Fitch revises outlook on Jubilant Pharma to negative; Affirms at 'BB'

16 Feb 2022 , 09:53 AM

Fitch Ratings has revised the Outlook on Singapore-based Jubilant Pharma Limited’s (JPL) Long-Term Issuer Default Rating (IDR) to Negative, from Stable, and has affirmed the IDR at ‘BB’. The agency has also affirmed the company’s senior unsecured rating and the rating on its USD200 million 6.00% senior unsecured notes due 2024 at ‘BB’ and has assigned a Recovery Rating of ‘RR4’.

The Negative Outlook reflects Fitch’s expectation of a deterioration in JPL’s profitability, which is likely to see financial leverage surge to above the negative rating sensitivity level in the financial year ending March 2023 (FY23).

Profitability should stabilise in FY24, which will help leverage come back down to below the negative rating sensitivity level. Nevertheless, JPL’s weak headroom underscores the downside risks from operational underperformance or investments that are more aggressive than Fitch expects.

JPL’s limited dependence on generic formulations and favourable market position in speciality pharmaceutical-focused segments underpins its credit profile, despite its small size and the high degree of regulatory risk arising from limited production-facility diversification.

KEY RATING DRIVERS
Lower Profitability: Fitch estimates JPL’s EBITDA, which we adjust to remove capitalised R&D expenses, to drop significantly in FY23, due to lower volume and narrowing of the margin to 11% (FY22 estimate: 14%). A slow volume recovery at JPL’s high-margin radiopharma business will coincide with higher R&D spending and the tapering of the Covid-19 pandemic-related uplift in contract manufacturing of sterile products (CMO) and generic dosage segments.

JPL is also shifting its active pharmaceuticals ingredients (API) business to its parent, Jubilant Pharmova Limited (JPHL), and we expect pricing pressure to weigh on profitability in the generic segment, despite the normalisation of one-off factors in 2HFY22. Our estimates do not factor in yet-to-be approved products and hence remain more conservative than JPL’s FY24 expectations.

Weak Leverage Headroom: We forecast JPL’s financial leverage, measured by consolidated net debt/EBITDA, to rise to 3.9x in FY23, from 1.8x in FY21. This is above the 3.0x level where we would consider negative rating action. Pre-R&D EBITDA in FY24 is likely to remain above our FY22 estimate, but elevated R&D spending along with expansion capex will narrow leverage headroom.

Small Scale; Specialty Focus: JPL has a smaller scale and less business diversification than larger generic-pharmaceutical companies. Nonetheless, we believe its focus on segments such as radiopharma, CMO and allergy therapy – which will make up the bulk of EBITDA – limits its exposure to pricing pressure in the US generic-pharmaceutical market.

JPL is the third-largest participant by sales in North America’s small radiopharma market, with some of its top products enjoying limited competition. It is also among the leading contract manufacturers in North America for sterile injectables. The segment’s sustained growth benefits from its longstanding customer relationships. JPL is the second-largest company in the allergenic extract market and the sole supplier of venom products in the US.

Regulatory Risk: JPL is exposed to above-average regulatory risk due to its small scale and limited production plants compared with global peers. Resolution of adverse actions by the US Food and Drug Administration (USFDA) on its API and generic dosage plants in India will be key for new product approvals for the US market. Nonetheless, JPL has low dependence on generic drugs, particularly after considering the proposed transfer of its API business to its parent. However, the impact will be greater if US drug pricing policies or any adverse regulatory actions affect JPL’s specialty segments.

Parent and Subsidiary Linkage: We assess JPL’s Standalone Credit Profile (SCP) at the same level as that of its parent. JPL accounts for bulk of JPHL’s consolidated operations and debt following the demerger of the parent’s life science ingredient business in 2021. We expect a limited impact to JPL’s SCP from the proposed API business transfer, considering its low EBITDA contribution and JPHL’s investment in the contract research business outside of JPL group. JPHL controls JPL’s management and funding strategy through its 100% stake and there are limited restrictions on intercompany flows.

Notes Rated Same as IDR: JPL’s notes are rated at the same level as its IDR, because they represent its direct, unconditional, unsecured and unsubordinated obligations. JPL’s low secured and prior-ranking debt/EBITDA ratio alleviates subordination risk. The senior notes’ indenture also limits prior-ranking debt to 0.2x of JPL’s consolidated assets, subject to certain carve-outs.

DERIVATION SUMMARY

JPL has a smaller scale, with limited geographic diversification, than larger generic-pharmaceutical peers, Viatris Inc. (BBB/Stable) and Teva Pharmaceutical Industries Limited (BB-/Stable). This is counterbalanced by higher acquisition-led leverage of larger peers, particularly Teva, which Fitch expects to remain above that of JPL amid continued pricing pressure on generic drugs in the US and litigation.

Glenmark Pharmaceuticals Ltd (BB/Stable) has a larger and more geographically diversified pharma business than JPL. Nonetheless, JPL’s greater presence in specialty pharmaceuticals limits its exposure to ongoing pricing pressure in the US generic-pharmaceutical market. We expect JPL’s leverage to remain higher than that of Glenmark over the next few years, underscoring the Negative Outlook on JPL’s rating.

Ache Laboratorios Farmaceuticos S.A. (BB/Negative) benefits from solid market positioning and a stronger financial profile than JPL, although Brazil’s Country Ceiling of ‘BB’ constrains its rating.

KEY ASSUMPTIONS

Fitch’s Key Assumptions Within Our Rating Case for the Issuer

– Revenue to fall by 8% over FY23, with growth in the radiopharma segment partly offsetting lower revenue from pandemic-related opportunities and the absence of API revenue post demerger. Revenue to increase by high-single-digits in FY24.

– EBITDA margin to decline to 11% in FY23, before improving to 14% in FY24 due to radiopharma segment growth.

– Annual capex to rise to 8% of sales in FY23 and FY24 amid capacity expansion in the CMO segment.

– Annual dividend payout of USD13 million over FY23 and FY24.

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Sustained deterioration in financial leverage, as measured by JPL’s consolidated net debt/EBITDA, to more than 3.0x.

– Weakening of the competitive position or adverse USFDA action.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– The Outlook may be revised to Stable if we believe an improving trend in operating performance will enable JPL’s consolidated net debt/EBITDA to be on track to reduce sustainably below 3.0x by FY24.