Fitch Affirms Roche at 'AA'; Outlook Stable

Wed Apr 16, 2014 11:25am EDT

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(The following statement was released by the rating agency) LONDON, April 16 (Fitch) Fitch Ratings has affirmed Switzerland-based healthcare company Roche Holding Ltd's (Roche) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA'. The Outlook on the Long-term IDR is Stable. The Short-term IDR has been affirmed at 'F1+. A full list of rating actions is attached at the end of this rating commentary. The affirmation reflects Roche's excellent position in the global pharmaceutical industry based on market-leading positions in high-margin oncology treatment as well as in diagnostics. Fitch considers Roche's pipeline as strong and its patent protection profile remains comfortable compared with industry peers. Other rating strengths include its strong deleveraging profile after the Genentech acquisition in 2009, supported by industry-leading profitability. These positives are partly offset by Roche's strong reliance on the oncology market and limited diversification of its treatment coverage. Fitch sees this reliance on oncology as a constraint on the ratings and would expect an improvement in product diversification before considering any positive rating action. KEY RATING DRIVERS Market Leader Roche enjoys a strong position in the global pharmaceutical industry and is the number-one market player in the high-margin and high-growth oncology segment. Roche's large scale and solid market positioning remains an important anchor to the ratings. Diagnostics Diversification In addition, Roche is a global market leader in in-vitro diagnostics, in which it has around a 20% global market share. Vitro diagnostics account for 20% of group sales and provide some diversity to earnings, emerging-market growth prospects, as well as R&D synergies with the pharmaceuticals division. Compared with the pharmaceutical business in-vitro diagnostics also has structurally lower profitability, higher capital intensity and faces greater competition due to the mostly unpatented product offering. Patent Risk Roche has limited exposure to near-term patent expiry with currently less than 1.5% of sales being subject to loss of patent over the next 18 months (its sixth best-selling drug Xeloda lost US exclusivity in December 2013). This is a comfortable percentage in comparison with industry peers, especially given Roche's recent pipeline approvals. Strong R&D Profile Roche continues to develop a strong drug pipeline with five molecules in Phase III trials, with three key clinical trial data points to be reported during 2014. Outside oncology, the R&D pipeline has, however, not been immune to failure. Therefore increasing dependency on cancer treatment remains a constraint on the ratings. Strong FCF Supports Deleveraging Roche's funds from operations (FFO)-adjusted net leverage continued to improve 0.5x in FY13 (2012: 0.8x) and remains comfortably within Fitch's expectations for the 'AA' rating. Fitch projects free cash flow (FCF) margins (post capex & dividends) of around 10%, supporting expected further deleveraging in the absence of corporate activity. Focus on Capital Allocation As leverage falls and financial flexibility increases, Roche may look to allocate capital to fund a leveraged transaction, which Fitch will consider as event risk. Although not considered essential to deliver its research-based strategy, Roche has continued to look at potential acquisition targets and Fitch would expect future acquisitions either to strengthen the R&D foundations of the company and/or diversify treatment coverage. We, nevertheless, expect the company will continue its disciplined approach to identifying and integrating acquisition targets under the stewardship of the recently appointed new Chairman. LIQUIDITY AND DEBT STRUCTURE Roche's liquidity profile is considered strong with cash and marketable securities available of CHF11.9bn at FYE13, comfortably covering 2014 debt maturities totalling CHF1bn. For short-term funding requirements, it has also access to a USD7.5bn CP programme (utilised USD791m at FYE13) and access to CHF5.1bn of undrawn committed bank facilities, of which CHF4.7bn serve as CP backup. RATING SENSITIVITIES Positive: Although not expected in the near-term, future developments that could lead to positive rating actions include: -Sustained industry-leading profitability and cash flow generation with commitment to financial ratios in line with a higher rating category. These would be FFO adjusted net leverage no greater than 0.5x (FY13: 0.5x) and FFO fixed charge cover of 20x or above (FY13:10.5x), both on a sustained basis -Increased product diversification reducing Roche's reliance on its oncology franchise Negative: Future developments that could lead to negative rating action include: -Significant pipeline setbacks and negative clinical trial results -Major debt-financed acquisition or share buybacks, which result in FFO adjusted net leverage greater than 1.6x on a continuing basis -FFO fixed charge cover below of 10x on a continuing basis FULL LIST OF RATING ACTIONS Roche Holding Ltd. Long-Term IDR: affirmed at 'AA'; Stable Outlook Senior unsecured debt: affirmed at 'AA' Short-Term IDR: affirmed at 'F1+' Roche Holdings Inc. Senior unsecured debt: affirmed at 'AA' Roche Finance Europe BV Senior unsecured debt: affirmed at 'AA' Contact: Principal Analyst Roma Patel Analyst +44 20 3530 1465 Supervisory Analyst Britta Holt Director +44 20 3530 1335 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Pablo Mazzini Senior Director +44 203 530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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