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Fitch Affirms Jubilant Pharma at 'BB-'; Outlook Stable
September 19, 2017 / 8:21 AM / 3 months ago

Fitch Affirms Jubilant Pharma at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, September 19 (Fitch) Fitch Ratings has affirmed Singapore-based Jubilant Pharma Limited's (JPL) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. The agency has also affirmed JPL's senior unsecured rating and the rating on its USD300 million 4.875% senior unsecured notes due 2021 at 'BB'. JPL's ratings reflect moderate linkages with parent, Jubilant Life Sciences Limited (JLS), which has a weaker credit profile on account of lower profitability and commodity-price driven volatility in its life science chemicals business. JPL enjoys a good market position in its speciality pharmaceutical-focused segments, such as radiopharma and contract manufacturing of sterile products. The company has maintained a solid regulatory record with the US Food and Drug Administration (USFDA), which we believe mitigates the risks associated with the small size of its operations. The Stable Outlook is underpinned by JPL's healthy new launch pipeline, especially in the radiopharma business, which alleviates ongoing pricing pressure in the US generic pharmaceuticals market. Overall, Fitch expects moderate growth supported by new launches and selective capacity additions, which, along with stable dividends, will lead to positive free-cash generation and gradual improvement in leverage. KEY RATING DRIVERS Weaker Consolidated Profile: JPL's IDR is based on its parent's consolidated profile as Fitch assesses moderate linkage between the two entities due to management control and commonality as well as JLS's access to its key operating subsidiary's cash and cash flow. JLS's life science ingredients business has strong positions in some products - such as pyridines, acetyls and niacinamide - and its backward integration provides a cost advantage against some peers. However, Fitch believes JLS has a weaker credit profile than JPL due to its weaker credit metrics and volatile cash flow on account of the commodity nature of its products and intense competition. Bond Rated above IDR: JPL's bondholders have direct recourse to its cash flow and assets. The rating on the bond is above the IDR to reflect lower secured debt at JPL following its October 2016 bond issue and use of proceeds to repay secured debt on its balance sheet. The refinancing cut the ratio of JPL's secured and prior-ranking debt/EBITDA to below 0.5x in the financial year ending March 2017 (FY17), from more than 1.5x in FY16. In addition, the bond's indenture restricts the amount of prior-ranking debt JPL can have. Robust Speciality Segment Positioning: JPL's scale is small compared with larger generic pharmaceutical companies. Nonetheless, Fitch believes its focus on speciality pharma segments, such as nuclear imaging, contract manufacturing of sterile products and allergy therapy (which contributed more than 65% of pharma EBITDA in FY17) limits its exposure to ongoing pricing pressure in the US generics pharmaceutical market. JPL's Draximage business is the fourth-largest participant by sales in North America's small nuclear imaging market. Similarly, JPL is among the leading contract manufacturing organisations in North America for sterile injectables. Regulatory Risks; Adequate Record: Industry-wide regulatory risks associated with non-compliance with good manufacturing practice norms stipulated by the USFDA seem more pronounced for JPL due to its small size and lower number of production facilities. Nonetheless, JPL's continued adequate regulatory record since the successful resolution of USFDA-related issues in 2014-2015 mitigates this risk to an extent. Healthy Pipeline to Support Growth: JPL's Draximage business is poised to expand further, with a healthy pipeline of radiopharma products. In particular, the ramp-up of Ruby Fill - an infuser device used for heart imaging - which was launched in 1QFY18 will support growth. Ruby Fill, the first new product launched in this segment in nearly 25 years, has significant patient safety-related advantages over a competitor's existing alternative. JPL estimates the product's market size at about USD70 million. The order book for JPL's contract manufacturing business was USD630 million as of June 2017, rising from USD534 million in the previous year to represent 6.9x of the segment's FY17 revenue. JPL enjoys a high degree of stickiness in its customer base, which mainly comprises of large pharmaceutical companies that are focused on quality standards rather than costs alone. JPL's generics formulation business has adequate off-patent abbreviated new drug application filings - 53 approved and 31 pending as at end-June 2017 - to counter competitive pressure on its existing portfolio. Triad Acquisition Improves Market Access: Fitch believes JPL's acquisition of Triad Isotopes Inc's radiopharma distribution business in the US will help the company improve its market access. Triad operates the second-largest radiopharmacy network in the US, comprising of 52 pharmacies across 35 states. Fitch does not expect the acquisition to have a significant effect on JPL's credit metrics given the small consideration. Improving Consolidated Financial Profile: Fitch expects moderate EBITDA growth for JLS over the medium term, supported by a healthy pipeline in the pharma business and selective expansion across businesses. Credit metrics will benefit from a moderate degree of capex and stable dividend payout, which should enable it to generate positive free cash flow. DERIVATION SUMMARY JPL's rating reflects its smaller scale and geographic diversification against that of larger generic pharmaceutical companies, such as Teva Pharmaceutical Industries Limited (BBB-/Negative) and Mylan N.V. (BBB-/Stable). JPL's rating also takes into account its parent's focus on life science chemical products, which are commodities in nature and thus exposed to competition and price volatility, as well as the weaker financial profile on a consolidated basis. JPL is smaller and less geographically diversified compared with Glenmark Pharmaceuticals Ltd (BB/Stable), but benefits from a greater presence in specialty pharmaceuticals, which limit its exposure to ongoing pricing pressure in the generic pharmaceutical market in the US. Compared with JPL, Ache Laboratorios Farmaceuticos S.A. (BB+/ Negative) benefits from a bigger scale, solid market positioning and a stronger financial profile, although Brazil's Country Ceiling of 'BB+' constrains its rating. JLS's leverage compares well against that of larger peers, such as Teva and Mylan, given their acquisitive focus. Nonetheless, the leverage remains weaker compared with that of Glenmark. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - JLS revenue growth of around 22% in FY18 and FY19, including the Triad acquisition, then 10%-11% thereafter, supported by new launches in the radiopharma and generic formulations businesses as well as moderate growth in the life sciences business. - EBITDA margin to decline to about 17% in FY18 (FY17: 20%), reflecting addition of Triad business and pricing pressure in the US generics business, then improve to around 20% by FY20, supported by radiopharma business expansion while life sciences margins remain stable from FY17 levels. - Annual capex of nearly INR5.7 billion over the medium term reflecting selective expansion plans in expanding pharma and life sciences business segments. - Dividend payout to remain at less than 12% of net income. RATING SENSITIVITIES Positive: Fitch does not anticipate any positive rating action in the near term given the challenges faced by JLS's life sciences business, which will limit the improvement in its credit profile. However, developments that may, individually or collectively, lead to positive rating action include: - sustained improvement in the operating profile of the life sciences business; - sustained free cash flow generation; and - FFO adjusted gross leverage sustained at less than 2.5x (FY17: 3.9x). Negative: Developments that may, individually or collectively, lead to negative rating action include: - volatility in free cash flow generation due to a weak operating environment in life sciences or adverse USFDA actions; and - deterioration in FFO adjusted gross leverage to more than 4.5x. LIQUIDITY Adequate Liquidity: JLS had an unrestricted cash balance of INR4.5 billion and undrawn credit facilities of INR7.0 billion as of FYE17, which sufficiently covered INR5.4 billion in short-term debt maturities and small free cash flow deficit in FY18. The company's liquidity profile is further supported by Fitch's expectations of sustained positive free cash flow generation beyond FY18. There are no material debt maturities due before October 2021 when USD300 million of senior notes mature, following the 2016 US-dollar bond issuance and refinancing activities. Contact: Primary Analyst Akash Gupta Associate Director +65 6796 7242 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Snehdeep Bohra Associate Director +91 22 4000 1732 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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