlevi, etc. Successful approval and launch of Deuruxolitinib will strengthen its specialty product offerings. However, growth in the US may be impacted by the sustained intense pricing pressure in the generics segment. The healthy market position in other regulated markets of Europe, Japan, Canada and Australia is supported by its strength in the specialty products, generics, and OTC segments.
Given healthy adjusted networth and moderate debt, adjusted gearing was comfortable at less than 0.1 time as on September 30, 2022. Sun Pharma’s large cash accrual will be sufficient to meet moderate capex and incremental working capital requirement and the capital structure is expected to remain comfortable over the medium term. Debt protection metrics are healthy with estimated debt/OPBDIT and interest coverage ratios of ~0.3 time and ~180 times, respectively, for first half of fiscal 2023. While CRISIL Ratings expects the long-term debt to increase, debt/OPBDIT is expected to remain healthy at less than 0.5-0.6 times over the medium-term. While large cash flows and sizeable liquid surplus lend strong financial flexibility, any large debt-funded capex will remain a monitorable.
Weaknesses
Sun Pharma is exposed to regulatory risks, with instances of adverse observations for its plants. In December 2022, the US FDA issued an import alert for company’s facility at Halol which will impact sales from the facility until the import alert is resolved. Supplied to the US from Halol accounts for ~3% of the consolidated revenue. Further, three facilities (Toansa in Punjab; Dewas in Madhya Pradesh; and Poanta Sahib in Himachal Pradesh) remain under import alert and subject to certain clauses of a consent decree with USFDA. Resolution of pending regulatory issues and sustained compliance will remain key monitorables. CRISIL Ratings notes that Sun Pharma provided for a sizeable settlement amount in last quarter of fiscal 2022 for alleged violation of antitrust laws with respect to its ANDAs for three drugs: Valganciclovir, Valsartan and Esomeprazole. This settlement is without any admission of guilt or wrongdoing. CRISIL Ratings also understands that Sun Pharma is engaged in other ongoing litigations and there are tax liabilities under dispute as well, the impact of which may not be ascertainable at present. However, any continuing sizeable settlements or adverse regulatory outcomes materially impacting cash surplus of the company will be a monitorable.
Sun Pharma faces intense competitive pressure in the US generics market through introduction of authorised generics, customer consolidation, faster pace of ANDA approvals by the US FDA, and healthcare cost-containment measures by the US government. Also, players in the US and Europe are vulnerable to pricing pressure on account of entry of many cost-competitive Indian players. Increasing competition in international markets and R&D cost are likely to constrain the operating margin. |
Liquidity: Superior CRISIL Ratings expects that the annual cash accrual of over Rs 6,500-7,000 crore will be sufficient to cover annual expected debt obligation (which could be upto Rs 450-550 crore should company decide to draw debt to partly fund the acquisition of Concert) and incremental working capital requirement. Organic capex is expected to remain moderate at upto USD 200 million annually, which is likely to be funded through a mix of cash accrual and liquid surplus. Liquid surpluses were strong at over Rs 17,000 crore as on September 30, 2022, part of which could be utilized to fund the acquisition of Concert. Any significant payouts towards legal or regulatory claim settlements or large acquisition will remain a key monitorable
Environment, social and governance (ESG) profile The ESG profile of Sun Pharma supports its already strong credit risk profile.
The pharmaceutical sector can have a significant impact on the environment on account of greenhouse gas emissions, water use and waste generation. The social impact of the sector is characterised by impact on the health and wellbeing of its consumers on account of its products and on employees and local community on account of its operations.
Key ESG highlights: The company targets reduction of carbon emissions by 35% by 2030 (for scope 1 and scope 2 emissions) and of water consumption by 10% by 2025 from the base year of 2020. Company was able to reduce its combined scope 1 and 2 emissions by 6.3% and water consumption by 7.3% in fiscal 2022 with respect to the base year. It has also set a target of disposing 30% of hazardous waste through co-processing by 2025 and was able to achieve 19% of hazardous waste disposal through co-processing in fiscal 2022. The company also intends to maximise energy consumption from renewable sources. In fiscal 2022, 31% of the total energy consumed by the company was from renewable sources. Sun Pharma has a track record of resolution of sexual harassment cases. However, gender diversity remained marginally lower than industry peers, with women employees forming 7.6% of the total workforce in fiscal 2022. The company focuses on upskilling of the workforce through training. The governance profile is marked by 50% of its board comprising independent directors and split in chairman and CEO position. The company also has in place an investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.
There is growing importance of ESG among investors and lenders. Sun Pharma’s commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor. |
Outlook: Stable Sun Pharma will continue to benefit from healthy revenue growth in the Indian formulations, specialty business and international generics markets, driven by strong market position, diverse geographical base and comfortable product pipeline. Healthy revenue growth and strong profitability will ensure that financial risk profile remains robust, supported by large cash accrual and substantial cash surplus. |
Rating Sensitivity Factors Downward Factors Any sizeable revenue decline or operating profitability dropping below 15-17% Any stretch in the working capital cycle or large debt-funded capex or acquisitions impacting debt metrics; for instance, Debt/OPBDIT in excess of 0.7-0.9 time Any adverse regulatory outcome leading to significant payouts for settlement of claims impacting liquidity and debt metrics |
About the Company Sun Pharma was formed as a partnership firm in 1982 in Vapi, Gujarat, to manufacture drugs. It was reconstituted as a limited company in 1993. Mr Dilip Shanghvi is the promoter. Sun Pharma is one of the largest Indian pharmaceutical company, with a leading position in the high growth chronic segments. Its product mix comprises both formulations and bulk drugs, with formulations accounting for nearly 95% of revenue. To focus on specialty segments, the company has undertaken product acquisitions, which helped establish its global specialty business. The company has, in the past, undertaken a few acquisitions in the generics business, which helped broaden its global product basket and enhance its presence in key geographies.
In the first half of fiscal 2023, the company reported revenue of Rs 21,714 crore (Rs 19,345 crore in the corresponding period of fiscal 2022) and net profit of Rs 4,323 crore (Rs 3,491 crore). |
Key Financial Indicators
*Adjusted for intangibles and goodwill amortisation |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Fully interchangeable with working capital demand loan @All facilities are interchangeable with non-fund-based limit #Fully interchangeable with bank guarantee $Fully interchangeable with letter of credit |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||||||||||||||
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^Fully interchangeable with working capital demand loan
@All facilities are interchangeable with non-fund-based limit
#Fully interchangeable with bank guarantee
$Fully interchangeable with letter of credit
Criteria Details
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