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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB+/Stable issuer rating of Richter Gedeon Nyrt. (Richter). Scope has also affirmed the BBB+ senior unsecured debt rating.

Rating rationale

The rating affirmation mainly reflects the group’s excellent financial risk profile with a near net cash position, its solid competitive position in speciality innovative pharmaceuticals, and good prospects for growth and cash generation despite potential disruption from the Russian and Ukrainian business.

As regards Richter’s business risk profile (assessed at BBB-), the group continues to reinforce its exposure to specialty pharmaceuticals with an increasing contribution from Vraylar royalties and the successful launch of Cariprazine in a number of markets. The women’s healthcare portfolio continued to be the most important component of the pharmaceutical business, with a sales contribution exceeding one third. The growth rate of the contraceptive franchise surpassed 12%, thanks primarily to the acquisition in December 2020 of Janssen’s contraceptive patch, Evra. Impressive growth by turnover was reported for biosimilar teriparatide both in Europe and Japan, with proceeds exceeding the sales levels achieved in 2020 by over 50%.

Revenue and gross profit ambitions are growing, with additional budgets secured for launches. Richter is continuing to make R&D investments in its major biotechnology and central nervous system projects, where it is reaching significant pre-clinical and clinical milestones. The group aims to double its innovative patent-protected portfolio by 2024. This will reinforce its market position, especially in women’s healthcare, the niche market in which Richter is expanding its footprint. Biosimilars are also a focus for Richter. The group has an exclusive licence agreement with Hikma Pharmaceuticals to commercialise two biosimilar products referencing Prolia and Xgeva in the United States. The products are used for the treatment of osteoporosis and fractures due to bone metastasis respectively and are currently in global phase I and phase III clinical studies.

In terms of product concentration, dependence on central nervous system drug Cariprazine continues to be significant as the product is providing further sales including Vraylar royalties. Vraylar reached USD 1.7bn in sales in 2021 and guidance is for USD 2.2bn in 2022 with a potential peak of USD 4bn, which will make it a mega blockbuster. Richter is also extending its agreement with AbbVie to conduct further research into neuropsychiatric diseases.

Russia is Richter’s second largest market in terms of sales. While this may raise some concerns, Scope notes that the group is taking countermeasure to limit losses. Richter has been gradually working to curb its exposure to the Russian market with an expansion drive in Western markets. Scope expects Richter’s top line growth to be increasingly supported by royalties from Vraylar, EU launches of Cariprazine, the expansion of its top products and new launches in further markets. All of this would mitigate the potential negative consequences from the war.

Scope expects Richter’s operating profitability to stagnate this year. Here, the Scope-adjusted EBITDA margin improvement in 2021 will be offset by potential losses in Russia and Ukraine as well as further investment in marketing to support new launches products.

Scope also highlights the impact of the Russia-Ukraine conflict on the global supply chain for pharmaceutical companies including Richter. The rating agency believes that profitability will recover quickly in the next few years, driven by strong recurring revenues from key product Cariprazine.

Richter’s financial risk profile (assessed at AA) is the strongest driver of the issuer rating. The group’s previous net cash position has allowed it to self-finance its activities for a few years. The recurring cash inflow from Vraylar royalties since 2020 has ensured robust cash generation. This will allow Richter to invest in a new innovative pipeline and continue its transition to a specialty innovative pharmaceutical group. Leverage increased in 2021 due to the acquisition of contraceptive Evra for around HUF 80bn in 2021 and the bond issuance. However, Scope-adjusted debt/Scope-adjusted EBITDA is still below 0.5x. The group aims to acquire mature assets that will complement its portfolio, especially in women’s healthcare. There is no target acquisition on the near horizon.

The potential consequences of the war in Ukraine on Richter’s financials were considered in Scope’s base case scenario.

Scope sees liquidity as adequate, as reflected by the close to net cash position and annual cash flow from operations of above HUF 130bn.

As regards supplementary rating drivers, financial policy is the most relevant for Richter. As of now, the dividend payout is set at 40% of net profit in a normal operating environment. Scope‘s assessment of financial policy is neutral, as management appears unwilling to take risks on acquisitions. However, as the timing and conditions of acquisitions are still uncertain, Scope has assessed Richter’s credit metrics conservatively, assuming that the close to net cash position will not be sustained and factoring in possible execution risk.

The rating assessment includes the high regulatory and reputational risks inherent to the pharmaceutical industry (credit-negative 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 switches to an aggressive financial policy. It could also follow a deterioration in credit metrics, e.g. if Scope-adjusted debt/Scope-adjusted EBITDA increased towards 1.5x on a sustained basis as a result of a large scale acquisition.

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 affirmed at BBB+, the same level as the issuer rating.

In June 2021, Richter issued a HUF 70bn senior unsecured corporate bond, with a 1.75% coupon, under the Bond Funding for Growth Scheme of the Hungarian Central Bank. The bond has a 10-year tenor with amortisation of 10% in each of the years 7-9 and 70% in year 10. The proceeds are used for general corporate financing. 

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, 6 July 2021; Pharmaceutical Companies’ Rating Methodology, 10 January 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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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