CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Pfizer Inc.'s (Pfizer's) $4.5 billion notes offering. Fitch expects Pfizer to use the net proceeds for general corporate purposes, including pre-funding the repayment at maturity of the EUR900 million outstanding of its 4.75% notes due December 2014 and pre-funding a portion of its outstanding 5.35% notes due March 2015. The rating action does not incorporate any effect from Pfizer's potential acquisition of AstraZeneca. The Rating Outlook is Stable. A full list of Pfizer's ratings is provided at the end of this release.
KEY RATING DRIVERS
--While an acquisition of AstraZeneca would offer Pfizer benefits related to taxes, increased product breadth and greater scale, there is no public offer from which to evaluate the credit impact of such a transaction.
--Fitch believes Pfizer's narrowing strategic focus on human branded pharmaceuticals will improve long-term profitability and growth, offsetting the negative effect of a less-diversified business model.
--The company's patent cliff is becoming less steep as a smaller percentage (roughly 20%) of branded revenues are exposed to patent expiration in the next three years.
--One of Pfizer's at-risk branded products, Enbrel, is a biologic drug, which Fitch expects will lose less market share to biosimilar competition than the 80%-90% that typically occurs with generic competition to small molecule drug.
--Pfizer is making decent progress in developing and commercializing a pipeline of the new drugs; the company has launched four new therapies (one of which is Eliquis, a product co-developed and co-marketed with Bristol-Myers Squibb) during the last two years for uses in treating cancer, preventing strokes and treating inflammation.
--Despite the company's recent drug launches, Fitch expects Pfizer will generate relatively flat organic revenues through 2016. Fitch's expectation incorporates the anticipated performance of Pfizer's mature, new and expected-to-be launched products, moderate macroeconomic headwinds and the beneficial demand effects of the Affordable Care Act (ACA).
--Fitch anticipates Pfizer will generate strong free cash flow (FCF) and maintain solid liquidity during the intermediate term, with significant international cash balances and adequate access to the credit markets.
--Fitch believes Pfizer will continue to aggressively deploy cash towards acquisitions and share repurchases.
NARROWING STRATEGIC FOCUS
Fitch believes Pfizer's sharpening strategic focus on human branded pharmaceuticals, while decreasing the diversity of its product portfolio, will enable the company to improve the productivity of its core operations, including research & development, marketing and manufacturing. This should result in improved profitability and topline growth over the longer term. Fitch believes Pfizer is strongly committed to the more narrowly focused business model as evidenced by the recently completed divestiture of its Animal Health business (Zoetis) in the second quarter of 2013, and the sale of its nutritional business in November 2012.
MODERATING PATENT CLIFF
The company's patent cliff is appreciably less steep than it was in 2012. Over the next three years, around 20% of the company's drug portfolio is at-risk of losing market exclusivity, including the loss of market exclusivity for two of its five-bestselling medicines - Celebrex (approximately 5% of expected 2013 total firm sales) and Enbrel (approximately 7% of expected 2013 of total firm sales). The main U.S. patent for Celebrex expires in December 2015 although an authorized generic version is expected to be launched in the U.S. around December 2014. The base patent for Enbrel expires internationally beginning in 2014. Pfizer does not have rights to Enbrel in the U.S., but does receive alliance revenues from Amgen for sales in the region. The profitability of this agreement for Pfizer has dropped off significantly after Oct. 31, 2013, due to the terms of the contract with Amgen.
Fitch does not expect that Enbrel will face as serious a competitive threat from biosimilar alternatives as Celebrex will with generic substitutes. Enbrel is a biologic, and Fitch does not think a generic biologic that is automatically interchangeable with Enbrel will emerge in the E.U. or U.S., given the industry's currently limited level of technological expertise in replicating biologics and only modest regulatory experience in the U.S. Therefore, Fitch expects competitive challengers will require significant research and marketing investments, making steep price discounts and drastic market share gains by competitors unlikely in the first few years following Enbrel's patent expiry.
Helping to mitigate the anticipated revenue challenges from patent expiries, Pfizer has added new revenue sources over the past two years, including Xalkori (cancer), Eliquis (blood clots) Xeljanz (arthritis) and Bosulif (cancer). The company is also making progress on late-stage pipeline candidates, such as tafamidis (polyneuropathy) and dacomitinib (cancer), while also conducting clinical trials that could expand the use of currently marketed products to additional treatment indications. Also in April 2013, the U.S. Food and Drug Administration designated Pfizer's investigation drug, palbociclib, for expedited development and review for the treatment of breast cancer.
EXPECTED FLAT ORGANIC REVENUES
Fitch expects the net effect of existing product sales, lost sales due to patent expirations and the ramp up of recently introduced products will result in relatively flat organic revenues through 2016. Fitch's revenue forecast assumes:
--Moderate uptake of recently launched products;
--An authorized generic of Celebrex launched around December 2014;
--Enbrel's loss of European exclusivity in 2015;
--The declining contribution of U.S./Canada sales of Enbrel that began in November 2013;
--Persisting weak macroeconomic trends;
--A modest demand tailwind from the expected increase in the rolls of the insured in 2014 from the Affordable Care Act.
STRONG CASH FLOW EXPECTED
Fitch forecasts $6 billion-$8 billion of FCF (cash flow from operations minus capital expenditures minus dividends) for Pfizer in 2014. The forecast incorporates relatively durable legacy margins supported by a stable sales mix and a strong focus on cost control. In addition, aggregate pricing growth across the company's product portfolio is expected to be supportive for margins in the near term.
Pfizer has solid liquidity through strong FCF generation and ample access to the credit markets. FCF for the latest 12 months (LTM) ending Dec. 31, 2013 was $10 billion. At the end of the period, Pfizer had approximately $32.4 billion in cash/short-term investments (largely held outside the U.S.) and full availability on its $7 billion revolver, maturing on April 18, 2017.
Fitch views Pfizer's debt maturity schedule as manageable and expects the company to refinance upcoming maturities with additional borrowings. Pfizer has approximately $1.3 billion of long-term debt maturing in 2014, $3 billion in 2015 and $4.3 billion in 2016.
AGGRESSIVE CASH DEPLOYMENT TO PERSIST
Fitch believes Pfizer will continue to aggressively deploy cash towards acquisitions and share repurchases with the relative intensity between the two options likely driven by the respective returns to shareholders. In addition, Fitch expects that Pfizer will remain committed to an increasing dividend over time.
LEVERAGE BELOW 1.7X ANTICIPATED
The Stable Outlook incorporates Fitch's anticipation that Pfizer will operate with total debt leverage ranging between 1.5x and 1.7x, driven by relatively flat profitability and debt levels. FCF and cash on hand should be sufficient to fund targeted acquisitions and share repurchases without requiring incremental debt issuance. In the event of a leveraging strategic acquisition, Fitch expects that Pfizer would work towards reducing leverage in a timely manner following such a transaction.
Future developments that may, individually or collectively, lead to a positive rating action include:
--If Pfizer were to durably maintain gross debt leverage in the range of 1.0x to 1.3x.
--If the company sustained strong operational performance through the current patent cliff.
Future developments that may, individually or collectively, lead to a negative rating action include:
--If pressure on operations were significant enough to result in sustained gross debt leverage greater than 1.7x. Operational pressure would most likely originate from weaker than expected demand for pharmaceuticals in developed healthcare markets, unfavorable clinical developments regarding Pfizer's pipeline of new drug therapies, and/or increased pricing pressure by payors, particularly with respect to new drug launches.
--If Pfizer pursues a transaction (acquisitions/share repurchases) that places pressure on gross leverage for an extended time frame.
DEBT ISSUE RATINGS
Fitch currently rates Pfizer Inc. as follows:
--Issuer Default Rating (IDR) 'A+';
--Short-term IDR 'F1'.
--Commercial paper program 'F1';
--Credit facility 'A+';
--Senior unsecured notes 'A+'.
The ratings apply to roughly $28.8 billion of debt (excluding subsidiary debt) outstanding at Dec. 31, 2013. The Rating Outlook is Stable.
Fitch rates Pfizer's consolidated subsidiaries as follows:
The ratings apply to roughly $5.5 billion of subsidiary debt outstanding at Dec. 31, 2013. The Rating Outlook is Stable.
The ratings apply to roughly $1.4 billion of subsidiary debt outstanding at Dec. 31, 2013. The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Pharmaceutical Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Pharmaceutical Companies