S&P revises Glenmark outlook to negative on weaker cash flow

S&P Global Ratings today revised Glenmark Pharmaceuticals' outlook to negative from stable due to likely slower revenue growth with profitability constrained by natural price erosion.
"The negative outlook reflects the risk of delayed deleveraging for Glenmark, resulting in a ratio of debt to EBITDA.
"We estimate Glenmark will continue to register negative free operating cash flow on the back of relatively slower revenue growth with profitability constrained by natural price erosion, elevated research and development and capital expenditure (capex), and higher working investments," S&P said in a note here.
"The lower revenue growth due to a weaker-than- expected rate of new approvals, continuing generic price compression, and negative working capital movement together could result in a ratio of debt to EBITDA of above 3x, resulting in a downgrade.

"A higher tax incidence for the company will also result in a significantly weaker ratio of funds from operations (FFO) to debt of about 20-25 per cent," the rating agency said.
"At the same time, we affirmed the rating at 'BB'. We also affirmed our 'BB' issue rating on the company's senior unsecured notes," it added.

Glenmark's revenues in FY17 were in line with expectations though lower than management's expectations. A pricing pressure in the US, slowdown due to the impact of demonetisation on the domestic business, and the devaluation of the pound sterling weighed on the company's EBITDA margin, S&P said.

Sales from its first large exclusivity opportunity from a generic Zetia, a cholesterol drug, were lower than estimates, the rating outfit said.
As a result, EBITDA margin was nearly 300 basis points lower than our earlier expectation of about 22.7%. In addition, estimated continuing negative working capital movement of over Rs 400 crore resulted in adjusted debt rising to Rs 4,900 crore in fiscal 2017 from Rs 4,200 crore in fiscal 2016, compared with our previous expectation of a reduction in gross debt, S&P said.
"We expect slower revenue growth in fiscal 2018 from fiscal 2017 levels due to continuing generic price compression in US markets, only partial contribution of generic Zetia exclusivity revenues, and significant dependence on new approvals in the US, which could constrain growth in the case of any delays."

The company's management now expects overall Zetia sales to be in the range of USD 180 million to USD 200 million, compared with USD 200 million to USD 250 million previously. Product approvals by the US Food and Drug Administration (USFDA) slowed considerably in the second half of fiscal 2017 on the expectation that the USFDA would inspect some its plants, it said.
"We now expect EBITDA margin to stabilise at about 19- 20 per cent, with EBITDA of about Rs 2,000 crore in fiscal 2019 compared with our previous expectation of Rs 2,500 crore," the rating agency added.