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Fitch Affirms GlaxoSmithKline PLC at 'A+'; Outlook Stable
September 30, 2013 / 3:15 PM / 4 years ago

Fitch Affirms GlaxoSmithKline PLC at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 30 (Fitch) Fitch Ratings has affirmed UK-based pharmaceuticals company GlaxoSmithKline PLC's (GSK) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A+' and Short-term IDR at 'F1'. The Outlook is Stable. Fitch has also affirmed GlaxoSmithKline Finance PLC's commercial paper programme at 'F1'. GSK's ratings are supported by its strong market position within the healthcare industry, its wide geographical and product diversification, its high profitability and strong R&D product pipeline and its well manageable patent expiry profile. Negative rating factors include significant payouts for litigation settlement and GSK's shareholder friendly policy. The ratings affirmation assumes a slower pace of share buybacks as already seen in H113. Any evidence of continuing aggressiveness in distributions to shareholders could result in a negative rating action, particularly if GSK does not show signs of improvement in free cash flow (FCF) generation relative to peers. KEY RATING DRIVERS Manageable Patent Expiry Profile At end-2012, only about 12% of GSK's pharmaceuticals sales were at risk from US patent expiration by 2015. This calculation includes the US patent expiry of Advair, GSK's top selling drug, in effect since 2010. While the threat of a generic version is greater following the recent draft guidance from the FDA, we believe Advair's generic copy will not enter the market before 2015. In addition, the patent on the Diskus inhaler device, related to Advair, remains until 2016. Solid Pipeline Progress GSK's R&D product pipeline remains relatively full and since the start of the year, GSK's late-stage pipeline received significant positive news as a number of its compounds received FDA approvals and/or EU marketing authorization and it has only faced one setback so far in 2013. Strong Market Positions In 2012 GSK was the fifth largest pharmaceuticals company worldwide by revenue and is one of the largest market players in the consumer health segment comprising over-the-counter (OTC) medicines and oral care products. In addition it is one of the world's leading vaccine manufacturers. These strong market positions help the company in negotiations with market participants. GSK is also geographically well diversified which makes it relatively un-reliant on healthcare reforms in single countries. Slight Sales Improvement, Profit Resilience in 2013 GSK put an end to its top-line decline related to patent expirations in H113 as it achieved flat sales growth at constant exchange rates (CER). For 2013 Fitch expects a slight increase in revenues at CER although full year sales would still be negatively affected by EU austerity pricing pressures and the divestment of certain products. Profitability should remain high aided by ongoing cost restructuring measures. The latest restructuring programme, announced at the beginning of 2013, is expected to deliver cost savings of around GBP1bn by 2016 with a similar amount in cash costs spread annually by the end of 2015. Provisions for Legal Disputes GSK has been exposed to various legal settlement payouts amounting to a high of GBP2.6bn in 2012. We believe that the ongoing investigations in China is not material to the rating at this time as sales from China account for around 3% of group sales. Any material fines triggered by these investigations may however put pressure on GSK's already thin FCF generation. Given the uncertainty about cash outlays related to lawsuits, litigation is often treated as event risk by Fitch. Declining Financial Headroom GSK's rating headroom has declined since the end of 2011. In 2012 GSK's funds from operations (FFO) adjusted net leverage increased to 2.2x from 1.6x in 2011. The sale of its non-core brands (nutritional drinks under the Ribena and Lucozade brands and anticoagulant products) should help support the group's financial flexibility in the near term. However, Fitch believes that GSK will continue to have limited headroom within its current rating especially if a generic version of Advair were to enter the market sooner than expected. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to a negative rating action include: -Major debt-financed acquisitions or share buybacks which result in FFO adjusted net leverage above 2.5x on a continuing basis -FFO net fixed charge cover below 8x on a continuing basis -FFO/sales below 22% Positive: Future developments that may, individually or collectively, lead to positive rating action include: -Credit protection measures in line with a 'AA-' rating following a change in share buyback and acquisition policies such that: -FFO adjusted net leverage remains below 1.6x and FFO net fixed charge cover above 12x on a continuing basis -FFO/sales above 25% and FCF/sales at least in mid-single digits Contact: Principal Analyst Roma Patel Analyst +44 20 3530 1465 Supervisory Analyst Britta Holt Director +44 203 530 1335 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 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: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 5 August 2013, are available at 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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