Fitch Affirms Actavis at 'BBB-' on Allergan Acquisition Announcement; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of Actavis plc (Actavis; NYSE: ACT) and its subsidiaries at 'BBB-'. The Rating Outlook is Stable.

The rating actions follow the firm's announcement that it has entered a definitive agreement to acquire Allergan, Inc. (Allergan; NYSE: AGN) in a deal valued at approximately $66 billion, including the assumption of Allergan debt. New and assumed debt is expected to approximate $30 billion.

A full list of rating actions, which apply to approximately $15.3 billion of debt at Sept. 30, 2014, follows at the end of this release.

KEY RATING DRIVERS

--Fitch views the combination of Actavis and Allergan as strategically compelling. The resulting firm will be one of the largest pharmaceutical firms in the world, with a differentiated business model that combines a strong generics business with a well-diversified and growing specialty drug business.

--Fitch-estimated pro forma gross debt-to-EBITDA exceeding 4.8x at deal close (before projected synergies) exhausts Actavis' flexibility at the 'BBB-' ratings in the near term. Nevertheless, strong cash generation is expected to be sufficient to facilitate rapid debt repayment.

--The Stable Rating Outlook reflects Actavis' history of swift business integration and debt repayment following leveraging transactions and Fitch's expectation for dramatically moderated M&A activity going forward, citing management's strong assertion that the Allergan deal completes its transformation.

--Fitch forecasts organic top-line growth in the upper-single to low-double digits for the combined firm over the ratings horizon, driven by a strong portfolio of long duration assets and a generally favorable outlook for the global generic drug industry.

--Dependent on the faithful and successful completion of the firm's de-leveraging and synergy capture plans, Fitch thinks Actavis' credit profile will show meaningful improvement in the years to come. Increased scale, improved profitability and diversification, and very strong cash generation post-deal imply that the business profile could support a higher credit rating.

RATING SENSITIVITIES

Ratings flexibility will be exhausted for at least the 12 months following the close of the Allergan deal. Maintenance of the current 'BBB-' ratings and Stable Rating Outlook will require strict adherence to the firm's commitment to direct substantially all free cash flow (FCF) toward debt repayment, with small amounts of cash used for tuck-in deals or the acquisition of developmental assets only.

The use of cash flows for material M&A activity or shareholder payments that disrupt progress reducing gross debt-to-EBITDA to below 3.5x within 18 months post-deal could drive a downward rating action. Nevertheless, the Stable Rating Outlook reflects Fitch's view that the combined firm is committed to de-leveraging and will generate sufficient cash flows to do so. Debt repayment will be facilitated by more than $9 billion of pre-payable term debt expected to be outstanding at deal close.

An upgrade will not be considered until material de-leveraging has been accomplished post-deal. But upward ratings momentum is expected to accompany faithful and successful implementation of the firm's integration and de-leveraging plans. Gross debt-to-EBITDA trending toward and expected to be maintained at or below 3x could result in an upgrade to 'BBB'. Fitch notes that several facets of the firm's credit profile, including its growth outlook, profitability, and strong product portfolio could support higher ratings than the current 'BBB-'.

UNIQUE ACQUISITION OPPORTUNITY EXHAUSTS FLEXIBILITY IN NEAR TERM, BUT PROVIDES OFFSET TO UNFAVORABLE TIMING

The proximity of Actavis' announced acquisition of Allergan to the close of its $25 billion purchase of Forest Laboratories, Inc. (Forest) in July 2014 exhausts the firm's flexibility at its current 'BBB-' ratings. Fitch projects pro forma gross debt-to-EBITDA of 4.8x, before expected Allergan synergies, at deal close. However, Fitch acknowledges the unique acquisition opportunity afforded to Actavis by becoming Allergan's 'White Knight' in its hostile takeover battle with Valeant. In short, Fitch believes the strategic strength of the deal offsets its largely unfavorable timing.

The acquisition of Allergan is strategically compelling for Actavis, as it adds to the firm a very strong product lineup in one new therapeutic class - ophthalmology - while greatly strengthening its presence in dermatology, neurology, and urology. Allergan's Botox, within indications for chronic migraine and overactive bladder in addition to wrinkle reduction, is a strong contributor of cash flows with more than $2 billion in sales projected for 2014.

The firms' complementary product portfolios should provide the opportunity to drive revenue synergies, particularly with the opportunity to leverage Actavis' primary care channels for Allergan's primarily specialty products. Furthermore, Actavis has outlined at least $1.8 billion in targeted cost synergies as a result of its combination with Allergan, plus synergies yet to be achieved from the Forest and Aptalis deals and cost reduction plans already initiated by Allergan and Forest.

Integration risk associated with acquiring a firm as large as Allergan is material, but mitigated by Actavis' history of successful and swift business integrations. Integration is further aided by Actavis' ability to plug in Allergan product volumes to its comparatively larger supply chain due to its high-volume generics business.

RAPID SUCCESSION OF DEALS EXPECTED TO DRASTICALLY MODERATE

The pace of Actavis' M&A over the last three years has been rapid, increasing the company's size and debt load many times over. Successively larger deals since the 2012 acquisition of the legacy Actavis Group have stretched Actavis' 'BBB-' ratings. Going forward, however, Fitch expects Actavis to dramatically moderate the size its M&A deals, citing management's commitment that the Allergan acquisition completes its transformation from a generic to a primarily specialty drug firm.

STRONG GROWTH OUTLOOK SUPPORTED BY LONG DURATION ASSETS, FAVORABLE OUTLOOK FOR GLOBAL GENERICS

The resulting firm has a critical mass in global generics and in its primary therapeutic areas of focus, including CNS, dermatology/aesthetics, women's health, urology, and ophthalmology. Sales of the top-five products, including Botox, Namenda, and Restasis, represent less than one-third of overall combined revenues. Budding products in cardiovascular, respiratory, gastrointestinal, and anti-infectives will provide further growth and diversification of revenues and cash flows. Future deals are expected to be tuck-ins or the acquisition of developmental assets in one of these targeted therapeutic areas.

Fitch estimates that less than 10% of the combined firm's sales are at risk of generic competition over the next several years. This figure is moderated by Fitch expectation for a sizeable portion of Namenda volumes to be preserved given the company's discontinuation of its immediate release formulation to force conversion to its new extended release version.

The global generic drug industry will benefit from gradually improving generic penetration rates in many developed European countries, the opportunity for continued expansion into developing markets, and the prospects of a burgeoning biosimilars market over the ratings horizon. Headwinds include cost pressures from growing drug purchasers, generally constrained healthcare reimbursement globally, and a slower pace of branded-to-generic conversions post-2014/2015.

SOLID LIQUIDITY, CASH FLOWS; WELL-LADDERED DEBT MATURITIES

Actavis' liquidity position is solid, supported by its $750 million unsecured revolver and strong cash generation. Fitch forecasts pro forma FCF of $5.5 billion and $7.5 billion in 2015 and 2016, respectively, with upside potential depending on the pace of synergy capture. Notably, the Ireland-based Actavis is not subject to large amounts of trapped overseas earnings like its U.S.-based peers and, accordingly, does not generally carry large cash balances.

Debt repayment is expected to be accelerated relative to contractual maturities, with $5 billion to $6 billion of annual debt repayment anticipated in 2015-2017.

Fitch has affirmed the following ratings:

Actavis plc

--IDR at 'BBB-'.

Warner Chilcott Limited

--IDR at 'BBB-'.

Actavis Capital S.a r.l.

--Senior unsecured bank facility at 'BBB-'.

Actavis Funding SCS

--Senior unsecured notes at 'BBB-'.

Actavis WC 2 S.a r.l.

--Senior unsecured bank facility at 'BBB-'.

Actavis, Inc.

--IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Forest Laboratories, Inc.

--IDR 'BBB-';

--Senior unsecured notes 'BBB-'.

The Rating Outlook for each IDR is Stable.

Fitch rates Allergan as follows:

--Long-term IDR at 'A+';

--Short-term IDR at 'F1';

--Senior unsecured bank facility at 'A+';

--Senior unsecured notes at 'A+';

--Commercial paper at 'F1'.

Allergan's ratings were placed on Rating Watch Negative on April 23, 2014 following an unsolicited bid by Valeant Pharmaceuticals International Inc. to acquire the firm.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Fitch Rates Forest Labs Bonds 'BBB-'; Affirms Actavis at 'BBB-'; Outlook Stable (July 1, 2014);

--'Fitch Places Allergan's Ratings on Negative Watch' (April 23, 2014);

--'Fitch Rates New Actavis Bonds 'BBB-'; Outlook Stable' (June 10, 2014);

--'Fitch Affirms Actavis at 'BBB-' on Forest Labs Acquisition; Outlook Stable' (Feb. 18, 2014);

--'Fitch Assigns Initial 'BBB-' Ratings to Actavis plc & Subsidiaries; Outlook Stable' (Oct. 1, 2013);

--'Fitch Affirms Actavis' at 'BBB-'; Outlook Stable (Sept. 25, 2013);

--'Fitch: Warner Chilcott Deal In Line with Actavis' 'BBB-' Ratings' (May 20, 2013);

--'Global Pharmaceutical R&D Pipeline - Breakthroughs, Biosimilars, and a Blockbuster' (Oct. 20, 2014);

--'U.S. Healthcare Stats Quarterly: Second-Quarter 2014' (Oct. 9, 2014);

--'Trekking the Path to Biosimilars - Forging Ahead' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Global Pharmaceutical R&D Pipeline (Breakthroughs, Biosimilars and a Blockbuster)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=790708

U.S. Healthcare Stats Quarterly (Second-Quarter 2014)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=775748

Trekking the Path to Biosimilars -- Forging Ahead

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714715

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=925395

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Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W Madison St.
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Craig Fraser
Managing Director
+1-212-908-0310
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W Madison St.
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Craig Fraser
Managing Director
+1-212-908-0310
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com