TEXT-Fitch affirms AmerisourceBergen ratings
Sept 24 - Fitch Ratings has affirmed the long-term ratings of AmerisourceBergen Corp. at 'A-'. The short-term ratings have also been affirmed at 'F2'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. The ratings apply to approximately $1.5 billion of debt, pro forma for the repayment of $392 million of notes in September 2012. KEY RATING ISSUES --The oligopolistic nature of the U.S. drug distribution industry and steady pharmaceutical demand contributes to exceptionally stable operating profiles for ABC and its peers. However, longer-term growth opportunities are limited in pure U.S. drug distribution. --ABC maintains strong credit metrics through its consistently strong cash flow generation, ample liquidity, and commitment to low debt leverage. --Margin expansion has been driven recently by the unprecedented wave of branded drugs' patent expirations during ABC's fiscal 2012. Fitch believes the majority of this margin expansion is durable. Furthermore, a smaller but still sizeable wave of patent expirations is expected in ABC's fiscal 2014. --ABC's incumbent market leadership in the higher-margin and -growth specialty drug distribution space provides support to the company's growth prospects and appropriately slim margins. --Much uncertainty remains related to U.S. healthcare and budget reform. Fitch expects that pharmaceutical reimbursement will be constrained in the near-to-intermediate term, though drug distributors are relatively insulated from these forces. --Recent and continued expansion into consulting and related drug channel services will support margins and growth prospects over the ratings horizon. The Stable Outlook reflects Fitch's view that ABC will continue to conduct stable operations which generate consistent and meaningful cash flows. Fitch further expects that ABC will maintain its historically conservative approach to acquisitions and cash deployment and will remain committed to its core business of drug distribution. GUIDELINES FOR FUTURE RATING ACTIONS Maintenance of an 'A-' Issuer Default Rating (IDR) will require debt-to-EBITDA generally maintained at or below 1.2 times (x) over the ratings horizon, accompanied by steady funds from operations (FFO) in excess of $800 million annually. An upgrade to 'A' is not likely in the near term, as Fitch believes company management would need to demonstrate a commitment to operating with debt leverage below 0.75x. Fitch does not expect ABC to commit to operating with such low leverage over the ratings horizon. Fitch believes ABC has ample flexibility at its current 'A-' ratings. However, a negative rating action could be caused by deteriorating profit margins leading to materially depressed cash flows and elevated leverage metrics. Pricing pressure greater and more direct than expected from payors' cost containment efforts could cause such margin deterioration. Furthermore, a leveraging transaction or one that illustrates a departure from ABC's traditional commitment to its core drug distribution business could cause downward ratings pressure. STEADY DEMAND, OLIGOPOLISTIC INDUSTRY SUPPORTS STABLE OPERATING PROFILE Steady demand for pharmaceuticals in the U.S. contributes to an exceptionally stable operating profile. Drug distributors have proven rather resilient in recent years despite depressed patient volumes in hospitals and elevated levels of unemployment. Although organic top-line growth in traditional drug distribution has been in the low-single digits, ABC has grown its profit margins and continues to produce material amounts of free cash flow (FCF). Fitch expects relatively flat organic top-line growth in 2013. GENERIC WAVE DRIVING MARGIN EXPANSION, THOUGH LIMITING TOP-LINE GROWTH ABC has benefited in the past couple years from the unprecedented wave of branded drug patent expirations. Drug distributors, as well as mail-order and retail pharmacies, earn higher margins on the sale of generic drugs. Generic conversions have driven latest 12 months (LTM) EBITDA margin expansion of 20 basis points (bps) over the past six quarters. Fitch expects the effects of these branded-to-generic conversions to be less pronounced in ABC's fiscal 2013 due to fewer large drugs' patent expirations. Fitch believes much of the recent margin expansion is durable. However, margins are likely to be pressured somewhat by ABC's new lower-margin contract with Express Scripts, Inc., which begins Oct. 1, 2012. DEMONSTRATED COMMITMENT TO CONSERVATIVE FINANCIAL MANAGEMENT ABC's management has demonstrated a commitment to maintaining a financial profile reflective of an entity rated in the single-A category. Fitch expects the company to remain committed to operating with leverage, as adjusted for operating leases, below 1.5x. (This figure implies Fitch-calculated unadjusted leverage of 1.2x-1.3x.) The issuance of $500 million of new notes in November 2011 caused leverage to temporarily increase outside this range. However, Fitch forecasts unadjusted debt leverage of 1.0x at Sept. 30, 2012 due to the repayment of $392 million of notes in September 2012. Fitch expects ABC to operate with unadjusted leverage near 1.0x over the ratings horizon. ABC has proven judicious in its M&A activity over the past several years. Fitch views event risk associated with M&A to be limited given ABC's track record of sticking to its core competencies and management's traditional financial discipline, as well as the fact that there remain only a few acquisition targets in the pure U.S. drug distribution space. STRONG POSITION IN SPECIALTY, RECENT DEALS IN ADJACENT BUSINESSES SUPPORT GROWTH, MARGINS ABC's specialty distribution business is the largest in the U.S. The company's incumbent leadership position in the higher-growth and -margin specialty drug distribution business provides margin support and growth potential in excess of that inherent to the traditional drug distribution business. The prospect of biosimilars in the U.S. over the next few years also adds to the growth potential afforded ABC by its strong specialty distribution business. ABC has completed four acquisitions in the past 15 months, aimed at strengthening the company's relationships with especially biotech manufacturers, positioning the company at certain important points within the drug channel, and providing growth opportunities tied to its core drug distribution operations. Fitch views each of the deals as strategically sound and important for strengthening ABC's competitive position within the drug channel. REGULATORY AND FISCAL UNCERTAINTY Despite the Supreme Court's ruling on the constitutionality of the Patient Protection and Affordable Care Act (ACA) and the writing of many of the rules and regulations that are to guide the bill's execution, much uncertainty remains. Additionally, the upcoming U.S. elections could have a material effect on healthcare industry participants over the next several years. Fitch believes that drug distributors are relatively insulated from these forces due to their position in the middle of the drug channel. However, Fitch's expectation for constrained reimbursement going forward could result in modest margin pressure on ABC and its peers over the ratings horizon. AMPLE LIQUIDITY AND CAPITAL MARKET ACCESS ABC maintains ample liquidity, consisting of $1.7 billion of cash on hand, approximately $600 million available on its $700 million revolver due 2016, and full availability on its $700 million A/R facility due 2014 at June 30, 2012. As evidenced by a recent notes issuance and credit facility amendment, Fitch believes ABC has exceptional access to the capital markets. Debt maturities are as follows: $500 million in 2015, $88 million in 2016, $400 million in 2019, and $500 million in 2021. Forecasted cash generation and anticipated market access are sufficient to cover debt obligations. Fitch has affirmed ABC's ratings as follows: --Long-term Issuer Default Rating (IDR) at 'A-'; --Short-term IDR at 'F2'; --Senior unsecured bank facility rating at 'A-'; --Senior unsecured notes at 'A-'; --Commercial paper at 'F2'. The Rating Outlook is Stable.