September 24, 2012 / 6:40 PM / 5 years ago

TEXT-Fitch affirms AmerisourceBergen ratings

9 Min Read

Sept 24 - Fitch Ratings has affirmed the long-term ratings of
AmerisourceBergen Corp. at 'A-'. The short-term ratings have also been 
affirmed at 'F2'. The Rating Outlook is Stable.

A full list of rating actions follows at the end of this release. The ratings 
apply to approximately $1.5 billion of debt, pro forma for the repayment of $392
million of notes in September 2012.


--The oligopolistic nature of the U.S. drug distribution industry and steady 
pharmaceutical demand contributes to exceptionally stable operating profiles for
ABC and its peers. However, longer-term growth opportunities are limited in pure
U.S. drug distribution. 

--ABC maintains strong credit metrics through its consistently strong cash flow 
generation, ample liquidity, and commitment to low debt leverage. 

--Margin expansion has been driven recently by the unprecedented wave of branded
drugs' patent expirations during ABC's fiscal 2012. Fitch believes the majority 
of this margin expansion is durable. Furthermore, a smaller but still sizeable 
wave of patent expirations is expected in ABC's fiscal 2014.

--ABC's incumbent market leadership in the higher-margin and -growth specialty 
drug distribution space provides support to the company's growth prospects and 
appropriately slim margins.

--Much uncertainty remains related to U.S. healthcare and budget reform. Fitch 
expects that pharmaceutical reimbursement will be constrained in the 
near-to-intermediate term, though drug distributors are relatively insulated 
from these forces.

--Recent and continued expansion into consulting and related drug channel 
services will support margins and growth prospects over the ratings horizon.

The Stable Outlook reflects Fitch's view that ABC will continue to conduct 
stable operations which generate consistent and meaningful cash flows. Fitch 
further expects that ABC will maintain its historically conservative approach to
acquisitions and cash deployment and will remain committed to its core business 
of drug distribution.


Maintenance of an 'A-' Issuer Default Rating (IDR) will require debt-to-EBITDA 
generally maintained at or below 1.2 times (x) over the ratings horizon, 
accompanied by steady funds from operations (FFO) in excess of $800 million 
annually. An upgrade to 'A' is not likely in the near term, as Fitch believes 
company management would need to demonstrate a commitment to operating with debt
leverage below 0.75x. Fitch does not expect ABC to commit to operating with such
low leverage over the ratings horizon.

Fitch believes ABC has ample flexibility at its current 'A-' ratings. However, a
negative rating action could be caused by deteriorating profit margins leading 
to materially depressed cash flows and elevated leverage metrics. Pricing 
pressure greater and more direct than expected from payors' cost containment 
efforts could cause such margin deterioration. Furthermore, a leveraging 
transaction or one that illustrates a departure from ABC's traditional 
commitment to its core drug distribution business could cause downward ratings 


Steady demand for pharmaceuticals in the U.S. contributes to an exceptionally 
stable operating profile. Drug distributors have proven rather resilient in 
recent years despite depressed patient volumes in hospitals and elevated levels 
of unemployment. Although organic top-line growth in traditional drug 
distribution has been in the low-single digits, ABC has grown its profit margins
and continues to produce material amounts of free cash flow (FCF). Fitch expects
relatively flat organic top-line growth in 2013.


ABC has benefited in the past couple years from the unprecedented wave of 
branded drug patent expirations. Drug distributors, as well as mail-order and 
retail pharmacies, earn higher margins on the sale of generic drugs. Generic 
conversions have driven latest 12 months (LTM) EBITDA margin expansion of 20 
basis points (bps) over the past six quarters. Fitch expects the effects of 
these branded-to-generic conversions to be less pronounced in ABC's fiscal 2013 
due to fewer large drugs' patent expirations. Fitch believes much of the recent 
margin expansion is durable. However, margins are likely to be pressured 
somewhat by ABC's new lower-margin contract with Express Scripts, Inc., which 
begins Oct. 1, 2012.


ABC's management has demonstrated a commitment to maintaining a financial 
profile reflective of an entity rated in the single-A category. Fitch expects 
the company to remain committed to operating with leverage, as adjusted for 
operating leases, below 1.5x. (This figure implies Fitch-calculated unadjusted 
leverage of 1.2x-1.3x.) The issuance of $500 million of new notes in November 
2011 caused leverage to temporarily increase outside this range. However, Fitch 
forecasts unadjusted debt leverage of 1.0x at Sept. 30, 2012 due to the 
repayment of $392 million of notes in September 2012. Fitch expects ABC to 
operate with unadjusted leverage near 1.0x over the ratings horizon.

ABC has proven judicious in its M&A activity over the past several years. Fitch 
views event risk associated with M&A to be limited given ABC's track record of 
sticking to its core competencies and management's traditional financial 
discipline, as well as the fact that there remain only a few acquisition targets
in the pure U.S. drug distribution space.


ABC's specialty distribution business is the largest in the U.S. The company's 
incumbent leadership position in the higher-growth and -margin specialty drug 
distribution business provides margin support and growth potential in excess of 
that inherent to the traditional drug distribution business. The prospect of 
biosimilars in the U.S. over the next few years also adds to the growth 
potential afforded ABC by its strong specialty distribution business.

ABC has completed four acquisitions in the past 15 months, aimed at 
strengthening the company's relationships with especially biotech manufacturers,
positioning the company at certain important points within the drug channel, and
providing growth opportunities tied to its core drug distribution operations. 
Fitch views each of the deals as strategically sound and important for 
strengthening ABC's competitive position within the drug channel.


Despite the Supreme Court's ruling on the constitutionality of the Patient 
Protection and Affordable Care Act (ACA) and the writing of many of the rules 
and regulations that are to guide the bill's execution, much uncertainty 
remains. Additionally, the upcoming U.S. elections could have a material effect 
on healthcare industry participants over the next several years. Fitch believes 
that drug distributors are relatively insulated from these forces due to their 
position in the middle of the drug channel. However, Fitch's expectation for 
constrained reimbursement going forward could result in modest margin pressure 
on ABC and its peers over the ratings horizon.


ABC maintains ample liquidity, consisting of $1.7 billion of cash on hand, 
approximately $600 million available on its $700 million revolver due 2016, and 
full availability on its $700 million A/R facility due 2014 at June 30, 2012. As
evidenced by a recent notes issuance and credit facility amendment, Fitch 
believes ABC has exceptional access to the capital markets.

Debt maturities are as follows: $500 million in 2015, $88 million in 2016, $400 
million in 2019, and $500 million in 2021. Forecasted cash generation and 
anticipated market access are sufficient to cover debt obligations.

Fitch has affirmed ABC's ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'A-';
--Short-term IDR at 'F2';
--Senior unsecured bank facility rating at 'A-';
--Senior unsecured notes at 'A-';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below