Fitch Downgrades Bristol Myers Squibb's IDR to 'A-'; Outlook to Stable
CHICAGO -- July 1, 2013
Fitch Ratings has downgraded Bristol-Myers Squibb Co.'s (Bristol Myers Squibb)
long-term Issuer Default Rating (IDR) to 'A-' from 'A'. See a full list of
affected ratings below.
The ratings apply to approximately $7.3 billion of debt. The Rating Outlook is
revised to Stable from Negative.
KEY RATING DRIVERS
--Operational pressure peaking in 2013: Plavix and Avapro patent expirations
have negatively affected total company sales, operating margins and cash flows
more than expected. Fitch sees operational improvement in 2014 due to a lull
period in patent losses. Recovery will be short-lived, however, as another
wave of patent losses representing over 35% of present revenues arrives in
--Debt leverage reflective of 'A-' category: Fitch expects debt could trend
higher, net of refinancing maturing securities, during the second half of 2013
as the company seeks additional liquidity in the U.S. Fitch sees leverage in
the range of 1.7x to 2.0x EBITDA over the long term, fluctuating due to timing
of key drug patent lapses.
--Free cash flow moderates: Dampened profitability from patent losses is
expected to hinder free cash flow generation (FCF; cash from operations less
dividends and capital expenditures); however, Fitch anticipates FCF to remain
above $400 million annually in 2013 and 2014.
--Coming patent cliff less daunting: Fitch anticipates that continued market
uptake of promising new medicines, growth of core therapeutics, and successful
commercialization of key research projects may minimize patent expirations of
Sustiva, Baraclude, and Abilify in 2015. Fitch anticipates revenue growth in
the long term as drug patent expirations ease.
--Capital deployment eases: Fitch sees capital uses ease for business
development and share purchasing this year following heavy spending in 2012.
The company spent more than $12 billion to buy new assets and return value to
shareholders via dividends and share repurchases in 2012.
Operational Pressure from Plavix Expiration
The dramatic decline in Plavix sales following patent expiration in May 2012
was the main driver of overall revenue decreases of 24.6% and 17.1% for the
latest 12-month (LTM) period ending March 31, 2103, and 2012, respectively.
Concomitantly, EBITDA margin compressed more than expected to 23.3% for the
same LTM period, from 35.8% in 2011, In addition, FCF fell to $537 million in
2012 and turned negative for the LTM period after excluding $3.57 billion
received from AstraZeneca plc (AstraZeneca) for the shared purchase of Amylin.
Fitch sees some margin improvement and modest FCF growth over the next year as
the company recovers from the Plavix patent loss. However, the company faces
another patent expiration period in 2015-2016.
Moderate Impact from Patent Losses in 2015
A second wave of drug patent expirations hits in 2015 when Sustiva, Baraclude,
and Abilify lose market exclusivity in the U.S. The maturing medicines
generated sales of $5.69 billion for the LTM period or 35.1% of total
revenues. The patent expiration of Baraclude in the U.S. is immaterial;
however, the potential loss of exclusivity in international markets in October
2016 presents the main challenge. Market uptake of Bristol-Myers Squibb's most
promising new therapeutics - Yervoy, Eliquis, Bydureon, and Forxiga - and
continued growth of core blockbuster medicines, notably Sprycel, Reyataz, and
Orencia, provides support during the coming patent cliff. As such, the impact
from patent lapses during 2015 may be more moderate than that experienced in
the present patent expiration period. Fitch forecasts revenues to 'recover'
from the patent losses as shown by a compound annual growth of 2.3% in 2012 to
Leverage to Vacillate in the Long Term
Gross debt leverage has risen to 1.94x for the LTM period ending March 31,
2013 from 1.38x in 2012, and is expected to remain above 1.8x in 2013, a level
reflective of the current rating category. Margin contraction and an increased
debt load led to the increase in total debt leverage since the end of the
year. Fitch assumes that Bristol-Myers Squibb will seek new financing to pay
down $600 million in maturing debt in the second half of the year. Fitch
anticipates improvement in debt leverage in 2014 following annualizing the
Plavix patent loss; however, the decrease will reverse in 2015 in conjunction
with the next patent expiration period, yet remain below 2.0x. The next
significant debt maturity is $650 million in 4.375% unsecured notes due in
Margins Pressured by Partnered Medicines
In addition to margin pressure from key drug patent losses, a product-mix
shift to promising lower margin partnered products - Eliquis,
Onglyza/Kombiglyze, Forxiga, and Bydureon - will dampen overall margin despite
the benefit of sharing the marketing and development costs. Potentially
affecting the sales mix positively in the long term is successful
commercialization of internally developed all-oral Hepatitis C treatments and
first-in-class oncology treatment, nivolumumab. Fitch expects sequential
improvement in margins during 2014, but compression in 2015 accelerated by key
drug patent losses.
Free Cash Flow Moderates
Excluding the cash received from AstraZeneca for its share of the Amylin
acquisition in 2012, FCF was $537 million or 3.1% of revenues in 2012 and
-$271 million for the LTM period. Working capital uses plus significantly
lower Plavix and Avapro sales resulted in $1.1 billion less operating cash
flow in the first quarter of 2013 versus the prior year first quarter. As
such, Fitch anticipates FCF to fall to around $450 million in 2013 and $550
million in 2014, assuming a continued commitment to dividends and higher
Capital to Be Preserved
Fitch expects Bristol-Myers Squibb will refrain from devoting significant
capital toward business development and share repurchasing activities in 2013
following a year of heightened spending. During 2012, the company returned
$4.69 billion to shareholders via dividends and share repurchases, while
adding two significant assets to its 'String of Pearls' for approximately $6
billion ($7.5 billion including assumed debt). The main lever for returning
value to shareholders this year in Fitch's opinion will be dividends, which
increased 2.6% for 2013. The company paid out $2.29 billion for the LTM
Fitch views an upgrade as unlikely given anticipated operational pressure from
expiring drug patents through 2016. However, positive action would be
warranted if Bristol-Myers Squibb circumvents the negative effect on earnings
and cash flows from lost revenues from expiring products such that gross
leverage returns and stays below 1.7x and FCF margin is maintained at 8%.
Operational improvement is likely to result from continued market demand for
new therapeutics as well as successful commercialization of promising oral
Hepatitis C treatments and the potential first-in-class oncology drug,
Further ratings pressure would stem from the company's inability to mitigate
the negative effects in 2015-2016 of the Abilify, Sustiva, and Baraclude
patent expirations. A one-notch downgrade could follow a sustained increase in
total debt leverage to greater than 2.0x together with significant FCF
contraction resulting from higher-than-expected margin compression and
Fitch has downgraded the following ratings:
--IDR to 'A-' from 'A';
--Senior unsecured debt to 'A-' from 'A';
--Bank loan to 'A-' from 'A';
--Short-term IDR to 'F2' from 'F1';
--Commercial paper to 'F2' from 'F1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'Corporate Rating Methodology' dated Aug. 8, 2012
'Rating Pharmaceutical Companies - Sector Credit Factors', dated Aug. 9, 2012
Applicable Criteria and Related Research:
Rating Pharmaceutical Companies
Corporate Rating Methodology
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Michael Zbinovec, +1 312-368-3164
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Robert Kirby, +1 312-368-3147
Dave Peterson, +1 312-368-3147
Brian Bertsch, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.