-- Canonsburg, Pa.-based Mylan Inc. reduced leverage within the last couple of years almost a full turn, and recently the generic drug maker adopted a more public commitment to a financial risk profile consistent with an investment-grade rating.
-- We are raising our corporate credit rating on Mylan to ‘BBB-’ from ‘BB+.’
-- We are also raising the rating on the unsecured debt to ‘BBB-’ from ‘BB’ and lowering the rating on the debt that is losing collateral backing to ‘BBB-’ from ‘BBB.
-- The stable outlook incorporates our expectation that share repurchases and acquisitions will be conducted with the intention that the capital structure will not stray far or long from a 3x leverage target.
On Nov. 20, 2012, Standard & Poor’s Ratings Services raised its corporate credit rating (CCR) on generic drug maker Mylan Inc. to ‘BBB-’ from ‘BB+'. The outlook is stable.
We raised the rating on Mylan’s unsecured debt to ‘BBB-’ from ‘BB’, pari passu with the CCR under our investment grade rating criteria. However, we lowered our issue-level ratings on Mylan’s $1.25 billion senior term loan and $1.25 billion revolving credit facility to ‘BBB-’ from ‘BBB’ given that the security interest in collateral will be released upon the upgrade of the company. Since Standard & Poor’s does not assign recovery ratings on the debt of investment-grade-rated companies, we are withdrawing the issue-level recovery ratings on all of the company’s debt.
The ratings on Mylan reflect our expectation of mid-single-digit EBITDA growth over the next few years, and that leverage measures will remain in line with the guidelines for an “intermediate” (according to our criteria) financial risk profile. The upgrade incorporates room for potential share repurchases and acquisitions, given the ongoing consolidation of the generic drug industry. We expect operational performance to reflect increased new product introductions and a higher level of R&D spending. A “satisfactory” business risk profile reflects Mylan’s well-established position in the generic drug industry and our expectation that Mylan will continue participating in ongoing industry consolidation in a measured manner. We expect the generic drug industry to experience mid-single-digit growth over the next three years, as a record number of patent expirations through 2014 expands the range of generic drugs available. At the same time, payors and revenue-challenged governments worldwide are encouraging greater use of less-expensive generic drugs.
Standard & Poor’s base-case scenario:
-- We believe Mylan can achieve mid-single-digit revenue growth over the next 12 months, excluding acquisitions. This forecast factors in new product launches under the specialty segment, with moderation thereafter, and the favorable mid-term generic industry outlook.
-- We expect EBITDA margins of more than 26%.
-- We expect debt to EBITDA of less than 3x and funds from operations (FFO) to debt of about 30% through 2013. We expect that a near-30% increase in EBITDA this year from 2010 contributes to a reduction of about one turn in leverage in that time. Moreover, it provides substantial capacity for share repurchases and acquisitions.
Mylan’s satisfactory business risk profile is highlighted by its position as the world’s third-largest generic drug company, with sales of $6.6 billion for the 12 months ended Sept. 30, 2012. In our view, size and geographic reach are increasingly important competitive factors. Mylan operates in two segments, generics and specialty. Its diverse generic drug portfolio contributes about 90% to revenues; the balance is from branded products serving the respiratory and severe allergy markets. Most of the specialty revenues are from sales of the EpiPen Auto-Injector, for treatment of severe allergic reactions, including anaphylaxis. Revised guidelines for use of epinephrine injectors are driving a sharp increase in sales of this high-margin product. The new guidelines recommend that both patients and public places, such as schools, maintain two injectors at all times. Previously, the recommendation was only for a single injector. The reported operating margins for the specialty segment expanded to 38% for 2011 from 29% for 2010, mainly on strong performance of EpiPen.
Mylan’s generic drug portfolio is one of the broadest in the industry. Its operations are diversified across more than 150 countries, with leadership positions in France and several other key European markets as well as Australia. Mylan derives approximately 46% of revenues from the U.S., 24% from Europe, and the rest from Asia. We expect this geographic diversity to continue to offset declines in European operations as governments target pharmaceuticals for price cuts. With approximately 172 new product applications pending with the U.S. Food and Drug Administration, Mylan operates one of the industry’s most successful new generic drug efforts. Importantly, this pipeline includes 42 potential first-to-file applications, which can garner 180-day exclusivity.
We view Mylan’s liquidity as strong, with sources of cash likely to exceed mandatory uses over the next one to two years. Our assessment of Mylan’s liquidity is based on the following expectations and assumptions:
-- We expect the ratio of liquidity sources to uses to be at least 1.5x over the next one to two years.
-- Even if EBITDA declines by 30%, we expect liquidity sources to continue exceeding uses. Similarly, we expect an EBITDA decline of 30% would not cause a breach of covenants.
-- With its sizable cash balance and largely undrawn $1.25 billion revolving credit facility, we believe Mylan could absorb, without refinancing, high-impact, low-probability events. Additional liquidity is provided by a $400 million receivables facility.
-- In our assessment, Mylan has well-established, solid relationships with banks, and a generally high standing in the credit markets.
-- Sources of liquidity as of Sept. 30, 2012, included cash and readily available investments of $366 million, net of $1.4 million of restricted cash. Mylan had $910 million available under its $1.25 billion revolving credit facility expiring in November 2016. We expect annual cash flow after dividends to approximate $700 million through 2013.
-- We expect Mylan to use at least a portion of this cash flow for share repurchases, similar to the $500 million repurchased in 2012. In our view, Mylan has more than adequate capacity to meet near-term requirements and limited long-term needs until 2015.
The outlook is stable. Debt to EBITDA fell to 2.7x as of Sept. 30, 2012, as Mylan continues realizing benefits from recent small acquisitions and sharply increased EpiPen revenues. With a large global footprint and a full generic drug pipeline, Mylan is also well positioned to capitalize on the opportunities in the global generic space over the next three years. These opportunities should enable revenue growth rates at least in the mid- to upper-single digits, with stable margins in the mid-20% area for the foreseeable future. A broad product portfolio lessens the risk that any one product setback could significantly affect operations. We could raise our rating if we believed that credit measures would be sustained at around 2.5x and FFO to debt at close to 40%. However, we could lower our rating if Mylan undertakes additional significantly debt-financed acquisitions or engages in shareholder-friendly capital market actions that drive leverage to about 4x, without the prospect that it would then decline to 3x within 18 months. Accordingly, we believe that the company has the capacity to make a richly valued $4 billion acquisition within the context of the current rating.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Corporate Credit Rating BBB-/Stable/-- BB+/Stable/--
Upgraded; Recovery Ratings Withdrawn
Mylan Inc. Senior Unsecured BBB- BB
Recovery Ratings NR 5
Downgraded; Recovery Ratings Withdrawn
Mylan Inc. Senior Secured BBB- BBB
Recovery Ratings NR 1