Fitch Affirms Allergan's IDR at 'A+'; Rates New Debt
CHICAGO -- March 7, 2013
Fitch Ratings has affirmed Allergan Inc.'s (Allergan) Issuer Default Rating
(IDR) at 'A+'. A complete list of ratings affirmed is provided at the end of
The Rating Outlook is Stable. The ratings apply to approximately $1.52 billion
of outstanding debt.
In addition, Fitch has assigned an 'A+' rating to Allergan's proposed issuance
of $600 million in senior unsecured debt due 2018 and 2023. Proceeds of the
new debt are expected to be used for general corporate purposes, including
funding for the recent acquisition of MAP Pharmaceuticals.
KEY RATING DRIVERS
Allergan sustained a trend of solid revenue growth for the third consecutive
year with a sales increase of 7.1% in 2012 despite pressures from U.S. health
care reform and growing European austerity measures. Fitch forecasts
continuation of the positive trend with average sales growth of greater than
5% in 2013 through 2015 accounting for the discontinuation of the obesity
intervention business in 2013 and the potential introduction of generic
Restasis products in 2014.
Last year, the company's cash-pay businesses, representing around 40% of total
revenues, performed well with global sales of Botox Cosmetic, facial fillers,
and breast augmentation products increasing 8.4%, 6.9%, and 8%, respectively.
The company's glaucoma franchises Alphagan and Lumigan generated sales growth
of 8.1% and 1.6% while competing with generic versions of Xalatan throughout
the year. Moreover, franchise sales were dampened by Allergan's decision to
halt U.S. distribution of the first-generation Lumigan 0.03% by the end of
Allergan continues to drive productivity from its research program that has
already launched over 20 novel eye-care treatments, line extensions, and new
medical devices since 2010. Most recently, the FDA granted approval for the
company's long-delayed next generation breast implant, Natrelle Style 410, as
well as an idiopathic overactive bladder indication for Botox. In Fitch's
view, the company will continue to devote significant resources to the
internal R&D program, supplemented by business development activities
including in-licensing new treatment projects.
Fitch sees continued benefits from commercialization of the R&D pipeline
helping offset the negative affect of patent losses, primarily the potential
U.S. expiration of the Restasis formulation patent in May 2014. Patent
expiration exposure is manageable as revenues from Restasis represented 13.6%
of total sales in 2012. Allergan has also proactively minimized the risk from
the looming U.S. patent expiration of Lumigan 0.03% in 2014 with the
discontinuation of U.S. distribution of the eye care drug in 2012.
Margins expanded in 2012 despite increased expenses for a deeper research
pipeline. Allergan is seeing the benefits of leveraging its sales and
marketing spending to promote complementary products and indications launched
since 2010. As such, EBITDA margin was 34.6% in 2012 compared to 32% in 2011
as SG&A was relatively consistent on a dollar basis with the prior year while
revenues increased 7.1%. Fitch believes that efforts to extract efficiencies
from sales and marketing expenses will offset downward pressure from
incremental investment into the R&D program leading to EBITDA margins greater
than 33% in 2013-2015.
Fitch believes that Allergan can maintain solid liquidity driven by steady
free cash flow of greater than $1 billion annually in 2013 to 2015 despite
rising capital spending in the intermediate term. The company reached a peak
in free cash flow generation at $1.38 billion (representing a margin of 23.8%)
in 2012. Additional liquidity is provided by full availability under an $800
million credit facility maturing in October 2016, serving to back up an $800
million commercial paper program, and cash and short-term investments of $2.96
billion at the end of 2012.
Debt leverage has been maintained below 1.0 times (x) since 2011 and was 0.8x
in 2012 due to a combination of EBITDA growth and debt reduction. Debt
leverage is expected to remain consistent with the current rating category
below 1.1x at the end of 2013 and beyond despite incremental debt to be used
for funding the MAP Pharmaceutical acquisition. Allergan has no refinancing
risk given the next significant debt maturity of $800 million in 5.75% senior
notes in April 2016.
Fitch anticipates Allergan to remain prudent with returning value to equity
shareholder. The company has historically prioritized investment to support
growth strategies over satisfying shareholder interests, which comprises a
small dividend and share repurchases to offset stock option dilution. After a
temporary increase in share repurchasing to 10 million shares (from 6 million)
in 2012, Fitch expects no significant changes to Allergan's annual dividends
of $.20 per share or the company's 'evergreen' share repurchase program. In
2012, Allergan paid $60.4 million in dividends and repurchased a net of $662.6
million in common equity.
Positive momentum to the rating would be supported by continued strong
operational performance and total debt leverage sustained at 1.0x or below
through the intermediate term. Incremental debt used for the recent purchase
of MAP Pharmaceuticals makes the leverage goal difficult to maintain over the
ratings horizon. In addition, Fitch would like to see a meaningful increase in
scale such that EBITDAR approaches $2.5 billion.
Fitch does not anticipate negative rating action given Allergan's proven
ability to leverage its operating cost base in light of reimbursement and
demand pressures stemming from macroeconomic headwinds, U.S. healthcare reform
efforts, and European austerity measures. However, negative pressure would
result from a leveraging transaction such that gross debt leverage rises and
stays around 1.5x through the intermediate term.
Fitch has affirmed the following ratings:
--Issuer Default Rating (IDR) at 'A+';
--Senior unsecured debt at 'A+';
--Bank loan at 'A+';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Pharmaceutical Companies - Sector Credit Factors' dated Aug. 9,
--'Corporate Rating Methodology' dated Aug. 8, 2012.
Applicable Criteria and Related Research
Rating Pharmaceutical Companies
Corporate Rating Methodology
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Michael Zbinovec, +1-312-368-3164
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Bob Kirby, CFA, +1-312-368-3147
Mike Weaver, +1-312-368-3156
Brian Bertsch, New York, +1 212-908-0549
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