Fitch Places Allergan's Ratings on Positive Watch Following Pfizer Merger Announcement

CHICAGO--()--Fitch Ratings has placed the 'BBB-' ratings of Allergan plc (Allergan; NYSE: AGN) and its subsidiaries on Positive Rating Watch following the announcement that the firm will merge with Pfizer, Inc. (Pfizer; NYSE: PFE).

A full list of rating actions, which apply to approximately $42.5 billion of debt outstanding at Sept. 30, 2015, follows at the end of this release.

KEY RATING DRIVERS

A Leading Pharma Firm

Allergan is one of the largest pharmaceutical companies in the world, with a diversified, growing, and durable product portfolio generating double-digit sales growth and solid cash flows. Though the timing of each was not expected, Fitch views the divestiture of Allergan's generics business as strategically sound and sees strong strategic rationale in the proposed merger with Pfizer.

Financial Flexibility Further Enhanced

The credit profile of Allergan (ex-generics) will be strengthened by combining with Pfizer, which is 2.1x levered (gross; as of Sept. 27, 2015) and rated several notches higher ('A+') than Allergan. Post-merger, the combined company will have tens of billions of dollars of cash accessible without repatriation penalties and, according to management, could generate more than $25 billion in FCF annually, starting in 2018.

Fitch expects Allergan will contribute roughly $8.6 billion of EBITDA in 2016 and around $10 billion in 2017 to the combined firm. Allergan's debt is estimated at $34 billion, with roughly $22 billion of cash, incorporating Fitch's expectations for the use of proceeds associated with the sale of the firm's generics business to Teva Pharmaceutical Industries Ltd. (Teva; NYSE: TEVA). De-leveraging plans are not expected to change due to the Pfizer merger.

Already Strong Growth Outlook Improved

The growth profile at Allergan - forecasted to exceed 10% annually in 2016 - 2018 - will be further enhanced through a combination with Pfizer, as the firm's mostly US-centric distribution channels (~85% of sales are generated in the US) can leverage Pfizer's global network. The introduction of Allergan products in major pharmaceutical markets, like Japan and China, could add materially to Fitch's expectations for growth for several of Allergan's product franchises.

Botox, Restasis Headwinds

Competition could threaten sales of Allergan's two best-selling products, Botox and Restasis, in coming years. Botox therapeutic and Restasis accounted for about $1.2 billion and $1.1 billion of 2014 sales, respectively, though it is unlikely that these entire amounts are at risk. Leveraging Pfizer's more extensive sales networks could offset this risk, as could Allergan's acquisitions of late-stage assets from Merck and of Oculeve.

M&A Moderated

Fitch expects the size of potential acquisition targets for Allergan to be more moderate until the consummation of the Pfizer transaction. Engaging in another large integration effort before beginning such an undertaking with Pfizer seems unlikely. Therefore, the governor of positive ratings momentum for standalone Allergan -- Fitch's previous expectation of a continued aggressive M&A strategy -- is now less influential and could allow for positive rating action over the next 12 months. Though aggressive at times, Fitch views Allergan's M&A activity, with its commitment to rapid de-leveraging post-deal, as largely sound and supportive of an improving business outlook.

Relationship of Debt Ratings at This Time Uncertain

Fitch expects the debt ratings at the ex-generics Allergan entities will receive ratings uplift due to the improved financial flexibility and growth trajectory from the proposed merger with Pfizer. It is likely that strategic and operational ties will be relatively strong post-close. However, it is currently unknown to what degree contractual guarantees and/or the overall organizational structure will contribute to explicit ratings linkage between today's Pfizer entities and the various Allergan entities. Fitch will review information as it becomes available to determine explicit and implicit ratings linkage between the several issuing entities expected to be present in the resulting organizational structure.

RATING SENSITIVITIES

Successful consummation of its transaction with Teva, including expected debt repayment, will afford Allergan incremental flexibility at its current 'BBB-' ratings. Allergan's 'BBB-' ratings on a standalone basis consider run-rate gross debt/EBITDA of 3.0x - 3.5x. Cash flows and profitability are expected to be strong for the rating category.

Fitch notes that several facets of Allergan's credit profile, including its growth outlook, profitability, and strong product portfolio could support higher ratings than the current 'BBB-'. A combination with Pfizer further accentuates this fact. Consequently, positive ratings action could materialize sooner than originally expected, particularly given Fitch's revised expectations for moderated M&A activity leading up the merger with Pfizer.

Fitch will re-evaluate the Rating Sensitivities for Allergan, both on a standalone basis following the generics divestiture and in a combination with Pfizer, as a more detailed capital deployment strategy for the resulting firm is made available. Fitch is at this time unsure of the nature of ratings linkage, if any, between the credit profiles of Allergan and Pfizer.

A downgrade of the ratings is unlikely to occur, so long Fitch continues to expect the Pfizer merger to occur as currently proposed. However, if the merger were to be abandoned, Allergan's ratings could face downward pressure in the event of a significantly large debt-funded acquisition causing debt leverage to increase sustainably above 3.5x. Fitch believes Allergan management is at this time committed to maintaining investment grade ratings.

KEY ASSUMPTIONS

Assumptions for the standalone Allergan business, excluding any impact from the proposed merger with Pfizer, include:

--Top-line growth of the remaining business in the double-digits;

--Teva divestiture transaction closes no later than March 31, 2016;

--EBITDA margins exceeding 50% in 2016, with less credit for remaining synergy capture given costs of divesting the generics business;

--Debt repayment of up to $4 billion in 2015, in excess of debt repaid in first-quarter 2015. Approximately $10 billion of debt repayment in 2016 mostly funded from the proceeds of the generics business sale, leading to gross debt/EBITDA trending toward 3x by year-end 2016;

--No material share repurchase activity in 2015 - 2016.

LIQUIDITY AND DEBT STRUCTURE

Internal liquidity is ample, comprising $2.1 billion in cash and $171 million available under the firm's $1 billion unsecured revolver due December 2019, net of $800 million borrowed for the acquisition of Kythera. The successful consummation of the firm's transaction with Teva will further support Allergan's internal liquidity profile, adding around $20 billion or more of cash, net of anticipated taxes, fees, and debt repayment. Furthermore, Allergan enjoys strong access to various forms of external liquidity.

Fitch expects Allergan to use deal proceeds to repay any still-outstanding revolving and term loan facilities ($8.4 billion at Sept. 30, 2015), plus the $800 million of 5.75% notes at Allergan, Inc. due April 2016. The resulting bond maturity profile is relatively well-laddered and manageable relative to free cash flow expectations, due as follows: $1.3 billion in 2016; $2.7 billion in 2017; $3.75 billion in 2018; $1.95 billion in 2019; and $24.35 billion thereafter.

FULL LIST OF RATING ACTIONS

Fitch has placed all the ratings of Allergan plc and its subsidiaries, listed below, on Rating Watch Positive.

Allergan plc (f.k.a. Actavis plc)

--Issuer-Default Rating (IDR) 'BBB-'.

Warner Chilcott Limited

--IDR 'BBB-'.

Actavis Capital S.a r.l.

--Senior unsecured bank facilities 'BBB-'.

Actavis Funding SCS

--Senior unsecured notes 'BBB-'.

Actavis WC 2 S.a r.l.

--Senior unsecured bank facility 'BBB-'.

Actavis, Inc.

--IDR 'BBB-';

--Senior unsecured notes 'BBB-'.

Forest Laboratories, Inc.

--IDR 'BBB-';

--Senior unsecured notes 'BBB-'.

Allergan, Inc.

--IDR 'BBB-';

--Senior unsecured notes 'BBB-'.

Date of Relevant Rating Committee: Nov. 23, 2015

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995215

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com