Fitch Rates Pfizer's Notes Offering 'A+'

CHICAGO--()--Fitch Ratings has assigned an 'A+' rating to Pfizer's senior unsecured notes offering. Pfizer may use the net proceeds for general corporate purposes, including repaying a portion of its outstanding commercial paper. A full list of ratings follows at the end of this press release.

KEY RATING DRIVERS

Reduced Need for Significant Additional Debt: The termination of its merger agreement with Allergan followed new tax rules issued by the U.S. Treasury Department. The new rules significantly reduced the tax benefits from the proposed transaction. While the acquisition would have materially broadened Pfizer's product portfolio, it would have also significantly increased debt and leverage.

Little Leverage Flexibility: Despite Fitch's expectation that Pfizer will continue to generate stable operating performance and significant free cash flow (FCF), leverage remains strained, stemming from acquisitions and share repurchases during the past two years. The company's net cash outlays for acquisitions and share repurchases were roughly $29.7 billion during the period, while FCF was $13.8 billion. As a result, PFE currently has little-to-no flexibility to increase leverage further within the 'A+' rating category.

Uncertain Strategy for GEP: It remains unclear whether Pfizer will retain or sell its Global Established Pharmaceuticals (GEP) business. Fitch would view a divestiture as strategically positive for Pfizer, as it would narrow the company's focus on its higher margin, innovative portfolio. However, the company's business model would be more reliant on its innovative drug discovery efforts, and it remains unclear whether the company would take a more conservative approach to capital deployment.

Manageable Patent Expiries: The company's intermediate-term patent cliff is manageable. Over the next three years, roughly 18% of standalone Pfizer's drug portfolio is at risk of losing market exclusivity, including two of its five best-selling medicines - Lyrica (approximately 10% of total firm sales) and Enbrel (approximately 7%). The base patent for Enbrel expired 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. Lyrica's U.S. patent expires in late 2018.

Fitch does not expect that Enbrel will face as serious a competitive threat from generic alternatives as with traditional small molecules such as Lyrica. 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.

KEY ASSUMPTIONS

Fitch's key assumptions for Pfizer include:

-- Mid-single-digit organic revenue growth during 2016 - 2017 supported by newer product sales and manageable patent expiries;

-- Incrementally improving margins driven by new product sales mix and the achievement of $800 million in Hospira acquisition related cost savings;

-- Annual FCF (cash flow from operations minus capital expenditures minus dividends) of $6.0 billion to $7.0 billion during 2016-2017;

-- Leverage to decline to below 1.7x by 2017 through increased operational EBITDA or a combination of debt reduction and increased EBITDA.

RATING SENSITIVITIES

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 Pfizer does not return to a sustainable gross debt leverage of 1.7x or lower. This could stem from marketplace pressures, adverse actions from regulatory bodies, unfavorable clinical developments or an aggressive capital deployment strategy.

-- If Pfizer pursues transactions (another large acquisition and/or significant share repurchases) that place pressure on gross leverage without the expectation of deleveraging in a timely manner.

LIQUIDITY

Adequate 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 April 3, 2016 was $7 billion. At the end of the period, Pfizer had approximately $19.4 billion in cash/short-term investments and full availability on its $7 billion revolver, maturing in November 2020.

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 $3.7 billion of long-term debt maturing in 2016, $4.3 billion in 2017 and $2.3 billion in 2018.

FULL LIST OF RATING

Fitch rates the following:

Pfizer Inc.

-- Short-Term Issuer-Default Rating (IDR) 'F1';

-- Commercial Paper 'F1';

-- Long-Term IDR 'A+';

-- Credit facility 'A+';

-- Senior unsecured notes 'A+';

The Rating Outlook is Stable.

Wyeth LLC

-- Long-Term IDR 'A+';

-- Senior unsecured notes 'A+';

The Rating Outlook is Stable.

Pharmacia Corp.

-- Long-Term IDR 'A+';

-- Senior unsecured notes 'A+';

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Apr. 6, 2016

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=1005434

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

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Bob Kirby, CFA, +1-312-368-3147
Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gregory Dickerson, +1-212-908-0220
Director
or
Committee Chairperson
Megan Neuburger, +1-212-908-0501
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Bob Kirby, CFA, +1-312-368-3147
Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gregory Dickerson, +1-212-908-0220
Director
or
Committee Chairperson
Megan Neuburger, +1-212-908-0501
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com