Fitch maintains positive watch on Jubilant Pharma’s “ BB- ” rating


(The following statement was released by the rating agency) Fitch Ratings-Singapore-September 14, 2020: Fitch Ratings has maintained Jubilant Pharma Limited (JPL) long-term currency issuer default rating (IDR) Singapore-based rating of “ BB- ” on Watch Positive Rating (RWP) and has confirmed its senior unsecured rating and the rating of its senior unsecured notes at “ BB ”. A full list of rating actions can be found at the end of this commentary. Long-term IDR was placed on RWP in November 2019 following an announcement of approval by the board of directors of JPL’s parent company – Jubilant Life Sciences Limited (JLS) – to split the business Life Science Ingredients (LSI) from JLS as a separate listed entity. Fitch will continue to assess JPL against the consolidated profile of its parent company, which will benefit from the removal of links to the low-margin and more volatile LSI business upon the spin-off. The RWP reflects this improvement in the profile of the company, which will compensate for a marginal loss of diversification and support a one notch increase in the rating following the demerger. Fitch expects to resolve the RWP at the end of the split, which JLS expects to occur within the next four to six months, subject to necessary approvals. Fitch believes JLS will maintain a comfortable level of debt (pro forma for the split) in the fiscal year ending March 2021 (FY21), despite the impact of the coronavirus pandemic and competitive pressure in the high-margin radiopharmaceutical business of JPL. JPL’s limited reliance on generic formulations and favorable market position in specialty pharmaceutical focused segments, along with a strong financial profile, continue to support its credit profile despite its small size and its high degree of regulatory risk arising from the limited diversification of production facilities. Key Factors of LSI Positive Separation Rating: We believe the benefits of separation will outweigh the slight reduction in diversification due to LSI’s lower profile than the pharmaceutical business resulting from its commodity products. LSI accounted for 35% of JLS revenue, but only 22% of EBITDA in FY20. The LSI business has adequate market positions in certain segments, but its profitability is lower and it faces volatility due to competition and changes in input prices. The split will remove links to the pharmaceutical business, as we do not expect the resulting LSI entity to have any operational or legal links with JLS. The transaction is progressing as planned: the split remains on track with the receipt of shareholder and lender approval in August 2020. The new entity will share the brand name “Jubilant” and have common shareholders – including family founder Bhartia, who will own more than 50%. However, we do not see any significant risk around unwarranted intragroup transactions based on the family operating history of other independent listed companies that share the “Jubilant” brand. Comfortable leverage despite lower profitability: Fitch expects JLS ‘pro forma FFO consolidated net leverage to increase to 2.8x in FY21, from 2.2x reported in FY20, but it will remain well positioned for an IDR “ BB ”. The postponement of elective procedures in hospitals amid the coronavirus pandemic caused the volume of JPL’s radiopharmaceutical business to drop from 40% to 50% in April and May. Volumes have since grown to around 90% of normal levels, but we anticipate additional pressure from entry into competition for one of JPL’s leading nuclear imaging products. We believe that healthy contract manufacturing operations for sterile products (CMOs), active pharmaceutical ingredients (APIs) and generic dosage segments will only partially offset the declining profitability of the radiopharmaceutical business, which has high margins and represents over 50% of JPL. EBITDA. Our rating record does not include this additional revenue from new launches due to the uncertainty in the approval process. JLS aims to transfer the debt of the LSI activity – consisting of the external debt located at the autonomous level of JLS – to the new LSI entity. Small scale; Specialty: JPL has a smaller scale and a lower degree of business diversification than the large generic pharmaceutical companies. Nonetheless, Fitch believes that its focus on segments such as nuclear imaging, CMO and allergic therapy, which accounted for over 75% of the pharmaceutical business’s EBITDA in FY20, limits its exposure. to price pressure in the US generic pharmaceutical market. JPL’s Draximage business is the third largest player in terms of sales in the small North American nuclear imaging market, with some of its main products enjoying limited competition. JPL is one of the leading contract manufacturers in North America for sterile injectables and the continued growth of the segment benefits from its long-standing customer relationships. JPL is the second largest allergen extract company and the only supplier of venom products in the United States. Ratings rated above the IDR: Senior bonds are rated above the IDR because bondholders have direct recourse to the cash flows and assets of JPL, which has a better investment profile. credit as the consolidated profile of the parent company. The consolidated profile of JLS will closely mirror that of JPL after the split and an upgrade of the IDR will bring it to the same level as the note on the notes. JPL’s low secured and senior debt-to-EBITDA ratio after the 2016 bond issue mitigates the risk of subordination. In addition, the Senior Note Indenture limits the senior indebtedness to 0.2x of JPL’s consolidated assets, subject to certain exceptions. Strong link with parent company: JPL’s rating will continue to be based on the consolidated profile of its parent company JLS, as Fitch expects the links between the two entities to remain strong due to management control and community, as well as JLS’s access to cash and cash flows from its key operating subsidiaries. Regulatory Risk: JPL is exposed to above average regulatory risk due to its small scale and limited production facilities. New product approvals for the US market in the API and generic dosing segments will depend on the resolution of adverse actions by the United States Food and Drug Administration (USFDA) last year. However, JPL has little dependence on generic drugs, and sales in the United States are still permitted from its two factories. Any downside to the USFDA’s restrictions on sales in the United States will be limited by sales from factories elsewhere. However, the impact will be greater if US drug pricing policies affect JPL’s specialty segments. Summary of Derivation JPL is on a smaller scale, with limited geographic diversification, than large generic pharmaceutical companies, such as Mylan N.V. (BBB- / RWP) and Teva Pharmaceutical Industries Limited (BB- / Negative). This is partly offset by the higher acquisition-related leverage of larger peers, particularly in the case of Teva, as Fitch expects its influence to remain high amid continued pressure on generic drug prices in the United States and litigation. The split of the LSI business from JLS will also strengthen JPL’s business profile, given the exposure of this largely commodified business to competition and price volatility. Glenmark Pharmaceuticals Ltd (NS 🙂 (BB / Stable) has a larger and more geographically diverse pharmaceutical business than JPL. However, JPL’s increased presence in specialty pharmaceuticals limits its exposure to continued pricing pressure in the US generic drug market. The RWP reflects a likely improvement in JPL’s business profile after the split, while its leverage will remain similar to that of Glenmark. Ache Laboratorios Farmaceuticos S.A. (BB / Negative) benefits from its solid market positioning and a stronger financial profile than JPL, although Brazil’s country ceiling of “BB” limits its rating. Key Assumptions Fitch’s Key Assumptions in Our Issuer Rating Case – JLS pharmaceutical revenue will decline from single digit to single digit in rupees in fiscal year21, CMO and generics growth, and depreciation of the rupee offsetting the decline in the radiopharmaceutical segment. Revenues are expected to increase by one digit in mid-year 22. – JLS Pharmaceutical EBITDA margin will be reduced to around 18% in FY21 and FY22 (FY20: 23%) due to lower profitability in the radiopharmaceutical segment following the impact of the pandemic and competitive pressure. – The annual capex of JLS in the pharmaceutical sector should remain between 8% and 9% of the turnover over the fiscal years FY21-FY22. – No cash dividend in FY21 and annual proforma dividend for the pharmaceutical activity so that the split remains below 20% of net income in FY22. RATING SENSITIVITIES Factors that could, individually or collectively, lead to a positive rating action / upgrade: – Fitch will resolve the RWP and improve the IDR one notch if the proposed split is completed as indicated, with l ‘waiting for Fitch for a transfer of LSI activities. debt and cash owed to the new entity. Factors which could, individually or collectively, lead to negative rating action / downgrade: – Fitch will seek to confirm the ratings with a stable outlook if the proposed split is not completed. Best / Worst Rating Scenario International credit ratings of non-financial corporate issuers have a best-case upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction ) three notches over a three-year rating horizon; and the worst-case rating downgrade (defined as the 99th percentile of rating transitions, measured in a negative direction) by four notches over three years. The full range of best and worst case credit ratings for all rating categories ranges from “AAA” to “D”. Best and worst case credit ratings are based on historical performance. For more information on the methodology used to determine industry-specific best and worst case credit ratings, visit Liquidity and debt structure Adequate liquidity: JLS’s consolidated unallocated cash balance of INR 13.9 billion at end-March 2020 sufficiently covered INR 9.3 billion of short-term debt, including INR 6.5 billion of debt in the short term we expect the company to roll over in the ordinary course of business. JPL has comfortable liquidity with a consolidated cash balance of INR 10.5 billion at end-March 2020, compared to INR 3.3 billion of short-term debt maturities. After the spin-off, JLS’s debt structure will primarily consist of $ 400 million of senior notes, of which $ 200 million matures in October 2021 and $ 200 million matures in March 2024. Pro-forma for the spin-off, we expect JLS to generate liquidity in the next few years. Nonetheless, we expect that JPL will use cash to acquire rights to the products, which will result in some reliance on refinancing to pay for the US dollar notes due October 2021. We believe the leverage Reasonable JPL will mitigate the refinancing risk and expect JPL to complete the refinancing well. in advance, as in the past. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCES CITED AS A KEY RATING FACTOR The main sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means that ESG issues are credit neutral or have minimal credit impact on or the entities, either because of their nature or the way in which they are managed by the entity or entities. For more information on Fitch’s ESG relevance scores, visit Jubilant Pharma Limited; Long-term issuer default rating; Rating monitoring maintained; BB-; RW: Pos —- senior unsecured; Long-term rating; Affirmed; BB Contacts: Primary Rating Analyst Erlin Salim, Director +65 6796 7259 Fitch Ratings Singapore Pte Ltd. One Raffles Quay # 22-11, South Tower Singapore 048583 Secondary Rating Analyst Snehdeep Bohra, Associate Director +91 22 4000 1732 Committee Chairman Kah Ling Chan, Senior Director +65 6796 2711 Media Relations: Leslie Tan, Singapore, Tel : +65 6796 7234, Email: [email protected] Further information is available at Applicable criteria Corporate Hybrids Treatment and Notching Criteria (pub 11 Nov 2019) (https: //www.fitchratings .com / site / re / 10100477) Corporate Rating Criteria (publication 01 May 2020) (including the sensitivity of the rating assumption) ( site / re / 10120170) Corporates Notching and Recovery Ratings Criteria (pub 14 Oct 2019) (including the sensitivity of the rating assumption) ( Country specific treatment of Criteria recovery ratings ( pub. February 27, 2020) ( m / site / re / 10111386) Cr iterations of evaluation of parental and subsidiary ties (pub. 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