TEXT-Fitch ups Roche to 'AA'; outlook stable
Jan 31 - Fitch Ratings has upgraded Switzerland-based healthcare company Roche Holding Ltd's (Roche) Long-term Issuer Default Rating (IDR) and senior unsecured rating, including that for the issuances of Roche Holding Inc., to 'AA' from 'AA-' with a Stable Outlook and affirmed the Short-term IDR at 'F1+'.
Strong Deleveraging: Roche's funds from operations (FFO) adjusted net leverage is well in line with the expectations for a 'AA' rating and stood at below 1x in 2012 (2011: 1.16x). A significant reduction in leverage was seen in 2012 as net debt decreased by CHF5bn. Leverage is now almost in line with Roche's target of a net debt/assets position between 0% and 15% (FY12: 16%). Given Roche's strong business profile, major acquisitions are not expected.
Global Oncology Leader: Roche was in 2012 global market leader in the high-growth, high-margin oncology segment as well as the global market leader in in-vitro diagnostics. According to Fitch's calculations it was also globally the fourth largest pharmaceuticals company in terms of pharmaceuticals sales in 2011.
Limited Patent Risk: Roche has very limited exposure to patent expiry over the next few years and a strong pipeline. Less than 3% of 2011 pharmaceutical sales are exposed to US patent expiry by end-2014. Major US patent expiries include those for Rituxan in 2018 and for Avastin and Herceptin in 2019, while the patent expiry for these drugs in major EU areas start in 2013, 2022 and 2014 respectively. As the expiring products are biological drugs they are generally more protected from generic competition than if they were chemical molecules.
Strong R&D Product Pipeline: Fitch regards Roche's late stage pipeline as strong. At end-Q312 Roche had 70 new molecular entities in different stages of clinical development with 10 of them in Phase III. Several of Roche's projects in late stage R&D pipeline (for example Obinutuzumab, for chronic lymphocytic leukaemia and non-Hodgkin's lymphoma) but also some of the recently approved drugs, such as the HER2 Positive metastatic breast cancer drug Perjeta, have according to market estimates the potential of becoming a blockbuster drug.
Diagnostics Provides Diversification: The group's presence in the less cash-generative diagnostics business (23% of group sales in 2012 and 12% of core group operating profit (before overhead costs)) provides it with some diversification and synergies with the pharmaceuticals business.
Solid 2012 sales Sales Growth: Pharmaceuticals sales grew by 5% yoy in constant currencies driven by its Oncology business (up 9%), while Roche's diagnostics sales grew by 4%, driven by Professional Diagnostics (up 8% yoy) and Tissue Diagnostics (up 12% yoy).
Highly Profitable: In 2012 Roche's core operating profit margin increased stood at 27.7% (2011: 35.6%) and is industry leading. Its high profitability is driven by Roche's pharmaceutical segment, with its focus on highly profitable oncology drugs. The 2012 core operating profit margins in pharmaceuticals and diagnostics stood at 44% and 21% respectively.
RATING SENSITIVITY GUIDANCE
Positive: Future developments that could lead to positive rating actions include:
- A sustained industry leading profitability and cash flow generation combined with a commitment to financial ratios in line with a 'AA+' rating
- Increased product diversification outside oncology
- FFO adjusted net leverage not greater than 0.5x on a continuing basis and FFO net fixed charge cover of 20x or above on a continuing basis.
Negative: Future developments that could lead to negative rating action include:
- Significant pipeline setbacks
- Major debt-financed acquisitions or share buybacks, which result in FFO adjusted net leverage greater than 1.6x on a continuing basis
- FFO net fixed charge cover of below 11x on a continuing basis