Dec 5 - Fitch Ratings has affirmed Abbott Laboratories' (ABT/Abbott)
long-term ratings at 'A+', and removed the Negative Ratings Watch. The Rating
Outlook is Stable.
Fitch has also affirmed ABT's short-term ratings at 'F1'. A full list of ABT's
ratings follows at the end of this release, and the ratings apply to
approximately $16.3 billion of debt outstanding as of Sep. 30, 2012.
THE RATINGS REFLECT THE FOLLOWING FACTORS:
--Fitch believes the AbbVie Inc. (AbbVie) spinoff is strategically sound and
will leave ABT a profitable, cash generating, growing firm.
--Fitch estimates that ABT will exit the AbbVie spinoff with total debt and
leverage consistent with its 'A+' credit rating.
--ABT will remain diversified with its business segments more focused on
higher-growth geographic markets.
--Exiting the proprietary pharmaceutical market will significantly reduce ABT's
exposure to patent cliffs.
--Fitch anticipates that ABT will periodically pursue acquisitions that
temporarily increase leverage, thus limiting upward movement in its credit
--Fitch expects that ABT will maintain adequate liquidity to fund operations, as
well as fund acquisitions.
DURABLE OPERATING PROFILE
Fitch believes the spin-off of ABT's proprietary pharmaceutical business is
strategically sound, given the differences in its operating model and end-user
geographies. Legacy ABT will retain a diversified business model, although less
so following the spin-off, and patent-cliff risk will be substantially reduced.
Fitch forecasts that ABT's diversified product portfolio will continue to
produce mid-single-digit organic growth in the intermediate term, given the
strength of its product offerings and its geographic mix. Faster growing
emerging markets will represent a larger portion of legacy ABT's revenues. As a
result, Fitch estimates the remaining firm will continue to generate relatively
strong cash flow of roughly $1.8 - $2.0 billion.
ESTIMATED POST-SPIN LEVERAGE CONSISTENT WITH 'A+' RATING
Fitch expects that ABT will enter post-spin operations with approximately $7.5
billion of debt, as it has publicly stated.
Proceeds from AbbVie's $14.7 billion debt issuance will help ABT to fund $7.7
billion of debt reduction. Fitch believes that ABT's continued growth with
relatively stable margins will enable the company to operate with post-spin
leverage (total debt/EBITDA) of 1.4x - 1.5x, consistent with its 'A+' credit
STILL DIVERSIFIED, BUT LESS SO
Post spin-off, Abbott will operate with a less diversified business model, in
terms of the number of segments it operates. In addition, the proprietary
pharmaceuticals segment is highly profitable and cash generating. After the
spin-off, the largest segment of ABT's business, Nutritionals, will represent
roughly only 29% of firm sales, compared to the current business model, in which
proprietary pharmaceuticals comprise 44% of total firm sales.
Post-Spin Abbott's Business Segment Sales Mix
Established Pharmaceuticals 23%
Core Laboratory Diagnostics 16%
Molecular Diagnostics 2%
Point of Care Diagnostics 2%
Diabetes Care 6%
Medical Optics 5%
Other Sales 2%
Total Sales 100%
PATENT CLIFFS LESS OF A RISK
Without the branded and specialty pharmaceutical businesses, patent expiries
will be much less of a risk for legacy ABT. The remaining businesses have much
shorter product life cycles, where new devices are often developed and launched
into the marketplace before many of existing devices' key patents expire.
Nonetheless, intellectual property (IP) protection will remain important to the
business, given the potential for competitors to infringe.
EMERGING MARKETS OFFER GROWTH
ABT expects to generate roughly 40% of its revenues from emerging markets, and
the company expects that sales mix to increase to 50% by 2015. In particular,
Fitch expects that growth in both the established pharmaceuticals and nutrition
segments will garner much of their growth from emerging markets. According to
the company, the established pharmaceuticals segment will likely derive about
60% of its sales from emerging markets in 2012 alone.
Fitch believes ABT will remain acquisitive, focusing on companies or device
platforms that offer innovation and growth, as technological advancement in the
device sector is still relatively fragmented. ABT will also likely consider
targets that offer further expansion opportunities into favorable geographies.
Share repurchases will likely continue, especially in the absence of viable
acquisition targets. Dividends should remain manageable for the firm.
LIQUIDITY AND DEBT STRUCTURE
Fitch expects ABT to maintain adequate liquidity, as the company had
approximately $11.5 billion in cash at Sep. 30 2012 and full availability on its
$5 billion revolving credit facility that expires in July 2017. Baxter had
roughly $16.3 billion of debt outstanding at Sep. 30 2012. Fitch estimates that
ABT will have approximately $7.5 billion of debt outstanding and roughly $5.7
billion in cash after the AbbVie spinoff.
WHAT COULD TRIGGER A RATING ACTION
Fitch does not anticipate an upgrade in the near to intermediate term. However,
ABT would need to commit to and operate with leverage stronger than 1.2x while
maintaining relatively stable operations and solid FCF, in order for Fitch to
consider a positive rating action.
A downgrade of the ratings could result from debt above 1.5x EBITDA without the
prospect for timely deleveraging. This could result from a scenario in which
revenue and margins are significantly stressed (more than Fitch anticipates);
resulting FCF weakens; and capital deployment is not adjusted to reduce the
company's need for debt financing. As such, debt-financed share repurchases or
acquisitions in the near term would likely prompt a negative rating action,
given the limited flexibility associated with the company's current leverage.
Fitch affirms ABT's ratings as follows:
--Issuer Default Rating (IDR) at 'A+';
--Senior unsecured bank loan at 'A+';
--Senior unsecured debt at'A+'.
Fitch rates ABT's short-term ratings as follows:
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The issuer did
not participate in the rating process other than through the medium of its
public disclosure. The ratings above were unsolicited and have been provided by
Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012)
Applicable Criteria and Related Research:
Corporate Rating Methodology