CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' to Pfizer Inc.'s (Pfizer's) senior unsecured notes offering, which will be used to exchange Hospira's 2017, 2020, 2023 and 2040 senior unsecured notes. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
Acquisition Builds Existing Portfolio: The $17 billion acquisition of Hospira adds to Pfizer's global established pharmaceutical (GEP) business, particularly in the area of sterile injectable drugs and biosimilars. Both areas offer value-added margins and growth opportunities within the generic pharmaceutical/biopharmaceutical space, given the relative complexity involved in developing and manufacturing such products. Conversely, the process for small-molecule drugs is relatively more straightforward and commoditized.
Synergies Likely: Fitch believes that Pfizer can achieve its stated $800 million in annual cost savings by 2018 through sensible integration, which it has demonstrated successfully with past acquisitions. The acquisition also offers revenue synergies, given that Hospira's products are sold mainly in the U.S. and Europe, while Pfizer has a strong presence in emerging markets, where the company will be able to commercialize Hospira's products.
Future Plans for GEP Business Remain Uncertain: Fitch believes the acquisition fits well into Pfizer's GEP business, given the increased scale and complementary products and geographies. However, it remains unclear whether Pfizer is 'building-to-own' or 'building-to-sell' its GEP business through the acquisition of Hospira. Either way, the acquisition could, in the short term, moderate the pace at which Pfizer pursues other large acquisitions.
Stressed Leverage: Despite Fitch's expectation that Pfizer will continue to generate stable operating performance and significant free cash flow (FCF), leverage could remain above 1.7x during the two years following the transaction's close. This will provide the company with little to no flexibility to increase leverage further within the 'A+' rating category.
Manageable Patent Expiries: The company's intermediate-term patent cliff is manageable. Over the next three years, roughly 16% of the company'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's 'A+'/Stable Outlook 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'
--No major business development initiatives that would meaningfully increase leverage.
Positive: While Fitch does not anticipate a positive rating action in the near term, future developments that may individually or collectively, lead to such an action include:
--If Pfizer maintains gross debt leverage in the range of 1.0x to 1.3x;
--If the company sustains strong operational performance through the current patent cliff period, including relatively stable-to-positive trends in revenues, margins and FCF.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--If integration cost savings are not substantially achieved on schedule and the company does not offset the shortfall with other operational improvements or debt reduction;
--If pressure on operations is significant enough to prevent the company from returning to a sustainable gross debt leverage of 1.7x or lower. This could stem from marketplace pressures, adverse actions from regulatory bodies or unfavorable clinical developments;
--If Pfizer pursues a transaction (another large acquisition and/or significant share repurchases) that places pressure on gross leverage without the expectation of deleveraging in a timely manner.
Solid 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 June 28, 2015 was $96.7 billion. At the end of the period, Pfizer had approximately $30.3 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 billion of long-term debt maturing in 2015, $4 billion in 2016 and $3.9 billion in 2017.
DEBT ISSUE RATINGS
Fitch rates Pfizer Inc. as follows:
--Short-term IDR 'F1'.
--Commercial paper program 'F1';
--Credit facility 'A+';
--Senior unsecured notes 'A+'.
The ratings apply to roughly $28.2 billion of debt (excluding subsidiary debt) outstanding at June 28, 2015. The Rating Outlook is Stable.
Fitch also rates Pfizer's consolidated subsidiaries as follows:
--Senior unsecured notes 'A+'.
The ratings apply to roughly $5.5 billion of subsidiary debt outstanding at June 28, 2015. The Rating Outlook is Stable.
--Senior unsecured notes 'A+'.
The ratings apply to roughly $1.4 billion of subsidiary debt outstanding at June 28, 2015. The Rating Outlook is Stable.
Related Committee: Feb. 5, 2015.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)