Fitch Rates Johnson & Johnson's Notes Offering 'AAA'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'AAA' rating to Johnson & Johnson's (JNJ) Notes offering. The Rating Outlook is Stable. JNJ intends to use the net proceeds from the issuance for share repurchases, debt reduction and general corporate purposes. A complete list of JNJ's ratings follows at the end of this press release.

KEY RATING DRIVERS

The company's 'AAA' rating reflects the following:

--JNJ continues to generate strong operational and financial performance, despite select near-term headwinds.

--Biosimilar competition for Remicade in Europe, potential U.S. biosimilar competition for Remicade in late-2016/early-2017 and adverse foreign exchange movement will weigh on revenues during 2016, but the company's operating and financial trends remain positive.

--Fitch expects that JNJ will maintain a commitment to deploying cash for acquisitions, collaborations, licensing agreements and internal investment opportunities that it believes will support long-term profitable growth.

--Fitch believes JNJ will operate with leverage consistent with its 'AAA' rating and solid liquidity supported by significant cash balances and ample access to credit markets.

Growth Despite Headwinds: Fitch expects that JNJ will continue to generate moderate intermediate-term top line growth, despite facing a number of challenges during 2016 and beyond. The company continues to bring innovative new products to market and expand the utilization of established products and franchises. Nevertheless, unfavorable foreign exchange rates and competition in select franchises will likely dampen reported sales growth during 2016. Remicade faced biosimilar competition in Europe during 2015, which modestly reduced year-over-year sales in those affected countries. Fitch expects this trend to continue during at least the four-year forecast period. In addition, biosimilars could challenge Remicade in the U.S. as early as late-2016/early-2017.

Innovation-Driven Long-Term Organic Growth: JNJ pursues innovation across all three of its business segments, which provides it with favorable long-term growth prospects, as well as opportunities to support margins. Research and development (R&D) intensity is greatest in its biopharmaceutical business, followed by the medical device segment. The company also pursues collaborations and outright acquisitions to supplement its internal new product development efforts. This strategy has produced a significant number of innovative, value-added medical therapies and products. While the consumer business is not as R&D intensive, innovation is still a key component in defending and advancing JNJ's franchises in this segment.

Broad Portfolio Mitigates Risk: JNJ operates with three business segments and a large diversified product portfolio, reducing its operational and financial reliance any on individual product. It employs a decentralized business model with its various franchises to promote receptiveness to their respective markets, while maintaining a strong cultural-centric philosophy driven by its long-standing credo. The company develops and manufactures consumer healthcare related products, medical devices and pharmaceutical/biologic therapies. Its diverse business model also enables JNJ to pursue of a broad array of treatment advancements that offer growth opportunities.

JNJ's largest selling product, Remicade, accounts for roughly 9.4% of sales. It is also a biologic, which typically faces patent slopes as opposed to patent cliffs like traditional, small-molecule drugs. This dynamic mitigates the risk of generic/biosimilar competition. The next three largest products, in total, account for less than 10% of company sales. In addition, Fitch views the company's patent expiration risk as manageable.

FCF for Growth and Shareholder Returns: Fitch anticipates that JNJ will produce strong annual FCF during the forecast period of $4.6 billion - $5.1 billion. Moderately improving margins, aided by an improving sales mix and a continued focus on costs should support solid FCF, despite near-term operational challenges.

JNJ will likely remain acquisitive, focusing on targets or products that offer innovation and growth in the health care sector. Fitch expects the company to finance its transactions within the context of its 'AAA' credit profile. Shareholder-focused activities, such as dividend increases and share repurchases will likely continue, which Fitch believes the company will largely finance with FCF.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for JNJ's 'AAA' rating include the following:

--Low-single-digit revenue growth in 2016 and 2017 and incrementally improving in the following three years.

--Moderate margin improvement driven by favorable product mix and an ongoing focus on cost control during the intermediate term.

--Annual FCF of $4.6 billion to $5.1 billion during 2016 and 2017.

--Leverage to range between 0.7x and 0.9x with moderately increasing levels of debt.

--Capital deployment priorities balanced between acquisitions and share repurchases, with the mix depending on the availability and valuation of strategically appropriate targets.

RATING SENSITIVITIES

While Fitch does not anticipate a downgrade during its four-year forecast horizon, a negative rating action could occur because of some combination of a deteriorating operating performance and leveraging transactions. Fitch believes the company's broadly diversified health-care related franchises make it more likely that a negative rating action would be prompted by a leveraging transaction, as opposed to operational stress.

Three of the key rating metrics for JNJ's 'AAA' rating are the following:

--Total debt/FCF of 3.0x gives no flexibility (Sept. 27, 2015 reported at 2.8x);

--Total debt/EBITDA of 1.0x gives no flexibility (Sept. 27, 2015 reported at 0.84x);

--Net debt of $4 billion - $5 billion gives no flexibility (Sept. 27, 2015 reported at a Net Cash Position of $17.6 billion).

LIQUIDITY

Solid Liquidity: JNJ has significant liquidity and access to the credit markets. Moderate growth and relatively stable margins enabled the company to generate $6.9 billion of FCF during the LTM period, ended Sept. 27, 2015. JNJ had approximately $37.3 billion in cash plus short-term marketable securities and access to $10 billion in short-term borrowings on Sept. 27, 2015.

Debt Structure: JNJ had approximately $19.7 billion in debt, including $5.7 billion in short-term debt on Sept. 27, 2015, with approximately $2.1 billion of long-term debt maturing in 2016, $1.7 billion in 2017 and $1.5 billion in 2018. Fitch expects that the company will refinance the vast majority of its upcoming maturities.

FULL LIST OF RATINGS

Johnson & Johnson

--Issuer Default Rating (IDR) 'AAA';

--Senior unsecured debt 'AAA';

--Subordinated debt 'AAA';

--Short-term IDR 'F1+';

--Commercial paper 'F1+'.

The Rating Outlook is Stable.

Date of relevant committee: 27 March 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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000008

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gregory Dickerson
Director
+1-212-908-0220
or
Committee Chairperson
John Culver
Senior Director
+1-312-368-3216
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gregory Dickerson
Director
+1-212-908-0220
or
Committee Chairperson
John Culver
Senior Director
+1-312-368-3216
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com