UPDATE 1-Moody's says buybacks could weaken AstraZeneca

Wed Mar 14, 2012 8:45am EDT

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* AstraZeneca plans to buy back $4.5 bln of shares

* Buybacks exceed post-div free cashflow -Moody's

* Company has very steep patent cliff

LONDON, March 14 (Reuters) - AstraZeneca Plc's plans to buy back $4.5 billion of shares this year could weaken its financial position and pressure the drugmaker's credit rating, Moody's Investors Service said on Wednesday.

Other European drugmakers with buyback plans could also come under pressure, but the risk is more obvious at Britain's second-biggest pharmaceuticals company, given the size of its intended buybacks and the scale of the challenges facing the business.

Marie Fischer-Sabatie, a senior credit officer at Moody's, said AstraZeneca's planned buybacks exceeded the $2.5 billion that the company was expected to generate in post-dividend free cash flow in 2012.

What's more AstraZeneca, which Moody's currently rates A1 stable, has one of the steepest patent cliffs in the industry, with antipsychotic Seroquel set to lose patent protection this month and other top-sellers facing expiries through to 2016.

"Negative pressure on AstraZeneca's rating or outlook could build if sizeable buybacks combined with earnings erosion lead its financial profile to weaken," Fischer-Sabatie said.

AstraZeneca in recent years has built up a reputation for offering exceptional returns to investors, both through share buybacks and a generous dividend, which currently yields 6 percent.

It faces increasingly tough times, however, as sales and profits are projected to slide. The company has few new products in its pipeline and it is expected to look seriously at acquisitions to rebuild its portfolio.

Earnings visibility is greater at AstraZeneca's bigger British rival GlaxoSmithKline, also rated A1 stable, since its patent losses are largely behind it.

However, while Moody's expects GSK's free cash flow to cover planned share repurchases of 1 billion to 2 billion pounds ($1.6-3.2 billion) in 2012, the ratings agency added it still faced potentially large litigation payments that could consume extra cash.

GSK said in November it could face a $3 billion payment in 2012 related to a settlement with the U.S. government on various investigations. This amount is covered by existing provisions.

"Share buybacks combined with other large cash outflows could potentially lead GSK's financial profile to weaken, resulting in rating pressure," Fischer-Sabatie said. "However, GSK has provided a monetary range for its repurchases, enabling it to retain a degree of flexibility if conditions change."

Other European pharma companies, including Sanofi and Novartis, are expected to make more limited share repurchases this year.

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