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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB+/Stable to Richter Gedeon Nyrt^* (Richter) along with a first-time BBB+ senior unsecured debt rating.

Rating rationale

The issuer credit rating mainly reflects the group’s excellent financial risk profile with a net cash position, solid competitive position in speciality innovative and generic pharmaceuticals, and good prospects for growth and cash generation. The rating also reflects the company’s current net cash position and conservative financial policy. As Scope expects innovative pharma to eventually contribute three-quarters of the group’s profits, the rating mainly reflects this segment’s credit characteristics. Scope also considers the company’s wholesale and retail activities to be non-core and has therefore excluded them from the assessment. Richter plans to issue a HUF 70bn senior unsecured corporate bond under the Bond Funding for Growth Scheme of the Hungarian Central Bank later in 2021¹. The bond will have a 10-year tenor with amortisation of 10% in each of the years 7-9 and 70% in year 10. The bond will have an annual fixed coupon and the proceeds will be used for general corporate financing^**.

Within the business risk profile (assessed at BBB-), the commonality among Richter’s pharmaceutical exposures is the focus on speciality drugs, both in the innovative (neurology with Vraylar; women’s healthcare and the patch) and generics divisions. Some of its generics products have market shares of well beyond 50% and thus are in no danger of substitution. Management recently stated a future focus on innovative drugs, supported by increasing R&D towards a richer pipeline. This follows the company’s success with neurology drug Vraylar (cariprazine), outlicensed to Abbvie Inc in North America and generating almost USD 1bn in revenues in 2020 for the latter.

Richter’s operating profitability is thus high for a mid-sized pharmaceutical company, predominantly due to the Abbvie royalties. Its EBITDA margin in 2020 was about 35% overall and more than 40% for just the innovative arm – on par with the big pharma companies.

Diversification overall is held back by Richter’s small scale in an international context and the concentration rate for its largest product (Vraylar) in relation to innovative pharma sales, already high in 2020 at 35% and likely to increase in the near future. On the positive side, the 20% exposure to the US (which is very likely to grow) supports diversification, and its main treatment area exposure (neurology, women’s healthcare) is good for Richter’s size.

Richter’s R&D efforts are good overall (20% of pharmaceutical sales). However, any benefits for Scope’s analysis are eroded by Richter’s low scores for the breadth of its late-stage pipeline and the number of blockbuster drugs, though both need to be seen in the context of Richter’s size. The competitive position assessment benefits from Scope’s expectation of very favourable growth, mainly through the revenue potential of Vraylar and other women’s healthcare products – as Scope believes there is no significant patent expiry in the medium term. Richter’s generics division can easily be seen only with regard to its small scale, but Scope believes the division’s underlying strength lies in the specialist positioning, often accompanied by very high market shares and strong protection due to the dearth of competing products. This also tends to limit pricing pressure for many of Richter’s products, in contrast with many products in the generics segment in general. Thus, Richter’s generics positioning does not meaningfully weaken the credit profile overall as the product portfolio is reasonably protected and geographical diversification is good. Richter has also never had regulatory issues in any country, which reflects well on its production and compliance processes. Richter’s production and distribution network, often through subsidiaries and partner companies, also appears to service markets well.

The financial risk profile (assessed at AA) is the strongest driver of the issuer rating. Richter’s net cash position has allowed it to self-finance its activities for a few years. The recurring cash inflow from the Vraylar royalty since 2020 is ensuring robust cash generation and will allow Richter to invest into a new innovative pipeline and continue its transition into a specialty innovative pharmaceutical group. The group aims to acquire mature assets that will complement its portfolio, especially in women’s healthcare. An example is the recent acquisition of EVRA, a transdermal contraceptive patch, for around HUF 77bn, which will contribute to profits in 2021. Richter’s royalty may at least double depending on Abbvie’s near-term sales for Vraylar, while Scope’s base case scenario is assuming a single digit revenue growth. Richter plans to issue a HUF 70bn bond to boost its capacity for acquisitions. The Scope-adjusted debt (SaD)/EBITDA ratio will go up gradually from a net cash position to more than 0.1x in 2023, depending on acquisitions performed in the next three years.

Liquidity is adequate as reflected by the net cash position and the annual cash flow of above HUF 130bn.

Among the supplementary rating drivers, financial policy is the most relevant for Richter. While the size of the contemplated bond issuance makes product acquisition likely, management does not appear to be under any time pressure. Thus, a similar transaction like last year’s with Johnson & Johnson (EVRA) appears realistic. As the timing and conditions of acquisitions are yet uncertain, Richter’s credit metrics have been assessed conservatively, assuming the net cash position is not sustained. Scope has not applied a downward notch for financial policy, however, as management appears unwilling to take excessive risks on acquisitions.

Richter intends to increase its dividend pay-out in the next years to avoid excess cash accumulation.

The rating assessment includes a negative rating driver with regard to the generally high regulatory and reputational risk in pharma (ESG factor).

One or more key drivers of the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Stable Outlook reflects Richter’s ability to grow without its financial risk profile deteriorating significantly, as expressed by a close to net cash position.

A negative rating action could be triggered if the group switch to an aggressive financial policy. It could also follow a deteriorating credit metrics, eg. If SaD/EBITDA were to increase towards 1.5x on a sustained basis.

A positive rating action is remote but could be warranted if the innovative business grows in size, strengthening diversification.

Long-term debt rating

Senior unsecured debt has been rated at BBB+, the same level as the issuer rating, reflecting Scope’s view of Richter’s ability to meet contractual and financial debt obligations as a going concern, on time, and in full out of its operating business.

* The legal name of the company was changed after the publication on 26 May 2021. In the original publication the name was Gedeon Richter Nyrt.
** The sentence was amended after the publication on 26 May 2021 to include that the coupon is fixed.

Rating driver references
1. 31 March 2021 Richter announcing participation to the MNB bond for growth Program

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Pharmaceuticals, 11 January 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information 
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources. 
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed
Lead analyst: Azza Chamem, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 26 May 2021.

Potential conflicts 
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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