Scope affirms BBB+/Stable issuer rating on Hungarian pharmaceutical company Richter Gedeon
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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.
The rating action mainly reflects the group’s excellent financial risk profile with a near net cash position, its solid competitive position led by key drug Cariprazine, and good prospects for growth and cash generation despite macroeconomic and geopolitical challenges.
Regarding the business risk profile (assessed at BBB-), Richter continues to strengthen its exposure to specialty pharmaceuticals, especially central nervous system, with the successful launch of Cariprazine in several markets and royalties on Vraylar, the brand name of Cariprazine in the US, growing. Vraylar has become the best product for addressing a wide range of psychiatric spectrum diseases since receiving further approval by the Food and Drug Administration for the adjunctive treatment of major depression, condition for which drugs like Vraylar are commonly used and a major market in the US.
Women’s healthcare continues to contribute the most to the pharmaceutical business, representing more than one-third of sales. The growth rate of the contraceptive franchise reached 36% in 2022, thanks primarily to oral contraceptives and contraceptive Evra’s direct sales and royalties. Biosimilars business also experienced progress in 2022. Sales of Teriparatide have been impressive, growing by above 58% year on year and reaching HUF 21bn in 2022. Teriparatide is used for the treatment of osteoporosis as it reduces the risk of bone fracture in various patient groups.
The products, partnerships and licensing deals launched and the R&D milestones executed in 2022 have lay the foundation for Richter’s sales progress and resilience through the difficult business conditions.
Revenue and gross profit targets have become more ambitious, with more budget set aside for new product launches. Richter continues to make R&D investments in its major biotechnology, Women’s healthcare and central nervous system projects, where it is reaching significant pre-clinical and clinical milestones. The group aims to expand its innovative patented portfolio, which Scope expects will reinforce its market position, especially in the niche market of women’s healthcare, where Richter aims to become European leader in the next few years.
Richter also intends to strengthen its biosimilars portfolio over the coming years through launches in the main indication areas of osteoporosis and rheumatology, upon patent expiry of the originator products.
In terms of product concentration, dependence on Cariprazine continues to be significant as its sales grow. This includes the growing royalties from Vraylar, which is set to be a mega blockbuster, having reached USD 2bn in sales in 2022 with a 2023 guidance of USD 2.5bn and a potential peak of over USD 4bn over the medium term. Globally, proceeds from Cariprazine exceeded 22% of Richter’s pharmaceuticals turnover.
Russia remains Richter’s second largest market in terms of sales after the US. Business in Russia was slightly delayed in the early days of the war between Russia and Ukraine, but shipments have since returned to pre-war levels. Performance in Russia benefitted from foreign currency effects due to a stronger rouble in parallel with a weaker forint throughout most of the year 2022. The effect was most pronounced when turnover was translated into forint. Nevertheless, Richter has been gradually reducing its exposure to the Russian market by expanding to Western markets.
Profitability has continued to improve following the divesture of the Moldavian wholesale and retail business in 2021 and the sale of the entire stake of its Romanian wholesale and pharmacy enterprises in 2022, which is pending approval from the local competition authority and is expected to be finalised in the first half of 2023. Operating profitability also continues to be supported by the high-margin speciality business and also through its recurring royalties from Abbvie for the use of Vraylar. However, cost pressures from inflation will gradually be felt. Scope notes that Hungary’s extraordinary tax on the pharmaceutical industry for the years 2022 and 2023 has had a limited impact on Richter.
Richter’s financial risk profile (assessed at AA) is the strongest driver of the issuer rating. The recurring cash inflow from Vraylar royalties is ensuring robust cash generation. This will allow Richter to invest in a new innovative pipeline and continue its transition to a speciality innovative pharmaceutical group. Credit metrics reflect the near net cash position that are supported in 2023 by the proceeds from the Romanian wholesale business sale. Scope-adjusted debt/EBITDA is still below 0.5x and cash flow cover in terms of Scope-adjusted free operating cash flow/debt is significantly above 100%. The group aims to acquire mature assets that will complement its portfolio, especially in women’s healthcare. While Richer has no target acquisitions planned in the near term, Scope conservatively assumes acquisitions of HUF 80bn for 2024 and HUF 100bn for 2025.
The rating case considers up to HUF 40bn in planned share buybacks in 2023. However, it is important to note that the full amount may not be used if Richter finds an appropriate acquisition target. Scope has also not factored in any major regulatory interventions in its rating case.
Richter’s liquidity profile is adequate thanks to its low balance sheet financial debt and ample available cash (about HUF 60bn at YE 2022), supported by reliable free operating cash flow generation and no significant debt maturing until 2027.
As regards supplementary rating drivers, financial policy is the most relevant for Richter. Dividend payouts are set at 40% of net profit in a normal operating environment. Scope has assessed the financial policy as neutral, as management appears unwilling to take on the risks stemming from 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 high regulatory and reputational risks inherent to the pharmaceutical industry (credit-negative ESG factor). At the same time, Richter’s products have a long history of contributing to human health and well-being (credit-positive 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’s financial policy turned aggressive. It could also follow a deterioration in credit metrics, e.g. if Scope-adjusted debt/EBITDA increased towards 1.5x on a sustained basis as a result of a large acquisition.
A positive rating action is remote but could be warranted if the innovative business expanded, 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.
The methodologies used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 15 July 2022; Pharmaceuticals Rating Methodology, 10 January 2023), 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Azza Chammem, 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. The Credit Ratings/Outlook were last updated on 3 May 2022.
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
Conditions of use / exclusion of liability
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