Fitch Downgrades Bristol Myers Squibb's IDR to 'A-'; Outlook to Stable

Mon Jul 1, 2013 1:30pm EDT

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(The following statement was released by the rating agency) CHICAGO, July 01 (Fitch) Fitch Ratings has downgraded Bristol-Myers Squibb Co.'s (Bristol Myers Squibb) long-term Issuer Default Rating (IDR) to 'A-' from 'A'. See a full list of affected ratings below. The ratings apply to approximately $7.3 billion of debt. The Rating Outlook is revised to Stable from Negative. KEY RATING DRIVERS --Operational pressure peaking in 2013: Plavix and Avapro patent expirations have negatively affected total company sales, operating margins and cash flows more than expected. Fitch sees operational improvement in 2014 due to a lull period in patent losses. Recovery will be short-lived, however, as another wave of patent losses representing over 35% of present revenues arrives in 2015. --Debt leverage reflective of 'A-' category: Fitch expects debt could trend higher, net of refinancing maturing securities, during the second half of 2013 as the company seeks additional liquidity in the U.S. Fitch sees leverage in the range of 1.7x to 2.0x EBITDA over the long term, fluctuating due to timing of key drug patent lapses. --Free cash flow moderates: Dampened profitability from patent losses is expected to hinder free cash flow generation (FCF; cash from operations less dividends and capital expenditures); however, Fitch anticipates FCF to remain above $400 million annually in 2013 and 2014. --Coming patent cliff less daunting: Fitch anticipates that continued market uptake of promising new medicines, growth of core therapeutics, and successful commercialization of key research projects may minimize patent expirations of Sustiva, Baraclude, and Abilify in 2015. Fitch anticipates revenue growth in the long term as drug patent expirations ease. --Capital deployment eases: Fitch sees capital uses ease for business development and share purchasing this year following heavy spending in 2012. The company spent more than $12 billion to buy new assets and return value to shareholders via dividends and share repurchases in 2012. Operational Pressure from Plavix Expiration The dramatic decline in Plavix sales following patent expiration in May 2012 was the main driver of overall revenue decreases of 24.6% and 17.1% for the latest 12-month (LTM) period ending March 31, 2103, and 2012, respectively. Concomitantly, EBITDA margin compressed more than expected to 23.3% for the same LTM period, from 35.8% in 2011, In addition, FCF fell to $537 million in 2012 and turned negative for the LTM period after excluding $3.57 billion received from AstraZeneca plc (AstraZeneca) for the shared purchase of Amylin. Fitch sees some margin improvement and modest FCF growth over the next year as the company recovers from the Plavix patent loss. However, the company faces another patent expiration period in 2015-2016. Moderate Impact from Patent Losses in 2015 A second wave of drug patent expirations hits in 2015 when Sustiva, Baraclude, and Abilify lose market exclusivity in the U.S. The maturing medicines generated sales of $5.69 billion for the LTM period or 35.1% of total revenues. The patent expiration of Baraclude in the U.S. is immaterial; however, the potential loss of exclusivity in international markets in October 2016 presents the main challenge. Market uptake of Bristol-Myers Squibb's most promising new therapeutics - Yervoy, Eliquis, Bydureon, and Forxiga - and continued growth of core blockbuster medicines, notably Sprycel, Reyataz, and Orencia, provides support during the coming patent cliff. As such, the impact from patent lapses during 2015 may be more moderate than that experienced in the present patent expiration period. Fitch forecasts revenues to 'recover' from the patent losses as shown by a compound annual growth of 2.3% in 2012 to 2017. Leverage to Vacillate in the Long Term Gross debt leverage has risen to 1.94x for the LTM period ending March 31, 2013 from 1.38x in 2012, and is expected to remain above 1.8x in 2013, a level reflective of the current rating category. Margin contraction and an increased debt load led to the increase in total debt leverage since the end of the year. Fitch assumes that Bristol-Myers Squibb will seek new financing to pay down $600 million in maturing debt in the second half of the year. Fitch anticipates improvement in debt leverage in 2014 following annualizing the Plavix patent loss; however, the decrease will reverse in 2015 in conjunction with the next patent expiration period, yet remain below 2.0x. The next significant debt maturity is $650 million in 4.375% unsecured notes due in November 2016. Margins Pressured by Partnered Medicines In addition to margin pressure from key drug patent losses, a product-mix shift to promising lower margin partnered products - Eliquis, Onglyza/Kombiglyze, Forxiga, and Bydureon - will dampen overall margin despite the benefit of sharing the marketing and development costs. Potentially affecting the sales mix positively in the long term is successful commercialization of internally developed all-oral Hepatitis C treatments and first-in-class oncology treatment, nivolumumab. Fitch expects sequential improvement in margins during 2014, but compression in 2015 accelerated by key drug patent losses. Free Cash Flow Moderates Excluding the cash received from AstraZeneca for its share of the Amylin acquisition in 2012, FCF was $537 million or 3.1% of revenues in 2012 and -$271 million for the LTM period. Working capital uses plus significantly lower Plavix and Avapro sales resulted in $1.1 billion less operating cash flow in the first quarter of 2013 versus the prior year first quarter. As such, Fitch anticipates FCF to fall to around $450 million in 2013 and $550 million in 2014, assuming a continued commitment to dividends and higher capital spending. Capital to Be Preserved Fitch expects Bristol-Myers Squibb will refrain from devoting significant capital toward business development and share repurchasing activities in 2013 following a year of heightened spending. During 2012, the company returned $4.69 billion to shareholders via dividends and share repurchases, while adding two significant assets to its 'String of Pearls' for approximately $6 billion ($7.5 billion including assumed debt). The main lever for returning value to shareholders this year in Fitch's opinion will be dividends, which increased 2.6% for 2013. The company paid out $2.29 billion for the LTM period. RATING SENSITIVITIES Fitch views an upgrade as unlikely given anticipated operational pressure from expiring drug patents through 2016. However, positive action would be warranted if Bristol-Myers Squibb circumvents the negative effect on earnings and cash flows from lost revenues from expiring products such that gross leverage returns and stays below 1.7x and FCF margin is maintained at 8%. Operational improvement is likely to result from continued market demand for new therapeutics as well as successful commercialization of promising oral Hepatitis C treatments and the potential first-in-class oncology drug, Nivolumab. Further ratings pressure would stem from the company's inability to mitigate the negative effects in 2015-2016 of the Abilify, Sustiva, and Baraclude patent expirations. A one-notch downgrade could follow a sustained increase in total debt leverage to greater than 2.0x together with significant FCF contraction resulting from higher-than-expected margin compression and incremental debt. Fitch has downgraded the following ratings: --IDR to 'A-' from 'A'; --Senior unsecured debt to 'A-' from 'A'; --Bank loan to 'A-' from 'A'; --Short-term IDR to 'F2' from 'F1'; --Commercial paper to 'F2' from 'F1'. Contact: Primary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Robert Kirby Director +1-312-368-3147 Chairperson Dave Peterson Senior Director +1-312-368-3147 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: 'Corporate Rating Methodology' dated Aug. 8, 2012 'Rating Pharmaceutical Companies - Sector Credit Factors', dated Aug. 9, 2012 Applicable Criteria and Related Research: Rating Pharmaceutical Companies here Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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