RPT-Fitch affirms Novartis AG at 'AA'; outlook stable
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Dec 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Switzerland-based healthcare company Novartis AG's (Novartis) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA' and its Short-term IDR at 'F1+. The Outlook is Stable.
Novartis's ratings are supported by its solid market positioning in the global healthcare industry, its full late-stage R&D pipeline, and its solid product and geographical diversification. Other rating strengths are its conservative credit metrics which should remain unaffected by the recently announced CHF5bn share buyback programme. Also, a 33% stake in Roche's bearer shares provides some financial flexibility. These positives are only partly offset by Novartis' presence in the less profitable and less cash-generative non-branded pharmaceuticals healthcare businesses (Sandoz, vaccines and diagnostics as well as consumer health representing around 26% of 9M13 group sales) which, however, add diversification and provide synergies.
KEY RATING DRIVERS
Strong Market Positioning
Novartis AG's ratings are supported by its solid competitive position as a leading player in the global pharmaceuticals industry as well as in eye care. In addition to this, Novartis' Sandoz is the second-largest player in global generics and is the global leader in the rapidly growing market for biosimilars (also known as follow-on biologics or biopharmaceuticals).
Strong R&D Capabilities
Novartis enjoys strong R&D capabilities and this is evidenced by its full R&D pipeline. Recent successful product launches included those of Gilenya in 2011 (a multiple sclerosis drug) which received blockbuster status in 2012 and Afinitor (for the treatment of advanced renal cell carcinoma), which will receive blockbuster status in 2013.
Manageable Patent Expiries
By end-2015 an estimated 7% of the 2012 sales are at risk from US patent expiration (excluding the monotherapy version of Diovan). Fitch does not see patent expiry or the availability of a generic version of Diovan monotherapy to be a risk for Novartis, as the percentage of products with expiring patents relative to total sales is low for the industry. In addition, Novartis' R&D product pipeline is full and promising and new product launches are likely to help replace lost sales from expiring products.
Strong Geographical and Product Diversification
Novartis is geographically well-diversified and its product offering includes branded prescription drugs, eye care products, consumer health care products, vaccines, animal health products and diagnostics offering. Wide geographical diversification helps the company to balance out government cost containment measures and patent-expiry risk in individual countries. Furthermore, solid product diversification results in the company being fairly unaffected by the patent expiry of single products
In 2012 Novartis' EBITDAR margin was the third-lowest among Fitch-rated global pharmaceutical companies. Given that there is no material change in Novartis's portfolio composition we do not expect any material change in margins. The lower EBITDAR margin is a direct consequence of its wide diversification in other segments such as generics and consumer healthcare. These two businesses have lower margins than branded pharmaceuticals.
Credit Protection Measures
Novartis' financials are well in line with its 'AA'-rated peers within the pharmaceuticals industry and 'AA'-rated corporates in general. Fitch projects healthy FCF at between CHF3.5bn and CHF4.5bn annually over 2013-2015 which, together with sale proceeds from the blood diagnostics unit of USD1.7bn, will offset the recent announcement of a USD5bn share buyback programme over the next two years and leave debt protection measures flat. For 2013 Fitch expects funds from operations (FFO) net leverage to remain below 1x (FY12: 0.9x) and FFO fixed charge cover to remain around 18x (FY12:18.8x).
At 30 September 2013 cash and other cash instruments totalled USD7.3bn, while short-term debt stood at USD7.7bn, which includes drawdowns on the commercial paper programmes. Further liquidity is available via its USD4.5bn revolving credit facility, which was undrawn at end-9M13.
The 'F1+' Short-term ratings for Novartis's CP programmes are underpinned by its proven ready access to capital markets and by a low likelihood of adverse credit events.
Future developments that may, individually or collectively, lead to a negative rating action include:
-Major debt-financed acquisitions or share buybacks resulting in FFO-adjusted net leverage greater than 1.5x (2012: 0.9x) on a sustained basis
-FFO net fixed charge cover of below 13x (2012: 18.8x) on a sustained basis
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
-FFO-adjusted net leverage no greater than 0.5x on a sustained basis
-FFO net fixed charge cover of 20x or above on a sustained basis
-A commitment to financial ratios in line with a higher rating category
-Sustained industry leading profitability and cash flow generation
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