Fitch Places Pfizer's L-T Ratings on Negative Watch Following Allergan Merger Announcement
OREANDA-NEWS. Fitch Ratings has placed Pfizer's long-term credit ratings on Negative Watch. The rating action follows Pfizer, Inc.'s (PFE) announcement that it will merge with Allergan plc (AGN) for roughly $143 billion in stock and an estimated $32 billion Allergan debt outstanding at the time of the transaction.
Pfizer will also offer up to $12 billion cash for current Pfizer shares, assuming existing shareholders tender a minimum of $6 billion for cash settlement. The company expects the transaction to close in the second half of 2016.
In addition Fitch has affirmed Pfizer's Short-term Issuer-Default Ratings at 'F1' and Commercial Paper ratings at 'F1'.
A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
Transaction Likely to Increase Leverage: The combined firm will likely have higher debt leverage at the close of the transaction. Fitch estimates Allergan will have roughly $34 billion of debt outstanding when the deal closes. Pfizer had $38.9 billion of debt outstanding at Sept. 27, 2015. Fitch expects Allergan will contribute roughly $8.6 billion of EBITDA in 2016 and around $10 billion in 2017 to the combined firm.
Fitch estimates that pro forma leverage without synergies and any additional debt reduction would be roughly 2.2x - 2.4x, although the combined firm should be able to attain its projected $2 billion in synergies from cost savings by the third year following the acquisition. Synergies alone, however, will not be sufficient to reduce leverage below 1.7x, which is at the upper end of Fitch's expected range for Pfizer's 'A+' rating.
Adequate Cash to Reduce Debt/Leverage: Allergan will likely have $22 billion of cash at the time of the transaction, which should provide the combined company with ample liquidity to reduce its outstanding debt. Pfizer will have sufficient liquidity to pay down debt, although the vast majority of its cash balances reside overseas. The company had $20.6 billion in cash and short-term investments at Sept. 27, 2015 and should be able to access that cash in a more tax efficient manner after the acquisition.
Broadened Portfolio: Allergan provides Pfizer with a number of drugs and devices that will expand Pfizer's product portfolio. These products address medical issues related to the central nervous system, eyecare, gastroenterology, women's health, cardiology, infectious disease, urology, facial aesthetics, dermatology and plastic surgery. The company's largest product, Botox, approved for the treatment of facial lines/wrinkles, as well as several additional FDA approved indications.
Allergan's innovative product portfolio generates sales primarily in the U.S. and will likely benefit from Pfizer's ability to increase their presence in international markets. In addition, AGN's near- or mid-term, innovative pipeline has more than 20 projects including a number of expanded indications for currently approved products. As such, Fitch believes that Allergan's pipeline projects generally have relatively lower attrition risk than Pfizer's have. The addition of Allergan's lower-risk pipeline to Pfizer's moderately improves Pfizer's operating profile.
Improved Tax Efficiencies Likely: Pfizer expects to have a significantly lower tax rate after the transaction closes, reducing its effective rate to 17% - 18% from about 25%. The ability to access free cash flow in a more tax-efficient manner is clearly a credit positive. How Pfizer approaches capital deployment with its anticipated lower tax rate, particularly its use of debt, will strongly influence its credit profile and rating in the intermediate term.
Manageable Patent Expiries: The company's intermediate-term patent cliff is manageable. Over the next three years, roughly 16% of standalone Pfizer's drug portfolio is at risk of losing market exclusivity, including two of its five best-selling medicines - Celebrex (approximately 6% of total firm sales) and Enbrel (approximately 8%). Generic competition in the U.S. for Celebrex started in December 2014, and the base patent for Enbrel expires internationally beginning in 2015. Pfizer does not have rights to Enbrel in the U.S. and Canada, but does receive modest royalty income from Amgen for sales in those regions.
Fitch does not expect that Enbrel will face as serious a competitive threat from generic alternatives as will Celebrex. Enbrel is a biologic, and a generic biologic that is automatically interchangeable with Enbrel will not likely emerge. Therefore, Fitch expects competitive challengers will require significant research and marketing investments, making steep price discounts and drastic market share gains by competitors less likely.
Pipeline Successes: Helping to mitigate the anticipated revenue challenges from patent expiries, Pfizer has added new revenue sources over the past two years, including Ibrance/palbociclib (breast cancer), Trumenba (Neisseria meningitis vaccine), (Duavee (vasomotor symptoms of menopause), Adult Prevnar 13 (pneumococcal vaccine expanded use), Xeljanz (arthritis) and Bosulif (cancer).
The company is making progress with late-stage pipeline candidates, such as tafamidis (polyneuropathy, dacomitinib (lung cancer), inotuzumab (leukemia), tanezumab (pain) and avelumab (various cancers). In addition, Pfizer is conducting clinical trials that could expand the market of currently marketed products by garnering regulatory approvals for their broader clinical use.
Fitch's key assumptions for Pfizer on a standalone before the merger with Allergan include:
--Flat-to-down organic revenue growth, which is more than offset by the addition of at least $4 billion in base annual Hospira sales and potential gains through the realization of revenue synergies in emerging markets during 2015 - 2016;
--Relatively stable margins driven by new product introductions and the achievement of $800 million in acquisition-related cost savings by 2018;
--Annual FCF (cash flow from operations minus capital expenditures minus dividends) of $5.5 billion to $6.5 billion during 2015 - 2016;
--Leverage to decline to or below 1.7x by 2018 through increased operational EBITDA or a combination of debt reduction and increased EBITDA. Pfizer does have roughly $11 billion of debt maturing during the next three years, offering opportunities for debt repayment.
Negative: Fitch anticipates that any downgrade would likely be limited to one notch. Future developments that may individually or collectively, lead to a negative rating action include:
--If significant debt reduction does not follow within 18 months after the close of the Allergan transaction;
--If Pfizer fails to achieve the $2 billion of synergies in a timely manner and does not offset the shortfall with other operational improvements;
--If the anticipated improvement in the company's tax rate is not realized;
--If pressure on any of the above sensitivities prevent the company from returning to a sustainable gross debt leverage at or below 1.7x within 18 months following the transaction.
Positive: Fitch does not anticipate a positive rating action in the near term.
Adequate Liquidity: Fitch looks for Pfizer to maintain solid liquidity through strong FCF generation and ample access to the credit markets. FCF for the LTM ending Sept. 27, 2015 was $7.2 billion. At the end of the period, Pfizer had approximately $20.7 billion in cash/short-term investments and full availability on its $7 billion revolver, maturing in October 2018.
Fitch views Pfizer's debt maturity schedule as manageable and expects the company to refinance the vast majority of its upcoming maturities with additional borrowings. Pfizer has approximately $3.7 billion of long-term debt maturing in 2016, $4.3 billion in 2017 and $2.3 billion in 2018.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Negative Watch.
--Credit facility 'A+';
--Senior unsecured notes 'A+'.
--Senior unsecured notes 'A+'.
--Senior unsecured notes 'A+'.
Fitch has affirmed the following ratings.
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.