Fitch: Allergan's Acquisition of Kythera Within Expectations; No Rating Actions

NEW YORK--()--The acquisition of Kythera Biotherapeutics, Inc. (Kythera; NASDAQ: KYTH) by Allergan plc (Allergan; NYSE: AGN; f.k.a. Actavis plc) for approximately $2 billion is in line with expectations, according to Fitch Ratings. Fitch has reviewed the transaction but is taking no ratings actions.

NOTE: Actavis plc changed its legal name and stock ticker to Allergan plc and AGN, respectively, effective June 15, 2015.

Though ratings flexibility is still limited for Allergan, Fitch does not expect the acquisition of Kythera to materially disrupt the firm's progress reducing gross debt/EBITDA to below 3.5x by year-end 2016. The deal is expected to be funded with $500 million of short-term debt financing, $400 million of new equity and $1.1 billion of cash on hand, which the firm will build leading up to the close of the deal. Notably, the magnitude of incremental debt is small compared to the $44 billion of total debt outstanding at March 31, 2015.

The acquisition is strategically compelling as it complements Allergan's durable, diversified, and growing product portfolio - particularly the aesthetics portfolio of legacy Allergan - and will require relatively little incremental SG&A expense. Kythera's lead product, KYBELLA, was approved by the FDA in April 2015 for the treatment of moderate-to-severe submental fat, also known as a double chin. Sales growth could be somewhat slow at first, but cross-selling opportunities should be robust, with relatively small incremental SG&A expenses, for KYBELLA as a member of Allergan's product portfolio.

Free cash flow (FCF) may be somewhat muted in 2015 due to the cost of integration and synergy capture, but is expected to approach $8 billion in 2016, providing sufficient cash flows to repay debt while also engaging in targeted M&A activity. Fitch continues to expect that Allergan will be an active but responsible acquirer going forward, committed to de-levering and maintaining its investment grade ratings. Most targets in 2015-2016 are expected to be similar to but likely smaller than Kythera - targeted bolt-ons of durable products that can be mostly funded with internal cash flows. Larger transactions during this timeframe may require a component of equity financing in order for de-leveraging plans to remain on track.

Allergan's 'BBB-' ratings consider run-rate gross debt/EBITDA of 3.0x-3.5x. Fitch notes that several facets of the firm's credit profile, including its growth outlook and strong product portfolio, high margins, and robust cash flow profile could support higher ratings than the current 'BBB-'.

Fitch currently rates Allergan and its subsidiaries as follows:

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

--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-'.

The Rating Outlook for each IDR is Stable.

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

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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
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
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com