TEXT-Fitch cuts Bristol-Myers Squibb ratings

Tue Jul 3, 2012 10:33am EDT

July 3 - Fitch Ratings has downgraded Bristol-Myers Squibb Co.'s (Bristol Myers Squibb) Long-term Issuer Default Rating (IDR) to 'A' from 'A+'. Simultaneously, the 'F1' Short-term IDR and commercial paper rating have been affirmed. Fitch has also downgraded the following ratings for Bristol Myers Squibb:

--Senior unsecured debt rating to 'A' from 'A+'; --Bank loan rating to 'A' from 'A+'. The ratings apply to approximately $4.8 billion of debt. The Rating Outlook is Negative. Diabetes Treatment Portfolio Expanded Bristol Myers Squibb announced on June 29 the acquisition of Amylin Pharmaceuticals Inc. (Amylin) for approximately $7.0 billion comprising a purchase price of $5.3 billion, and net debt pay down and a contractual obligation payment to Eli Lilly of $1.7 billion on a combined basis. Bristol Myers Squibb also announced that upon completion of the acquisition, the existing diabetes alliance with AstraZeneca will be expanded to include Amylin's product portfolio, at which time, AstraZeneca will pay $3.4 billion for the change to the collaboration agreement. The acquisition of Amylin adds two diabetes treatments, Byetta and Bydureon, to Bristol Myers Squibb's current maturing drug offering. The companies plan to finalize the transaction approximately 30 days after the commencement of a tender offer. Fitch anticipates that the purchase will be funded through cash on hand and new debt issuance. Share Repurchases Pressure Credit Profile In addition, last week, Bristol Myers Squibb announced that the Board of Directors approved additional authorization of $3 billion to the company's present share repurchase program from May 2010. Fitch forecasts aggressive share repurchase activity over the ratings horizon despite the acquisitions of Amylin and Inhibitex Inc. that will total more than $6 billion this year. Coupling increased share repurchasing with the asset purchases made this year, Fitch expects Bristol Myers Squibb's leverage to remain in the range of 1.5 times (x) to 1.7x on a gross debt basis in the height of the patent cliff, a level consistent with the new rating category. Bristol Myers Squibb's long-term debt maturity schedule is favorable and does not include significant maturities during the patent cliff as only $597 million of senior notes mature in November 2013. Plavix Patent Expiration to Pressure Revenues Bristol Myers Squibb is at the beginning of its patent cliff that is expected to negatively impact sales during 2012 - 2013 of two top-selling pharmaceuticals, Plavix and Avapro, which represented 36.7% of total sales for the latest 12-month (LTM) period at the end of the first quarter of 2012. In the first half of 2012, U.S. market exclusivity was lost for Avapro at the end of March and for Plavix in May. Just ahead of the company's patent expiration period, revenues increased 9.1% for the LTM period ending March 31, 2012. Fitch believes the company cannot overcome top-line pressure with the addition of Amylin's product offering as well as the growth of the current portfolio of drug products, including the promising cancer treatment Yervoy. Patent Cliff Creates Operational Uncertainty Since 2007, Bristol has been preparing for the inevitable patent lapse of Plavix through operational restructuring actions, debt reduction, cash repatriation, divestiture of non-pharmaceutical businesses, and solid R&D productivity. As such, EBITDA margins have expanded to 36.7% for the LTM period ending March 31, 2012 from 22.3% in 2007, and, in the same timeframe, total debt leverage dropped to 0.6x from 1.5x. However, the operational success will reverse over the ratings horizon due to generic competition to Bristol's bestseller Plavix. The uncertainty of the effect on operations due to generic competition concomitant with more aggressive shareholder-friendly activities have led Fitch to maintain the Negative Rating Outlook. Liquidity to remain Strong Fitch recognizes Bristol Myers Squibb's effort to maintain U.S. cash as international legal entities were restructured in late 2010. Domestic liquidity provides the flexibility to fund a portion of the purchase price for Amylin with available cash. Bristol Myers Squibb had a cash balance and short-term marketable securities totaling $5.0 billion, and long-term investments of $3.6 billion at the end of the first quarter of 2012. Additionally, free cash flow has strengthened to over $2.0 billion for the LTM period ending March 31, 2012 from as low as $97 million in 2007 as the company preserved capital and restructured operations ahead of the Plavix patent expiry. Despite the patent cliff, Fitch anticipates free cash flow to remain above $600 million annually through the ratings horizon. Ratings Triggers Negative rating action the intermediate-term would stem from operational pressures on margin and cash flow as Bristol Myers Squibb contends with the negative effects in 2012 and 2013 of the Plavix and Avapro patent expirations. Total debt leverage (gross debt to EBITDA) sustained above 1.8x and significant free cash flow contraction resulting from greater-than-anticipated margin compression and incremental debt would drive the rating one notch lower to 'A-'.

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