Nov 22 (The following statement was released by the rating agency)
Fitch Ratings has revised UK-based pharmaceutical company AstraZeneca PLC's Outlook to Negative from Stable. Its Long-Term Issuer Default Rating (IDR) and senior unsecured rating have been affirmed at 'AA-' and its Short-term IDR at 'F1+'.
The change in the Outlook reflects the negative sales and operating profit trend over the last year, due to loss of exclusivity on key products. As a result of past and upcoming key expiries AstraZeneca's pipeline is under pressure to bring the company back to a growth phase. The Negative Outlook reflects our expectations that AstraZeneca will continue making bolt-on pipeline acquisitions leading to erosion in its credit protection measures and Fitch does not expect these acquisitions to deliver any material contribution to the top-line results before 2015-2016. We expect, however, any negative rating movement to be limited to one notch, due to the company's high financial headroom.
KEY RATING DRIVERS
Sales at Risk Put Pressure on R&D Pipeline
Fitch expects the top-line to progressively contract for at least the next three years as the company will continue to face loss of exclusivity on its key products. With around 12% of 2012 sales at risk from US patent expiration by 2015, AstraZeneca is less affected from patent expiration than some of its US peers although it is weakly positioned relative to other Europe-based pharmaceutical credits. However, given that Seroquel IR's US patent expired in 2012 and Crestor's US patent expires in 2016 there is pressure on AstraZeneca's research and development (R&D) pipeline to deliver.
Declining Debt Protection Measures
Fitch expects the financial ratios to remain within the parameters compatible with a 'AA-' rating for the sector, with funds from operations (FFO) adjusted net leverage of around 1x at FYE13 (FY12: 0.4x). AstraZeneca has some financial headroom within its current ratings; however, its debt protection measures will continue to weaken as Fitch expects the company to carry out further bolt-on acquisitions. Critically, such acquisitions will carry some execution risks as they are pipeline acquisitions which are still in the research and development phase and will therefore not contribute to the top-line in the near term.
Solid Market Positioning
In 2012, AstraZeneca was the seventh-largest out of the Fitch-rated pharmaceutical companies and had five products in the top 50 selling pharmaceutical products in the world. AstraZeneca has a strong product portfolio which includes the top selling product Crestor. Strong market positions enable the company to benefit from economies of scale in marketing and distribution and should help AstraZeneca in price negotiations with wholesalers and health care authorities.
With 37% of 9M13 group sales from the US, 26% from western Europe, 16% from the rest of the developed world, and 21% from emerging markets, the group is well diversified, and is not reliant on any single health-care system. With 22% of sales generated by its top product Crestor and 60% by its top five products in 9M13 AstraZeneca also has solid product diversification. AstraZeneca has the highest percentage of group sales generated by blockbuster drugs among large European peers.
AstraZeneca's core operating margin stood at a high 37% in 2012, far higher than that of more diversified pharmaceutical companies. Its profitability is supported by the group's strong presence in the highly profitable US market, by the high percentage of sales generated via "blockbuster" drugs as well as by its continuing cost restructuring initiatives.
No Share Buybacks
The rating is supported by Fitch's expectation that AstraZeneca will not pursue any aggressive distributions to shareholders, following the cancellation of the group's share buybacks plan in October 2012. Evidence of weak free cash flow generation or higher-than-expected shareholders' remuneration either in the form of a reinstatement of share buybacks or higher dividend pay outs, will be deemed negative for the ratings.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Any major debt-financed acquisitions (either one target or an aggregate of bolt-on acquisitions in a single year) or share buybacks which Fitch would expect to result in FFO adjusted net leverage rising above 1.9x on a sustained basis
- FFO/net fixed charges falling below 12x (FY12: 16x)
- Inability to deliver any meaningful results on its late-stage pipeline resulting in continuing decline in revenues
Positive: Future developments that may, individually or collectively, lead to stabilisation of the rating outlook include:
- FFO adjusted net leverage at below 1.5x
- FFO/net fixed charges of 14x or above
- Improvement and greater visibility in its late stage pipeline and/or FFO margin around 25% (FY12: 28%) on a sustained basis