Fitch Revises Outlook on Jubilant Pharma to Negative, Affirms at 'BB'

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 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.

DRIVERS WITH HIGH RATINGS

Lower Profitability: Fitch estimates JPL's EBITDA, which we adjust to remove capitalised R & D expenses, will drop significantly in FY23 due to lower volume and a 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.

In addition, JPL is also shifting its active pharmaceutical 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 the 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 speciality segments.

Parent and Subsidiary Linkage: We assess JPL's Standalone Credit Profile (SCP) at the same level as that of its parent. Following the demerger of the parent's life science ingredient business in 2021, JPL accounts for the bulk of JPHL's consolidated operations and debt. We expect a limited impact on 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 the JPL group. Through its 100% stake, JPHL controls JPL's management and funding strategy, and there are limited restrictions on intercompany flows.

JPL's Notes Rated at the Same as its 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 to 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 its larger generic-pharmaceutical peers, Viatris Inc. (BBB/Stable) and Teva Pharmaceutical Industries Limited (BB-/Stable). This is counterbalanced by the 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.

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JPL has a larger and more geographically diversified pharma business than Glenmark Pharmaceuticals Ltd. (BB/Stable). Nonetheless, JPL's greater presence in speciality 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 is expected 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. In FY24, revenue is expected to rise by the high single digits.

Due to radiopharma segment growth, EBITDA margins will fall to 11% in FY23 before improving to 14% in FY24.

An annual CAPEX of 8% of sales in FY23 and FY24 amid capacity expansion in the CMO segment.

Over the fiscal years FY23 and FY24, the company will pay out a total dividend of USD13 million.

RATING SENSITIVITIES

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

Sustained deterioration in financial leverage, as measured by JPL's consolidated net debt/EBITDA ratio of more than 3.0x

weakening of the competitive position or adverse USFDA action.

Factors that could, individually or collectively, lead to positive rating action or 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 be sustainably below 3.0x by FY24.

Best/Worst Case Rating Scenario

International scale credit ratings of non-financial corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best-and worst-case scenario credit ratings for all rating categories ranges from "AAA" to "D". Best-and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best-and worst-case scenario credit ratings, visit this link.

Liquidity and debt structure

Adequate Liquidity: JPL's consolidated unrestricted cash balance of USD 77 million as of FYE21 was sufficient to cover USD 53 million in debt maturities over FY22 and FY23 and modestly negative free cash flow after including investments. Debt maturities in FY24 will rise to USD 300 million, including USD 200 million of notes that mature in March 2024. We believe refinancing risk will rise to absent an improvement in leverage after FY23, but expect JPL to address this well in advance, in line with its record.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the applicable criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of "3". This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or how they are managed by the entity. For more information on Fitch's ESG Relevance Scores, visit this link.