(The following statement was released by the rating agency)
CHICAGO, April 24 (Fitch) Fitch Ratings has affirmed Merck &
long-term ratings, including the Issuer Default Rating (IDR) at
'A+'. The Rating
Outlook remains Negative. In addition, Fitch has affirmed the
short-term ratings at 'F1'. A full list of rating actions
follows at the end of
The ratings apply to approximately $24.6 billion in outstanding
KEY RATING DRIVERS
The Negative Outlook mainly reflects that leverage (total
remained above 1.5 times (x) since Merck's $5 billion, largely
repurchases in second-quarter of 2013. While leverage has
declined to 1.65x from
its peak of 1.92x at June 30, 2013, it remains higher than what
expect for an 'A+' credit rating for this issuer.
Fitch expects that Merck will continue to favor share
deleveraging, acknowledging the possibility of further
buybacks. Notably, the company has roughly $10.4 billion
remaining on its
existing repurchase authorization.
Sales at-risk to patent expiries have declined to roughly 20% of
sales. Roughly one-third of those sales are generated by
biologics, which tend
have significantly less market share erosion in the face of
than do traditional small molecule drugs.
Merck has made progress in building its late-stage pipeline. The
approximately 20 new molecular entities (NMEs) in phase 3
Merck initiated a restructuring program in October 2013, which
will be supportive to margins during the intermediate term. The
focus on costs in a number of areas including manufacturing,
administration and research & development.
Fitch believes the rumored sale of the company's consumer
business would be
strategically sound, as it would increase the company's focus on
mission of developing and marketing innovative medicines.
However, unless the
company were to use some of the proceeds to pay down debt, the
of diversification and EBITDA would be incrementally negative
for Merck's credit
Fitch expects modest growth for Merck's Januvia/Janumet
franchise, as the market
becomes increasingly crowded with new entrants. Although, the
growth in the
number of diabetic patients and some share gains from older
modalities should offset the competitive headwind.
Fitch forecasts that Merck will generate $5.8 billion - $6.1
billion in FCF
during 2014 as improving margins offset soft revenue.
Debt Financed Share Repurchases
Fitch expects that Merck will continue with shareholder friendly
the near term, some of which may be funded by debt. Merck
purchased $5.3 billion
(net of issuances) of its common stock during 2013, compared to
during 2012. The repurchases were executed under a $15 billion
authorized in May 2013 and a previously authorized program. The
approximately $10.4 billion remaining under the May 2013 share
program. The repurchases were funded, in large part, with debt
Patent Exposure Easing
The company faces significant number of patent expiries during
the next two
years. However, roughly only 20% of total firm sales are at
risk. In addition,
Remicade and PEG-Intron, which account for about 6.2% of total
biologics and tend not to experience the rapid sales loss to
as do traditiona, one small molecule pharmaceuticals.
Expanding Late Stage Pipeline
Fitch expects Merck to continue to build its late-stage
pipeline, despite the
company's intention to narrow its focus its focus on R&D
projects. The company's
late stage pipeline is broad with new molecular entities (NMEs)
to treat cancer,
bacterial and viral infections, diabetes, cardiovascular
nervous system disorders, osteoporosis, allergies and other
While the majority of these projects are internally developed,
partnered with other innovator firms to take advantage of
advancements that were discovered externally. The landscape for
is expanding, particularly as more is learned about how genetics
development, prevention and treatment of disease.
Cost Cutting Continues
In October 2013, Merck initiated a new global restructuring
program, in an
effort to sharpen its global commercial and research &
development focus. The
company expects to reduce its total workforce by approximately
including those in sales, administration and research &
Merck will sell some real estate, move its corporate
headquarters and continue
to work towards improving the efficiency of its manufacturing
network. The restructuring program is expected to be
substantially completed by
the end of 2015. Estimated pre-tax restructuring costs are
billion - $3 billion, of which two-thirds will be cash-related.
Consumer Business Possibly for Sale
Fitch believes the sale of Merck's consumer products business
would be a net
negative for the company's credit profile, with the expectation
proceeds of the sales would not be used for debt reduction.
While the consumer
business accounts for roughly 4% of total firm sales, Fitch
segment's contribution to the firm's total EBITDA is less than
we believe the negative effects of a less diversified product
portfolio and a
lower base of profitability will more than offset the benefits
to the firm from
increasing its focus on its core competency of drug development
and marketing in
the near term.
More Competition for Januvia/Janumet
Fitch expects that the growing number of diabetic patients and
share gains from some older generic diabetes treatments will
more than offset
the increasing number of competitors in the diabetes treatment
in relatively soft sales growth for Januvia/Janumet, Merck's
franchise. Growth has slowed in recent years due to competition
inhibitors, SGLT2 inhibitors, GLP-1 agonists) entering the
diabetes market. In
addition, concerns over the safety of these drugs(DPP-4
inhibitors) have been a
headwind to growth, although the FDA recently reaffirmed their
pancreatitis and pancreatic cancer.
Solid Free Cash Flow Expected
Fitch forecasts that Merck will continue to generate
significantly positive free
cash flow generate, including expected 2014 FCF of $5.8 billion
- $6.1 in FCF
during 2014. Improving margins driven by an improving sales mix
and strong cost
control should more than offset the negative effect that
expected soft top-line
growth will have on cash generation.
Fitch looks for Merck to maintain adequate liquidity through
generation and ample access to the credit markets. FCF for the
LTM ending Dec.
31, 2013 was $8.35 billion. At the end of the period, Merck had
$17.5 billion in cash plus short-term investments and full
availability on its
$4 billion revolver, maturing in May 2017.
At Dec. 31, 2013, Merck had roughly $24.6 billion in debt
outstanding, with $4.7
billion maturing in 2014, $2 billion in 2015, $2.3 billion in
2016 and $1
billion in 2017. Fitch expects near- to mid-term maturities will
primarily through refinancing in the public debt markets.
Fitch would consider revising the Rating Outlook to Stable if
Merck pursued a
capital deployment strategy that maintained gross debt leverage
during the long term, including managing through operational
stress such as
patent expiries and clearly taking a more conservative approach
to its use of
debt. In addition, the company must demonstrate long-term
positive sales growth
through demand for core drug products and uptake of new
Rating pressure would stem from total debt leverage remaining
above 1.5x in the
intermediate term. The high leverage would likely be driven by
borrowing to fund acquisitions or share repurchases. Leverage
also result from operational weakness due to an inability to
achieving cost containment targets or generating sales growth
improving patent risk profile and expanding late-stage pipeline.
Fitch anticipatates that FCF would be constrained in this
Fitch has affirmed the follow ratings for Merck:
--Long-term Issuer Default Rating (IDR) at 'A+';
--Senior unsecured debt rating at 'A+';
--Bank loan rating at 'A+';
--Short-term IDR at 'F1';
--Commercial paper rating at 'F1'.
The Rating Outlook on the long-term ratings remains Negative.
Bob Kirby, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2013);
--'Rating Pharmaceutical Companies - Sector Credit Factors'
(Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and
Rating Pharmaceutical Companies
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