Fitch Assigns 'BBB-' First-Time Ratings to Mylan
A full list of rating actions, which apply to approximately \\$6.3 billion of debt outstanding at Sept. 30, 2015, follows at the end of this release.
KEY RATING DRIVERS
Diversified, Scaled Operations: Mylan is a well-diversified top-five global generic drug firm. Scale and diversification are important for generic drug companies to maintain stable and durable margins, especially given recent large-scale consolidation of generic drug purchasing groups.
Aggressive Capital Deployment: The hostile bid for Perrigo illustrated management's willingness to aggressively deploy capital for acquisitions. Still, Fitch believes the pursuit was within a commitment to investment grade ratings. Fitch expects the firm to actively pursue other acquisition targets over the ratings horizon, including generic and/or branded generic, OTC, and possibly specialty drugmakers in the wake of ongoing large-scale industry consolidation.
Growth, 'Spinversion' Driving De-Leveraging: Gross debt/EBITDA at Sept. 30, 2015 was 2.25x, reduced from 3.6x at year-end 2013, though net debt repayment over the period was less than \\$500 million (7% of debt). Strong growth from a good product launch pipeline is expected to contribute to EBITDA growth, but debt leverage could increase before year-end 2015 to the extent the recently announced \\$1 billion share repurchase program is debt-funded.
Favorable Industry Outlook: Fitch's outlook for global generic pharma, particularly the largest players, is generally favorable. Growth opportunities are found in increasing generic penetration in many European markets, aging populations in developed markets, and improving access to healthcare in emerging markets.
Adequate Liquidity, Ample FCF: Liquidity is adequate, and free cash flow (FCF) is expected to outpace relatively well-laddered debt maturities. Fitch projects FCF to exceed \\$1.7 billion in 2015 and \\$2 billion in 2016.
EpiPen Losses Imminent, Delayed: Fitch expects generic competition to the firm's top-selling EpiPen is imminent, though now delayed, likely until second-half 2016. Generic substitution will be slower than that of a typical small-molecule product but will likely still dent EpiPen's blockbuster status. Price concessions to stave off share losses to the branded competitor product Auvi-Q, which is currently recalled, are expected to reduce sales in the meantime.
The 'BBB-' ratings consider gross debt/EBITDA around 3x, along with continued operational stability and the successful integration of the recently acquired Abbott EPD business. The firm's currently low leverage (2.25x at Sept. 30, 2015) provides good flexibility to pursue debt-funded, strategic M&A over the ratings horizon. Scale and diversification are appropriate for the ratings, and strong FCF is well in excess of annual debt maturities.
Negative rating pressure would likely be the result of management's abandonment of its fairly recent commitment to operating in the context of investment grade ratings, demonstrated by a willingness to sustain gross debt/EBITDA near 3.5x. Failure to launch meaningful new products, contributing to weaker growth prospects than Fitch currently expects, could also exert negative rating pressures.
An upgrade to 'BBB' is unlikely over the ratings horizon, given the firm's demonstrated willingness to add meaningful leverage to the balance sheet for M&A. Top-line growth and/or margin expansion in excess of Fitch's base case, particularly from successful launches of key products like generic Advair, could contribute to positive ratings momentum in the 2017+ timeframe, depending on capital deployment in the meantime. A commitment to operating with debt leverage near 2.5x could support 'BBB' ratings.
--Revenue growth in the mid-20% range in 2015, largely from the addition of Abbott EPD business and solid growth in the U.S. business from better volumes and favorable pricing trends, offset by currency headwinds outside the U.S. Double-digit top-line growth in 2016, owing to two incremental months and growth of the Abbott EPD business, the addition of Famy Care, growth in the company's injectables and anti-retrovirus portfolios, and continued strong results from the U.S. business.
--Modest EBITDA margin compression beginning in 2016 due to lower sales and associated margins from EpiPen competition and less favorable (albeit more normalized) generic pricing in the U.S. Biosimilar launches could offset this assumption.
--Operating cash flows exceeding \\$2.1 billion in 2015 and \\$2.6 billion in 2016. Capex of \\$400 million to \\$500 million annually, resulting in FCF of \\$1.8 billion in 2015 and \\$2.2 billion in 2016.
--Absent M&A, and incorporating incremental debt to fund the recently announced share repurchase program, gross debt/EBITDA of about 2.3x at year-end 2015. Cash flows are sufficient to repay maturing debt over the ratings horizon.
RATINGS FLEXIBILITY FOR COMPELLING M&A
Mylan's pursuit of Perrigo illustrates management's willingness to stretch its 'BBB-' ratings and will factor into Fitch's credit profile evaluation for some time. Nevertheless, Fitch viewed the deal in its final proposed form, accompanied by an expectation of successful integration, as still in line with 'BBB-' ratings.
The combination was strategically sound and capable of driving significant cost savings likely in excess of Mylan's published estimates. The resulting firm would have been better diversified across the drug channel, particularly in the U.S. and Western Europe, and would have generated substantial FCF. However, Fitch thinks that sales synergies may have been slow to emerge.
Mylan management has stated that Perrigo was a 'one-off' M&A opportunity, and that other targets under consideration are not nearly as large. Still, Fitch sees today's low-interest rate environment as a compelling opportunity for the generic and specialty pharma industries to engage in compelling consolidating M&A transactions that strengthen firms' longer-term strategic positioning. Consequently, Fitch is allowing some incremental ratings flexibility for these firms.
EVOLVING INDUSTRY LANDSCAPE
The need for scale among generic drugmakers has become increasingly apparent in recent years, as major purchasers of generic drugs, particularly in the U.S., have dramatically consolidated. Fitch estimates that the largest 10-12 generic drug purchasers have consolidated into only four over the past three years, improving their negotiating power. The largest players, including Mylan, Allergan plc (Allergan), Sandoz (the generic division of Novartis AG), and Teva Pharmaceutical Industries, Ltd (Teva) are best positioned for contract negotiations, as these firms are better able than their smaller peers to supply the very large quantities demanded by these influential drug purchasers.
Additional consolidation among generic drugmakers is expected over the ratings horizon, but Fitch thinks it is unlikely that the largest players will themselves unite - excluding the pending acquisition of Allergan's generics business by Teva.
STRONG PRODUCT PIPELINE, WELL-POSITIONED IN BIOSIMILARS
Mylan's generic R&D unit has been particularly active of late, boasting 47 ANDA approvals from the FDA in 2014 - the most among its peers - and 48 (including Famy Care) so far in 2015. Fitch notes that Mylan has missed expectations for a few high profile generic launches recently (Copaxone, Lidocaine). Nevertheless, new product launches, particularly in the U.S., are expected to drive strong sales growth and margins support through 2016. Mylan's progress in the development of biosimilars, in partnership with Indian drug firm Biocon Ltd., also positions the firm well for medium- to longer-term growth opportunities.
EPIPEN PRESSURES IMMINENT BUT DELAYED
Generic competition to Mylan's top-selling product, EpiPen, is imminent. But the product is currently enjoying virtual monopoly status, since there still has been no generic alternative launched and since Sanofi recalled its Auvi-Q product, which is EpiPen's primary competitor, in October 2015.
Fitch had previously expected generic competition to EpiPen from generic rival Teva in 2H15, contributing to EpiPen sales declines possibly in the double-digits. But Teva has yet to gain approval of an AB-rated generic version. Fitch forecasts now do not expect significant generic competition to EpiPen until 2016. EpiPen's name recognition and unique device should help stave off rapid generic substitution characteristic of most small molecule drugs once a generic version does become available.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
--Long-term IDR 'BBB-'.
--Senior unsecured bank facility 'BBB-';
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.