Fitch Affirms Scripps Research Institute (CA) Revs at 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' rating on approximately $53.3 million of outstanding California Infrastructure and Economic Development Bank revenue bonds issued on behalf of the Scripps Research Institute (Scripps Research).

The Rating Outlook is Stable.

RATING RATIONALE:

--The 'AA-' rating reflects Scripps Research's world-renowned scientific reputation, with highly ranked graduate programs offered by the institute's Kellogg School of Science and Technology; balanced financial operations in recent years; and a sound financial cushion.

--Offsetting factors include the significant reliance on grant funding, especially from the National Institutes of Health (NIH), and the uncertain impact of recent management turnover on the organization.

--Scripps Research's favorable second place ranking among stand-alone research institutions in NIH grant awards, and its top 25 rank overall, should help to mitigate expected declines in federal sponsorship of research over the near to intermediate term.

KEY RATING DRIVERS:

--Within the next two years, ability to generate balanced operations while simultaneously managing revenue reductions associated with the contract Scripps Research currently holds with Pfizer and a constrained federal research budget.

--Successful transition of leadership without material negative operational and/or financial impact.

--Maintenance of current standing among NIH-sponsored organizations in funding hierarchy.

SECURITY:

The bonds are an unsecured, general obligation of Scripps Research. For an 'AA-' nonprofit organization, the lack of additional bondholder protections is not a concern and is typical of the rating level.

CREDIT SUMMARY:

Scripps Research is among the largest independent, non-profit biomedical research organizations in the world. In conjunction with the training of postdoctoral fellows, it also offers a highly ranked graduate program in biological and chemical sciences. The organization emphasizes collaboration among interdisciplinary programs in the creation of basic knowledge in the biosciences. With locations in La Jolla, California, and Jupiter, Florida, Scripps Research employs more than 250 principal investigators. Scripps Research's current president, in office for 25 years, will be stepping down at year-end, and the new president will take office effective Jan. 1, 2012. As with any presidential transition, changes to organizational direction could occur. To maintain its 'AA-' rating, Fitch would expect such changes to have little, if any, negative effect on operations.

In most fiscal years, Scripps Research performs financially at or above the break-even level. For fiscal 2009 and 2010, the institute generated a positive operating margin of 1.8% and 0.3%, respectively, inclusive of the American Recovery and Reinvestment Act funding. Available funds, defined as cash and investments not permanently restricted, totaled $354 million as of Sept. 30, 2010, reflecting a 14% increase over the prior year, and reaching a level greater than what was experienced prior to the financial markets' downturn in 2008. Such liquidity represented 91% and 177% of fiscal 2010 operating expenses and debt, respectively; both metrics remain acceptable for the rating category and reflect improvement from the previous peak recorded in fiscal 2008. The institute's total investment portfolio, which encompasses a portion of available funds, is diversely invested across a variety of asset classes. Allocation to less liquid alternative assets, namely hedge funds (16%); real assets (13.1%); and private equity (10.9%) is appropriate given Scripps Research's level of financial flexibility and liquidity need. Scripps Research's investment spending policy equal to 5% of the trailing 12-quarter average portfolio value is standard for the industry.

Scripps Research's revenue base is concentrated. As would be expected for a research institute, grants account for the majority of revenues, at 89%, with the largest provider being NIH. While this level of concentration in a single granting agency exposes the institute's financial profile to periodic reductions in NIH sponsored research, the institute's favorable position in the funding hierarchy partially mitigates this concern. Scripps Research's indirect cost recovery rate, negotiated with the Department of Health and Human Services, is a high 89.5%.

Federal budgetary pressures over the near to intermediate term are expected to impact research institutions nationwide. While the institute's preeminence in molecular sciences and their connection to human health, and related favorable track record of NIH support, will likely spare it from severe cuts, expenditures directly tied to research activity will need to be closely managed. In addition to expected reductions in NIH funding, the institute's five-year agreement with Pfizer terminates in Scripps Research's fiscal 2012 resulting in the cessation of $20 million of annual payments previously received under the agreement. Management is attempting to enter into agreements with other pharmaceutical companies. However, it cannot be determined at this time how successful that will be given the changing environment in the pharmaceutical industry.

Given the expiration of the Pfizer contract and expected declines in federal research funding, management plans to draw down approximately $12 million of reserves during Scripps Research's fiscal 2012. This draw will provide the institute additional financial flexibility to manage a potentially challenging revenue environment over the near to intermediate term. Importantly, the $12 million draw does not materially diminish Scripps Research's existing financial cushion and the board anticipates continued balanced operations going forward. The institute's ability to generate an operating margin at or above the break-even level and maintain or enhance financial resources is assumed in the 'AA-' rating.

The institute's debt burden, including the significant level of capital leases is somewhat high, though manageable, at 6.7%. There are no additional debt plans currently anticipated. In addition to its primary location in La Jolla, CA, the institute expanded to Florida, opening a permanent facility in 2009. This Florida campus was established through receipt of more than $500 million in appropriations from the state of Florida (rated 'AAA' with a Negative Outlook by Fitch) and the county of Palm Beach (rated 'AAA' with a Stable Outlook by Fitch). Certain staffing benchmarks are required in order to receive these funds and, to date, all targets have been met and the state funding has been received as anticipated. As of Sept. 30, 2010, only $57.8 million remained to be disbursed. Scripps Research does not anticipate any issues with receiving the final allocation. According to management, staffing levels in Florida continue to grow, while the staffing level in California may need to be adjusted, in conjunction with the level of grants awarded.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Oct. 08, 2010).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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