(The following statement was released by the rating agency)
CHICAGO, February 06 (Fitch) Fitch Ratings has downgraded the
of McKesson Corp. (NYSE: MCK), including the long-term Issuer
(IDR), to 'BBB+' from 'A-'. The Rating Outlook is Negative.
A full list of rating actions follows at the end of this
The rating actions follow the close of MCK's agreements with
Franz Haniel & Cie
GmbH (Haniel) and Elliott Fund Management (Elliott) to acquire
respective stock and convertible bond holdings of Celesio AG
transactions are valued at approximately EUR3.7 billion (US$5.1
KEY RATING DRIVERS
-- MCK's acquisition of Celesio is strategically sound, though
risk remains as to the subsequent steps in the acquisition
scale from the deal will allow MCK to drive cost savings,
to generic drug sourcing, and future growth.
-- Fitch expects MCK's post-deal capital structure to include a
increased amount of long-term debt. Pro forma debt-to-EBITDA
could exceed 2.5x,
but MCK's strong cash generating ability should allow for
around 2x by fiscal year-end 2016. Liquidity is expected to
-- U.S. drug distributors maintain exceptionally stable
operating profiles and
consistent and strong cash generation, owing to steady
pharmaceutical demand and
generally oligopolistic markets. Margins and cash flows continue
to benefit from
the mostly durable effects of the unprecedented generic wave,
which is set to
ramp up again in calendar 2014.
-- Fitch sees the European drug channel as somewhat less stable
and generally higher risk, than the U.S. market due to increased
competitive/regulatory pressures. MCK's acquisition of Celesio
but manageable business risk related to operating a new business
pharmacy) and engaging new geographies (Europe, Brazil).
-- MCK holds top U.S. market positions in specialty drug
medical-surgical distribution, and healthcare IT, as well as
in Canada. These businesses will support intermediate-term
profitability and, in addition to measured expansion in other
are likely to represent areas in which MCK will pursue future
Maintenance of a 'BBB+' IDR will require MCK to direct
sufficient cash flows
toward debt repayment such that debt-to-EBITDA of 2x or below is
the next 24-30 months. Long-term funding plans have not been
made available, but
Fitch expects MCK's significant cash generating ability,
enhanced by the
addition of Celesio in the intermediate term, to be sufficient
to achieve this
target. Fitch forecasts cumulative free cash flow (FCF; cash
minus capital expenditures minus dividends) to exceed $4.5
billion in fiscal
2015-2016 for the combined firm.
Ratings flexibility will be limited during the de-leveraging
Significant M&A activity or the resumption of large-scale share
the next 2-3 years could contribute to downward ratings
pressure, to the extent
that such actions restrict MCK's ability to repay debt
maturities as they come
due. The addition of more long-term debt than currently expected
pressure the 'BBB+' ratings.
A positive rating action is not anticipated in the
The Negative Outlook represents the large amount of
de-leveraging necessary to
support the 'BBB+' ratings, plus uncertainty related to the
post-deal capital structure. Furthermore, some event risk
future acquisition-related transactions and processes.
Significant setbacks in
any of these areas requiring the use of material amounts cash or
financing could contribute to negative ratings pressure.
CELESIO DEAL IS STRATEGICALLY SOUND; LIMITED NEAR-TERM FINANCIAL
Fitch views the acquisition of Celesio by MCK as strategically
sound, as it
offers the potential for better buy-side drug pricing and
opportunities outside the largely penetrated U.S. market. The
these benefits, however, is likely to take several years. Fitch
few financial synergies in the near term.
The combination of MCK and Celesio is differentiated from the
engaged by other drug channel participants. Both of MCK's
AmerisourceBergen Corp. (ABC) and Cardinal Health, Inc.
(Cardinal), have entered
into drug purchasing joint ventures with other drug channel
participants - ABC
with Walgreen Co. and Alliance Boots GmbH, and Cardinal with CVS
Thus, these firms must share the benefits of increased scale,
cost savings on the purchase of generic drugs. Conversely, MCK
will retain all
the benefit of expected cost savings, but will also bear fully
associated therewith. The overall relative benefits of these
globalization/scale-enhancing schemes cannot yet be ascertained
and will take
some time to be fully realized.
STABLE OPERATIONS IN THE U.S. AND EUROPE
MCK and its peers in the drug distribution industry continue to
exceptionally stable operations and financial performance.
Despite still weak
macroeconomic conditions and moderately decreased utilization of
the U.S., core business growth at MCK has remained largely
in-step with or ahead
of broader market growth. Organic long-range growth in the
low-single digits is
driven by consistent demand for pharmaceuticals and is realized
uniformly, given the largely oligopolistic market.
Fitch expects the U.S. drug distribution industry to maintain
stability. The industry's very slim margins make it an unlikely
target for extra
taxes and fees (like those recently imposed on the pharma and
sectors in the U.S.). Distributors excel in adding value to the
through the supply chain management and other services they
offer to both
upstream and downstream customers.
The Celesio transaction will provide MCK with significant new
exposure to the
European drug distribution and pharmacy markets. Fitch sees the
channel as relatively less stable and efficient than that found
in the U.S.
Furthermore, Fitch believes risks related to drug pricing and
greater for drug channel participants in Europe than in the
given that regulatory and reimbursement constructs generally
vary from country
to country. The opportunity for increasing generic penetration
in most markets
could provide upside, however, over the ratings horizon.
A FEW MORE YEARS OF THE UNPRECEDENTED GENERIC WAVE
MCK and its peers - both in the U.S. and in Europe - continue to
the unprecedented wave of branded drug patent expirations in
Most drug channel participants, including distributors, earn
higher margins -
though less revenues - on the sale of lower-cost generic drugs.
much of the margin expansion MCK and its peers have achieved in
recent years is
Further margin growth is expected to benefit from the
biosimilars to the U.S. drug channel, as well as from new
drugs, as the pace of traditional branded-to-generic conversions
post-2015. Fitch believes biosimilars could represent an even
margin expansion opportunity for drug distributors than
traditional generics in
the intermediate-to-longer term.
SOLID PRESENCE IN SPECIALTY, MED-SURG, AND HIT
Traditional drug distribution in the U.S. is a consolidated
characterized by steady growth in the low-single digits.
distribution accounts for roughly 80% of MCK's overall revenues.
20% comes from the company's leading market positions in the
specialty pharmaceuticals and of med-surg supplies, and in
information technology (HIT). MCK is one of only a handful of
companies with a
significant share of these relatively fragmented markets.
As a result, Fitch believes MCK is uniquely positioned to
benefit from growth
opportunities related to its ancillary businesses as those
markets grow and
consolidate over time. To that end, Fitch expects MCK to
small, tuck-in acquisitions in especially the med-surg and HIT
ROBUST CASH FLOWS AND SOLID LIQUIDITY
MCK's stable margins, efficient operations, and good asset
to stable and strong cash generation measures. Funds from
operations (FFO) and
FCF for the latest 12 months (LTM) period ended Dec. 31, 2013
were $3.1 billion
and $2 billion, respectively. The firm's solid liquidity
position also includes
a $1.3 billion unsecured revolver due September 2016 and a $1.35
accounts receivable facility due November 2014. Cash on hand as
of Dec. 31, 2013
was $2.4 billion ($1.5 billion held outside the U.S.).
Debt maturities are estimated as follows: $350 million for the
fiscal 2014; $1.1 billion in 2016; $980 million in 2017
(including EUR 350
million of Celesio bonds); $1.2 billion in 2018 (including EUR
500 million of
Celesio bonds), and $2.4 billion thereafter.
Fitch has downgraded the following ratings of MCK:
-- Long-term IDR to 'BBB+' from 'A-';
-- Unsecured bank facility to 'BBB+' from 'A-';
-- Unsecured senior notes to 'BBB+' from 'A-'.
Fitch has affirmed the following ratings of MCK:
-- Short-term IDR at 'F2';
-- Commercial paper at 'F2'.
The Rating Outlook is Negative.
Jacob Bostwick, CPA
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
Bob Kirby, CFA
John Culver, CFA
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: Including Short-Term Ratings
and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--'U.S. Healthcare Stats Quarterly - Third-Quarter 2013' (Jan 2,
--â€˜2014 Outlook: U.S. Healthcare â€“ Secular Challenges
Require a Compelling Value
Propositionâ€™ (Nov. 25, 2013);
--'Trekking the Path to Biosimilars - The Destination' (Oct. 4,
--'Vital Signs - Currents in the Drug Channel' (Podcast) (April
--'Navigating the Drug Channel - Drug Distributors: A Deeper
Dive' (April 24,
Applicable Criteria and Related Research:
U.S. Healthcare Stats Quarterly â€”Third-Quarter 2013
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
Vital Signs -- Currents in the Drug Channel
Trekking the Path to Biosimilars -- The Destinatihere
2014 Outlook: U.S. Healthcare â€” Secular Challenges Require a
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