Fitch Affirms L-T Ratings of AmerisourceBergen at 'A-'; Outlook Stable
CHICAGO -- September 17, 2013
Fitch Ratings has affirmed the ratings of AmerisourceBergen Corp. (ABC),
including the long-term Issuer Default Rating (IDR) at 'A-'. The Rating
Outlook is Stable.
A full list of rating actions follows at the end of this release. The ratings
apply to approximately $1.4 billion of debt outstanding at June 30, 2013.
KEY RATING DRIVERS
Stable Operating Profile: 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. Drug
distribution, though low margin, is relatively insulated from pricing and
regulatory pressures faced by other areas of healthcare in the U.S.
Strong Credit Metrics: ABC maintains strong credit metrics through its
consistently strong core cash generation, efficient operations, and commitment
to operating with low debt leverage. Fitch expects ABC to maintain gross debt
leverage around 1x over the ratings horizon.
Solid Liquidity: ABC maintains a strong liquidity position, which provides
ample flexibility for the firm to fund significant working capital and other
cash requirements ahead of and during the beginning of its distribution
contract with Walgreens.
WAG-AB Alignment: Fitch views favorably ABC's alignment with Walgreen & Co.
(WAG) and Alliance Boots GmbH (AB), as it provides significant incremental
distribution volumes and improved long-term growth prospects. Fitch expects
the relationship will drive increased top-line growth, stronger cash flows,
and incremental margin expansion opportunities over the ratings horizon,
though initially resulting in a significant drop in profit margins and
material cash outflows for working capital.
Limited U.S. Growth, Event Risk: Fitch believes there are limited growth
opportunities in the traditional U.S. drug distribution space. As a result,
and now more so considering ABC's alignment with WAG-AB, Fitch expects ABC to
responsibly pursue growth in service-related and non-U.S. markets over the
ABC has good flexibility at its current ratings. Maintenance of its 'A-'
long-term ratings will generally require ABC to operate with gross debt
leverage at or below 1.2x-1.3x, accompanied by steady funds from operations
(FFO) in excess of $800 million annually. EBITDA margins will decline
significantly in fiscal 2013 and 2014 due to the onboarding of the new Express
Scripts, Inc. (ESRX) and WAG distribution contracts. But Fitch expects ABC to
generate steady to moderately expanding EBITDA margins thereafter, in support
of the firm's current ratings.
An upgrade to 'A' is not expected over the ratings horizon. Fitch believes
ABC's management would need to commit to operating with gross debt leverage
below 0.75x, accompanied by increased profit margins and cash flows, to
achieve an upgrade to 'A'. Fitch does not expect ABC to commit to operating
with such low leverage in the near-to-intermediate term.
Negative ratings momentum could be caused by greater and more direct pricing
pressures than Fitch currently expects and/or by a transaction which drives
leverage sustainably above 1.2x-1.3x or that illustrates a departure from
ABC's traditional commitment to its core drug distribution business. Fitch
notes the risks associated with ABC's recently announced alignment with
WAG-AB, including cash outflows associated with working capital and hedging
transactions, and the potential for setbacks along the way. But Fitch does not
expect these risks to precipitate a negative rating action over the ratings
STABLE OPERATIONS; COMMITMENT TO STRONG CREDIT PROFILE
Steady demand for pharmaceuticals contributes to an exceptionally stable
operating profile for U.S. drug distributors. The industry has proven rather
resilient to persistently depressed patient volumes, elevated levels of
unemployment, and constrained healthcare reimbursement in recent years.
Appropriately low EBITDA margins have grown steadily in recent years, owing
primarily to brand-to-generic conversions and efficiency improvements.
ABC's credit profile also benefits from management's demonstrated commitment
to conservative financial management. Fitch expects the firm to remain
committed to operating with debt leverage, as adjusted for operating leases,
below 1.5x. (This figure implies Fitch-calculated unadjusted leverage of
1.2x-1.3x.) Unadjusted debt leverage of 1.0x at June 20, 2013 gives ABC ample
flexibility to issue additional debt, if necessary, to help fund cash outflows
associated with working capital and/or hedging transactions. Fitch generally
views event risk associated with M&A to be limited given ABC's history of
sticking to its core competencies and management's demonstrated financial
ALIGNMENT WITH WAG-AB IS NET POSITIVE; BUT NOT WITHOUT RISKS
The unique 10-year, comprehensive distribution contract with WAG, which began
Sept. 1, 2013, will add materially to ABC's top-line and cash flows over the
next couple of years. Gross margins will decline in ABC's fiscal 2014 due to
the low-margin nature of distributing to a customer as large as WAG. But Fitch
expects the new WAG business will contribute to ABC's already stable and
highly efficient operations by allowing the firm to leverage the fixed costs
associated with drug distribution.
Fitch forecasts EBITDA margins of approximately 1.6% and 1.4% in ABC's fiscal
2013 and 2014, respectively, compared to 1.84% in fiscal 2012. Higher margins
in 2014 and beyond could be achieved depending on the pace at which generics
are added to the WAG distribution mix and the success of the generics
procurement joint venture among WAG, AB, and ABC. Expansion opportunities in
adjacent businesses (i.e. World Courier and consulting services) and in
non-U.S. markets - especially in partnership with AB - could also provide
margin upside over the ratings horizon.
Significant cash outflows for working capital needed to onboard the WAG
business and to fund hedging transactions will pressure ABC's overall cash
generation, particularly in 2013. Fitch forecasts free cash flow (FCF; cash
from operations minus capital expenditures minus dividends) of less than $100
million in fiscal 2013, largely as a result of these cash outflows.
Furthermore, Fitch expects ABC to engage in significant share repurchase
activity in 2014-2016 to offset dilution from the potential exercise of the
WAG-AB warrants. It is possible ABC could use additional debt to help fund
these cash needs. In general, Fitch believes these risks and any possible
incremental debt will be addressed in a manner appropriate at ABC's current
INCREASED CUSTOMER CONCENTRATION FROM NEW WAG AND ESRX BUSINESS
Fitch acknowledges the risks generally associated with increased revenue
concentration, as represented by ABC's new contracts with ESRX and WAG. But
these risks are mitigated by the long-term and comprehensive nature of the WAG
distribution contract, as well as the costs that are required to switch drug
distributors, especially as it relates to technological integration.
Furthermore, Fitch thinks ABC will benefit from the long-term market growth
connected with serving both the largest retail drugstore chain and the largest
mail-order pharmacy in the U.S. Fitch estimates that these two customers will
account for more than 40% of ABC's revenues in fiscal 2014.
ONCOLOGY SLOWDOWN LIKELY OFFSET BY OTHER GROWTH DRIVERS
ABC's incumbent leadership in the higher-growth and higher-margin specialty
drug distribution business is a material competitive advantage, supporting
ongoing growth and margin expansion prospects. However, recent pressure on
ABC's oncology volumes, though mostly explained by recent Medicare
reimbursement cuts, is somewhat concerning. Nevertheless, Fitch expects ABC
will continue to grow other areas of its specialty business, including more
nascent therapeutic classes and non-U.S. markets in the longer term, providing
growth and margin support over the rating horizon.
Brand-to-generic conversions will also continue to support profit margins. ABC
and its peers have benefited materially from the unprecedented wave of generic
launches in recent years, which will again show prominently in calendar 2014.
While Fitch believes much of the margin expansion achieved by drug
distributors due to generic conversions is durable, it will be harder to
identify for ABC going forward due to the impact of the lower-margin ESRX and
The introduction of biosimilars to the U.S. drug channel - possibly as early
as 2015 - will provide another area of potential margin growth for drug
distributors. ABC is uniquely positioned among its peers to benefit from
biosimilars, given its leadership position in specialty drug distribution and
its relationships with WAG and ESRX, which currently control sizeable shares
of the specialty pharmacy market.
SOLID LIQUIDITY; MANAGEABLE DEBT MATURITIES
ABC's maintains solid liquidity and capital market access. Total liquidity at
June 30, 2013 included $1.07 billion of cash on hand and $690 million
available under its $700 million unsecured revolver. In July 2013, ABC
increased the committed amount under its revolver to $1.4 billion, adding an
incremental $700 million to its available liquidity. ABC also has a $950
million A/R facility and $45 million under an uncommitted short-term facility.
Internal and external liquidity are more than adequate to address ABC's debt
maturities. Only $500 million is due in the next five years (September 2015),
which Fitch expects ABC will refinance.
Fitch has affirmed ABC's ratings as follows:
--Long-term IDR at 'A-';
--Short-term IDR at 'F2';
--Senior unsecured bank facility at 'A-';
--Senior unsecured notes at 'A-';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--'Trekking the Path to Biosimilars - Forging Ahead' (Aug. 5, 2013);
--'U.S. Healthcare Stats Quarterly - First-Quarter 2013' (June 25, 2013);
--'Vital Signs - Currents in the Drug Channel' (Podcast) (April 25, 2013);
--'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (April 24,
--'Fitch: Walgreens Deal Likely Positive for AmerisourceBergen; No Immediate
Ratings Impact' (March 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Trekking the Path to Biosimilars -- Forging Ahead
U.S. Healthcare Stats Quarterly - First-Quarter 2013
Vital Signs -- Currents in the Drug Channel
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
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.
Jacob Bostwick, CPA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Bob Kirby, CFA
Brian Bertsch, +1-212-908-0549 (New York)
Press spacebar to pause and continue. Press esc to stop.