OREANDA-NEWS. Fitch Ratings has affirmed Switzerland-based pharmaceutical company Roche Holding Ltd.'s (Roche) Long-term Issuer Default Rating (IDR) at 'AA' with Stable Outlook. The Short-term IDR has been affirmed at 'F1+'. A full list of rating actions is summarised below at the end of this commentary.

The rating affirmation reflects Roche's market-leading positions within the global pharmaceutical industry, particularly in high-margin oncology treatment as well as diagnostics. Focused on innovation, Roche's drug pipeline is industry-leading in selected treatment areas and its patent protection profile comfortable compared with industry peers, translating into strong profitability.

Given its reliance on oncology, which Fitch sees as a constraint on its rating at present, Roche actively uses its financial flexibility to diversify its operations, as evidenced by last year's pharmaceutical acquisition with a focus on rare diseases and R&D allocation across a variety of specialist treatments. In addition, Roche is gradually growing and diversifying its diagnostics portfolio, which has seen dynamic emerging market growth.

Despite these recent investments, Roche's financial profile is supported by strong operational cash flows and a fairly conservative financial policy protecting the group's solid financial profile and underpinning the Stable Outlook.


Financial Metrics Reflective of Acquisition
Roche's purchase of InterMune (completed in September 2014), together with bolt-on acquisitions totalling CHF2.5bn (including milestone payments), resulted in net acquisition spending of CHF9.6bn in 2014, leading to an increase in funds from operations (FFO)-adjusted net leverage to 1.1x by end-2014 from 0.6x in 2013, a level that remains consistent with the current ratings. Fitch expects Roche to generate free cash flow (FCF) margins (post capex and dividends) of 7%-9%, which should help support a steady pace of deleveraging over the next four years.

Improving Business Profile
Fitch views recent investments outside oncology and the steady development of the diagnostics division as positive for the business risk profile of the group, rebalancing its revenue away from its strong focus on oncology over time. Nevertheless, with key product launches in immuno-oncology expected over the next two years and development of combination therapies, oncology is expected to remain the key value driver for the group over the four-year rating horizon, limiting any rating upside due to treatment concentration.

Executing Targeted M&A Strategy
We see additional financial headroom at the current rating for Roche to continue its selective M&A approach of adding specific assets to areas of expertise that will enhance product, R&D and/or technology platforms. However, such M&A would need to be supported by successful product launches and pipeline developments, improving the underlying business risk, while maintaining financial metrics within the defined parameters to avoid negative rating action.

Modest Patent Risk
Fitch views Roche's exposure to near-term patent expiry as modest, with less than 3% of sales subject to loss of patent over the next 24 months. We view this as favourable compared with industry peers and reflects Roche's recent pipeline approvals and product launches. In addition, given the high biopharma content of its drugs portfolio (representing approx. 70% of all treatments) and expected gradual development of biosimilar competition, Fitch expects more gradual competition for biologic agents compared with large molecule drugs, resulting more in a patent 'slope' as opposed to a patent 'cliff'.

Diagnostics Diversification
Fitch views Roche's diversification in diagnostics as a positive factor underpinning the company's strong business risk profile. Roche is a global market leader in in-vitro diagnostics, in which it has around a 20% market share. In-vitro diagnostics account for 23% of group sales. Despite lower profitability and higher capital intensity than pharma, it provides some diversity to earnings, emerging-market growth prospects, and R&D synergies with the pharmaceuticals division, focusing on developing drug personalisation.

Positive Sector Trends
Fitch views secular trends in the pharma- and healthcare sectors as positive, with increasing access to healthcare globally, an ageing population, an increase of chronic diseases, as well as innovation in specialist treatments.

Value in Healthcare; Profitability Unaffected
We believe that the growing focus on value in healthcare has intensified the debate around pharma's pricing power, which may ultimately affect peak sales assumption for these new treatments and hence underlying R&D productivity.

Fitch however expects Roche's EBITDA margins to remain at industry-leading levels of around 40%, reflecting the strong biotech and innovation content of its treatments. Potentially softer pricing of some of its new treatments should be compensated by their increasing volumes in addition to the initiated restructuring of Roche's overall cost base.


Fitch assesses Roche's liquidity profile (as of end-December 2014) as strong, comprising readily available cash of CHF9.0bn (Fitch-defined), more than sufficiently covering short-term maturities of CHF6.3bn. Roche also has access to a USD7.5bn CP programme (of which USD3.3bn were utilised at end-2014), supported by EUR3.9bn undrawn committed bank facilities.


Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:
-Sales over our four-year rating case are expected to grow by CAGR3.3%, with pharmaceutical sales supported by recently launched and/or filed new treatments; the diagnostics division is expected to have a more moderate growth profile supported by emerging market investments and recent-bolt on acquisition widening the division's product offering.
-Continuation of industry-leading profitability with EBITDA margins at around 40%, as innovation and restructuring benefits offset pricing pressures
-R&D expenses at 18% of sales
-Moderate working capital profile that may be weakened in the short-term due to product launches.
-FX volatility (particularly EM and USD exposure) resulting in continued FX translation risks.
-Capex at no more than 7% of sales
-Annual bolt-on acquisition or shares buy-back basket of up to CHF2.8bn with larger M&A treated as event risk.


Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Significant pipeline setbacks and negative clinical trial results translating into weaker revenue and profit growth
-Major debt-financed acquisition or share buybacks, resulting in FFO adjusted net leverage above 1.5x on a sustained basis (2014: 1.1x)
-FFO fixed charge cover below 10x (2014: 16.5x) and free cash flow (FCF) margin of less than 5% (2014: 11.5x) on a sustained basis

Positive: Although not expected in the near-term, future developments that could lead to positive rating actions include sustained industry-leading profitability and cash flow generation with commitment to financial ratios in line with a higher rating category. These would be:

-FFO adjusted net leverage no greater than 0.5x on a sustained basis
-FFO fixed charge cover of 20x or above, on a sustained basis
-Increased product diversification, reducing Roche's reliance on its oncology offer


Roche Holding Ltd.
Long-term IDR: affirmed at 'AA'; Stable Outlook
Senior unsecured debt: affirmed at 'AA'
Short-term IDR: affirmed at 'F1+'

Roche Holdings Inc.
Senior unsecured debt: affirmed at 'AA'

Roche Finance Europe BV
Senior unsecured debt: affirmed at 'AA'