March 28, 2012 / 4:45 PM / 8 years ago

TEXT-S&P keeps Abbott Laboratories ratings on watch negative

March 28 - Overview	
     -- U.S. diversified pharmaceutical company Abbott Laboratories intends to 	
split off its global proprietary pharmaceutical operations into a separate 	
company, to be named AbbVie, leaving the lower margin established 	
pharmaceutical operations with Abbott.	
     -- At this time, neither the exact composition of either business or 	
their financial structure is known, but both will be smaller and less diverse 	
than Abbott is now.	
     -- On Oct. 19, 2011, we placed our 'AA' long-term and corporate credit 	
ratings and 'A-1+' commercial paper rating on Abbott on CreditWatch with 	
negative implications.	
     -- Resolution of the CreditWatch listing awaits publicly disclosed 	
details of the exact business and financial structure of Abbott postspinoff.	
 	
Rating Action	
On March 28, 2012, Standard & Poor's Ratings Services said that its 'AA/A-1+' 	
long- and short-term ratings on Abbott Park, Ill.-based diversified 	
pharmaceutical company Abbott Laboratories remain on CreditWatch, where
we placed them with negative implications on Oct. 19, 2011.	
 	
Rationale	
The CreditWatch listing reflects the smaller business risk profile and 	
uncertain financial risk profile of the remaining operations at Abbott. 	
Precisely which pharmaceuticals will remain with Abbott is uncertain, although 	
the emerging-market focus is clear. Abbott's pharmaceutical segment now 	
accounts for the majority of earnings and cash flows, with little significant 	
product concentration. Its nutritional business, with the well-recognized 	
Similac brand of infant nutritionals, has positions in mature and emerging 	
markets. The worldwide diagnostics unit has strong positions in 	
immunochemistry assays, hematology, and molecular diagnostics. The vascular 	
unit benefits from the growing success of the Xience family of drug-eluting 	
stents (DES) over its competitors.	
	
Acquisitions often strengthen these positions. For example, Abbott's presence 	
in the ophthalmic market was established through the early 2009 purchase of 	
Advanced Medical Optics (AMO). In 2010, Abbott added substantially to its 	
international presence, in our view, through the $6.7 billion acquisition of 	
the pharmaceutical business of Belgium-based Solvay SA and $3.7 billion 	
purchase of India's Piramal branded generic drug business. In our view, Abbott 	
has a solid track record of successfully integrating acquisitions.	
 	
Liquidity	
Abbott's liquidity is "exceptional," supporting our 'A-1+' commercial paper 	
rating. Sources of cash are likely to exceed mandatory uses of cash over the 	
next two to three years. Relevant aspects of Abbott' liquidity are:	
     -- We expect liquidity sources to exceed uses by at least 2x over the 	
next two to three years.	
     -- Even if EBITDA declines by 50%, we expect liquidity sources to 	
continue exceeding uses.	
     -- Debt to capital is more than 30% below the level specified by the sole 	
financial covenant in its credit agreement.	
     -- With its ample cash balance and a largely undrawn $6.7 billion 	
revolving credit facility, which supports a large commercial paper (CP) 	
program, we believe Abbott could absorb, without refinancing, high-impact, 	
low-probability events.	
     -- In our assessment, Abbott has well-established, solid relationships 	
with banks, and a generally high standing in the credit markets.	
 	
Sources of liquidity as of Dec. 31, 2011, included cash and readily available 	
investments of $9.0 billion. The company also has access to revolving credit 	
facilities totaling $6.7 billion, which it used to backup CP issuance. We 	
expect Abbott to generate discretionary cash flows of about $5.0 billion 	
annually. The largest recurring call on cash is the dividend it pays to 	
shareholders, which we expect to be about $2.7 billion in 2011. The payment of 	
this dividend sometimes will exceed a quarter's free cash generation. We 	
believe Abbott will readily pay near-term maturities of $1.0 billion in 2012. 	
Postretirement funding obligations are modest.	
 	
CreditWatch	
Resolution of the CreditWatch listing awaits publicly disclosed details of the 	
exact business and financial structure of Abbott postspinoff. Although the 	
established pharmaceutical products segment will be retained by Abbott 	
Laboratories, the pharmaceutical segment's sales base will become smaller. The 	
distribution of the $15 billion of debt carried as of Dec. 31, 2011, is the 	
second major uncertainty reflected in the CreditWatch listing.	
 	
Related Criteria And Research	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
 	
Ratings List	
	
Remaining On CreditWatch	
                                        	
Abbott Laboratories	
 Corporate Credit Rating                AA/Watch Neg/A-1+  	
 Senior Unsecured                       AA/Watch Neg       	
Commercial Paper                        A-1+/Watch Neg    	
	
Abbott Japan Co. Ltd.	
 Senior Unsecured                       AA/Watch Neg      	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings referenced 	
herein can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.
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