Fitch: Roche Has Headroom for Chugai Deal; R&D Benefit Possible

Tue Aug 19, 2014 10:16am EDT

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(The following statement was released by the rating agency) LONDON, August 19 (Fitch) Roche would probably have enough headroom to acquire the outstanding minority stake in Chugai Pharmaceutical without affecting its 'AA'/Stable rating, depending on the final structure of any deal, Fitch Ratings says. We believe the main benefit of a deal, which has been reported as possible but not confirmed by either company, is that it would enable Roche to cut costs by removing management duplication and improve the efficiency and coordination of its research and development operations. According to press reports, Roche may offer around USD10bn to buy the nearly 40% stake in Chugai that it doesn't already own. This would represent an expansion of the group's M&A strategy, which has focused on smaller bolt-on acquisitions, but it would not be transformational. An acquisition of this size could be absorbed at the current rating, given the group's strong funds from operations of more than CHF14bn a year. Having paid down leverage from its large scale acquisition of Genentech, which followed a similar path of a strategic partnership first before acquiring full control in 2009, Roche's financial flexibility has steadily increased, leading to the prospect of a net cash position as soon as FY15. The acquisition could be fully absorbed within the existing liquidity of the group. However, if it were to make an offer, we believe Roche could take out some dedicated debt financing, given the favourable conditions and attractive long-term rates in the debt capital markets. We highlighted Roche and Sanofi as the two European pharmaceuticals companies with the most financial flexibility at their current ratings in our recent report Tracking the Implications of M&A on European Pharma. This report highlighted a focus on R&D productivity as one of the key drivers of M&A activity in the sector, as companies seek to manage the increasing costs and risks of bringing new drugs to market. We believe improved efficiency in R&D could be the main benefit for Roche from buying the rest of Chugai. The group has a decentralised R&D approach with four core research labs that, at least in part, compete with each other in development of drugs. This has led to investor concerns around overlaps and inherent cost inefficiencies. Acquiring full control over the Japanese partner could therefore enable Roche to gain full control over research approaches, review its R&D footprint and drive efficiencies, cutting the time and cost to market of new treatments. Contact: Frank Orthbandt Director Corporates +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Tracking the Implications of M&A on European Pharma 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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