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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 action mainly reflects the group’s very strong financial risk profile with a near net cash position, and good prospects for growth led by the key drug Cariprazine and cash generation despite macroeconomic challenges and geopolitical uncertainties.

Regarding the business risk profile (assessed at BBB-), Richter continues to strengthen its exposure to specialty pharmaceuticals, especially Neuropsychiatry (CNS) due to the increasing sale of Cariprazine and specifically Vraylar, the brand name of Cariprazine in the US. Vraylar, marketed by Abbvie in the US, continued to impress in 2023, with net sales of the product exceeding USD 2.7bn in 2023, a 35% increase YoY, which formed the basis of the higher royalty payments received by Richter. In 2023, the royalties equated to HUF 194bn, an increase of 40% YoY and contributing to 26% of Richter pharmaceutical sales. Women’s healthcare remains the most significant contributor to the pharmaceutical business representing over one-third of sales (HUF 255bn). The sales of the oral contraceptive franchise continue to ramp up (HUF 137bn compared to HUF 129bn in 2022) driven by Drovelis in addition to direct sales from recent launches. The uterine fibroids treatment area and menopause management remained solid sales drivers through 2023 with constantly increasing demand and accelerated sales. Richter’s biosimilars division was renamed Biotechnology while its generics division was rebranded as General Medicine.

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. It is important to note that the exposure to neuropsychiatry and women’s healthcare – both representing large addressable markets – are expected to support future sales growth.

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. Early 2024, Richter completed the following two deals: (i) in January 2024, Richter became a strategic investor of Formycon AG, a pure play biosimilar company via 9% equity investment and; (ii) in March 2024, Richter agreed to acquire the interest of its partner, HELM, in all of its German biological assets, resulting in 100% ownership of both Richter-Helm BioLogics and RHT Richter-Helm BioTec. The transaction allows Richter to consolidate its ownership and control over all biological research, development and manufacturing assets in Germany. This deal is a further step on the road towards making the biological business unit sustainably profitable and expanding capacities.

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, with a 2024 sales guidance of USD 3.4bn and a potential peak approaching USD 5bn over the medium term. On the positive side, the 29% exposure to the US (very likely to grow due to Vraylar) supports diversification.

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. The ruble depreciation negatively affected revenues in 2023 and foreign exchange volatility will continue in 2024.

Richter’s operating profitability is high for a medium-sized pharmaceutical company and the strongest support for the business risk profile. Operating profitability continues to be supported by the high-margin speciality business and by recurring royalties from Abbvie for the use of Vraylar. Assuming that the generics operating margin is below that for innovative, the underlying EBITDA margin for innovative is probably higher than 40%. We expect the group’s Scope-adjusted EBITDA margin to remain relatively flat despite growth from Vraylar. This will be due to an inflation-induced increase in operating expenses.

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. Credit metrics reflect the near net cash position. 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% despite the increasing cash outflow associated with building up working capital due to supply chain disruptions.

The rating case considers the announced Formycon and Helm deals totalling around HUF 72bn that occurred in Q1 2024 and the remaining HUF 10.2bn share buybacks out of the HUF 40bn programme that started in 2023.

Richter’s liquidity profile is adequate thanks to its low balance sheet financial debt and ample available cash (about HUF 80bn at YE 2023), 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 around 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 large acquisitions. The group's objective is to acquire mature assets that will complement its portfolio and establish a sustainable business model, even beyond the anticipated loss of exclusivity of Vraylar in 2029.

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 (ESG factor: credit negative). At the same time, Richter’s products have a long history of contributing to human health and well-being (ESG factor: credit positive).

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 or lack of replacement for Caprizane in the medium term.

A positive rating action is currently remote, given the issuer's significant exposure to a high-risk country (Russia) and past domestic regulatory intervention, which remain difficult to predict. However, a positive rating action could be warranted if the innovative business expands, increasing diversification while perceived risk associated with (i) regulatory intervention or (ii) the company's exposure to Russia softened.

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, (General Corporate Rating Methodology, 16 October 2023; Pharmaceutical Companies’ Rating Methodology, 5 April 2024), 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 these 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 and/or Outlook 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 Chammem, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 26 May 2021. The Credit Ratings/Outlook were last updated on 26 April 2023.

Potential conflicts
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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