Fitch Affirms Roche at 'AA'/Stable on InterMune Buy

Thu Aug 28, 2014 10:31am EDT

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(The following statement was released by the rating agency) LONDON, August 28 (Fitch) Fitch Ratings has affirmed Switzerland-based healthcare company Roche's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA'. The Short-term IDR has been affirmed at 'F1+'. The Outlook is 'Stable'. A full list of rating actions is available at the end of this commentary. The rating affirmation follows Roche's proposed tender offer to acquire 100% of US-based biotech company InterMune for USD8.3bn, representing a 63% premium. The fully cash-funded transaction will be recommended by both boards to InterMune's shareholders on 29 August for approval. The announced transaction and its underlying valuation reflect Roche's confidence in InterMune's rare lung disease treatment, which has received approval in Europe and Canada, and is expected to receive US approval in 4Q14. Loss-making at present, InterMune will give Roche access to a new medicine for a previously untreatable lung disease, which Fitch projects will achieve USD700m of sales by FY17. We do not view the acquisition as transformational for Roche. KEY RATING DRIVERS Increased Leverage Consistent with Ratings The InterMune purchase, together with bolt-on acquisitions totalling USD2.5bn (incl. milestone payments), takes Roche's cumulative announced acquisition spend so far in 2014, to USD10.8bn, which will be financed by a combination of cash, commercial paper and bond issuance. Fitch projects this total acquisition spend will raise funds from operations (FFO) adjusted net leverage by a maximum 0.5x to around 1.0x (depending on the timing of closure). We expect FFO fixed charge cover to remain strong at no less than 10.5x, which is above the 10x minimum consistent with the company's 'AA' rating (the coverage ratio assumes a 75% debt refinancing of the InterMune and bolt-on acquisitions). In addition, based on strong free cash flow (FCF) generation and on our projection of FFO of no less than CHF14bn p.a., we expect Roche to deleverage over the next four years, allowing it to absorb the InterMune acquisition at the current rating. This is reflected in the Stable Outlook. Improving Business Profile The offered price is considered high, based on the underlying peak sales assumptions for the key drug. It represents a strategic premium which we believe Roche is paying due to the fact that it will 1) be acquiring a lucrative orphan drug treating a rare disease; 2) enable it to rebalance its future revenues away from its strong focus on oncology and towards its respiratory medicine offer; and 3) realise economies of scale in marketing the drug alongside the existing respiratory offer and in using the established Genentech platform. In addition, we expect the acquisition to generate immediate administrative cost benefits. Execution of Targeted M&A Strategy We see additional financial headroom at the current rating level for the company to continue its selective M&A approach of adding specific assets to its selected areas of expertise that will enhance product, R&D and/or technology platforms. Such transactions would, however, need to be supported by successful product launches and pipeline developments, hence improving the underlying business risk, to avoid negative rating action. Liquidity Expected to Remain Strong Roche's liquidity profile currently (as of end-June 2014) comprises cash and marketable securities of CHF10.2bn, more than sufficiently covering short-term maturities of CHF4.4bn. Roche also has access to a USD7.5bn CP programme (of which USD2.6bn were utilised at end-June 2014), which are supported by EUR3.9bn undrawn committed bank facilities. The current cash balances and unutilised portion of the CP programme are sufficient to pay for the transaction but would leave Roche's liquidity position stretched. The affirmation of the Short- term IDR assumes that, upon completion of the acquisition, some of this short-term debt will be refinanced with longer-tenor debt. 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) on a sustained basis -FFO fixed charge cover of 20x or above (FY13: 10.5x), on a sustained basis -Increased product diversification, reducing Roche's reliance on its oncology offer 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, resulting in FFO adjusted net leverage above 1.6x on a sustained basis -FFO fixed charge cover below 10x on a sustained 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 Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Giulio Lombardi Senior Director +39 02 8790 87214 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are 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. Additional information is available on www.fitchratings.com. 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