(The following statement was released by the rating agency)
Nov 06 - Fitch Ratings has affirmed Switzerland-based healthcare company Novartis AG’s (Novartis) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘AA’ and Short-term IDR at ‘F1+. The Outlook is Stable.
Novartis’s ratings are supported by its solid competitive positioning in the global healthcare industry, its strong pharmaceuticals R&D, as evidenced by its product portfolio and R&D product pipeline, and its solid product and geographical diversification. Novartis also holds 33% of Roche’s bearer shares, which provides the company with some financial flexibility.
Negative rating factors include the upcoming patent expires in its pharmaceuticals segment. By end-2014, the US patents on 14% of 2011 sales from pharmaceuticals will have expired, including the patent of the group’s largest drug, the hypertension medicine Diovan in the US in September 2012. Diovan had US sales of USD2.3bn in 2011. The patent expiry is considered well manageable by Fitch, due to Novartis’s relatively young product portfolio and its solid industry leading R&D product pipeline. Negative rating factors also include Novartis’s presence in non-branded pharmaceuticals healthcare businesses (25% of 9M12 group sales), where the free cash flow (FCF) margin is lower than in pharmaceuticals. However, Fitch recognises that although these businesses dilute the group’s FCF margin, they add some diversification and provide Novartis with the some synergies, as evidenced by the recent launch of an authorised generic in the US for the expired Diovan.
In 2011, Novartis was the seventh-largest pharmaceutical company in terms of pharmaceutical sales and held a number two market position in the global generics industry, while benefiting from a number four market positioning in OTC. Through Alcon, it is also the world’s largest eye care company.
Product diversification within its most important division, pharmaceuticals (57% of 9M12 group sales) is strong, with the top product accounting for 15% of 9M12 pharmaceuticals sales, while the top five products accounted for 45%. Novartis also benefits from a solid geographical diversification in pharmaceuticals. In 9M12, the US and Europe contributed 33% and 32% of pharmaceuticals sales, respectively, while Canada and Latin America amounted to 9% and Asia/Africa together with Australasia to 26%. This diversification helps the company to balance out cost-containment and patent-expiry risk in single countries.
Novartis’s 9M12 results showed a group sales decline of 1% in constant currencies to USD41.8bn, which was driven by a decline in sales at Sandoz, (minus 7% yoy) - where sales declined due to lower retail generic sales - and driven by a decline in sales in the consumer health business (minus 17% yoy), due to the absence of shipments from Lincoln. This could not be compensated by strong yoy sales growth of 5% at Alcon. For the full year, Fitch expects Novartis to show flat to slightly declining sales at constant exchange rates and a slight deterioration in EBITDA margin (9M12 core operating profit declined by 4% yoy).
Fitch expects flat credit protection measures in 2012 and a continuous slight improvement thereafter. Overall, credit protection measures are expected to remain in line with Fitch’s expectations for a ‘AA’ rated pharmaceuticals company with Novartis’s superior business profile over the next few years. Fitch takes comfort from Novartis’s current lack of intention to pursue larger acquisitions and that share buybacks are seen by the company as a flexible tool.
The ‘F1+’ Short-term rating for Novartis’s CP programmes is underpinned by its proven high market access, and low likelihood of adverse credit events.
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 greater than 1.5x on a continuing basis
- FFO net fixed charge cover of below 13x on a continuing basis
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A sustained industry leading profitability and cash flow generation combined with
- A commitment to financial ratios in line with a higher rating with FFO adjusted net leverage not greater than 0.5x and FFO net fixed charge cover of 20x or above, both on a continuing basis.