Fitch Affirms Mylan at 'BBB-' on Meda Acquisition Announcement; Outlook Stable
Mylan's ratings apply to approximately $7.3 billion of debt outstanding at Dec. 31, 2015. A full list of rating actions follows at the end of this release.
Fitch views the deal as strategically sound, strengthening Mylan's position in Western Europe while adding new important growth markets, including China, Mexico, and the Middle East. The deal is expected to drive pro forma gross debt/EBITDA to near 4x, and absolute debt outstanding is likely to double. But free cash flow (FCF) expected to approximate $2 billion in 2016, with solid EBITDA growth expected at Mylan standalone, should be sufficient to return gross debt/EBITDA to around 3x or below within 18 months of the transaction close.
Fitch maintains its expectation for Mylan to aggressively deploy capital for M&A in the context of maintaining its 'BBB-' ratings, though credit metrics may be stretched at times. Acquisition targets could be generic and/or branded generic, OTC, and specialty drugmakers that improve the firm's overall scale and geographic breadth. These areas of the global pharmaceutical market are expected to continue to consolidate rapidly during 2016.
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 failed hostile bid for Perrigo and recently announced acquisition of Meda illustrate management's willingness to aggressively deploy capital for acquisitions. Still, Fitch believes the firm is committed to pursuing leveraging M&A while maintaining 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 Dec. 31, 2015 approximated 2x, reduced from 3.6x at year-end 2013. Strong growth from a good product launch pipeline is expected to contribute to EBITDA growth, but debt leverage is unlikely to remain below 3x for a long period of time, particularly in 2016 following the Meda deal announcement and to the extent the recently announced $1 billion share repurchase program is consummated.
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 FCF is expected to outpace relatively well-laddered debt maturities. Fitch projects FCF to approximate $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. 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.
The following incorporate Fitch's assumptions for the Mylan standalone business:
--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.
--Flat to modestly improving EBITDA margins in 2016 due to better gross margin expectations. Biosimilar launches could improve this assumption.
--Operating cash flows around $2.5 billion in 2016. Capex of $400 million to $500 million annually, resulting in FCF of $2 billion in 2016.
--Additional smaller M&A transactions, in addition to the $9.9 billion acquisition of Meda, resulting in pro forma gross debt/EBITDA of 3.5x to 4x at year-end 2016. EBITDA growth and term loan reduction expected to reduce gross debt/EBITDA to near 3x by year-end 2017.
Fitch has affirmed the following ratings:
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.
--Senior unsecured bank facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.