Fitch Rates Bristol-Myers Squibb's Proposed Notes Offering 'A-', Stable
CHICAGO -- October 24, 2013
Fitch Ratings has assigned an 'A-' rating to Bristol-Myers Squibb Co.'s
(Bristol Myers Squibb) proposed notes offering. Fitch expects the net proceeds
from the issuance to be used for general corporate purposes, including the
repayment of all or a portion of the company's commercial paper borrowings.
The Rating Outlook is Stable. A full list of the company's ratings follows at
the end of this press release.
KEY RATING DRIVERS
--The Plavix and Avapro patent expirations are currently weighing heavily on
the company's sales, operating margins and cash flows. Fitch does see
operational improvement in 2014 due to a lull period in patent losses.
However, a sustained recovery will be difficult because another wave of patent
losses representing over 35% of 2013 revenues occurs in 2015.
--Fitch expects debt could trend higher than the June 30, 2013 level of $6.7
billion, if the company seeks additional liquidity in the U.S. for possible
targeted business development transactions. Fitch expects leverage sustained
in the range of 1.7x to 2.0x EBITDA over the long term, with fluctuation due
to timing of key drug patent lapses.
--Lower profitability from patent losses is currently a headwind to free cash
flow generation (FCF; cash from operations less dividends and capital
expenditures). FCF in the LTM ended June 30, 2013 was $3.69 billion, which is
quite weak given that this figure includes $3.57 billion received from
AstraZeneca plc (AstraZeneca) for the shared purchase of Amylin. However,
Fitch anticipates FCF to range between $400 million and $600 million annually
through 2014, excluding one-time items, such as the abovementioned AstraZeneca
--Fitch anticipates that continued market uptake of promising new medicines,
growth of core therapeutics, and successful commercialization of key research
projects will help offset the effects of the patent expirations of Sustiva,
Baraclude, and Abilify in 2015.
Operational Pressure from Plavix Expiration
The decline in Plavix sales following the U.S. patent expiration in May 2012
was the main driver of overall revenue decrease of 22.9% for the latest
12-month (LTM) period ending June 30, 2013. The operating EBITDA margin
compressed more than Fitch expected to 22.1% in 2012, from 35.8% in fiscal
year 2011. As mentioned above, resulting FCF was also quite weak in the LTM
ended June 30, 2013. Fitch projects operating margin improvement and positive
FCF generation (of roughly $550 million) in 2014, as the company recovers from
the Plavix patent loss.
Moderate Impact from Patent Losses in 2015 - 2016
A second wave of drug patent expirations occurs in 2015 - 2016 when Sustiva,
Baraclude, and Abilify lose market exclusivity in the U.S. The maturing
medicines generated sales of $5.6 billion in the LTM period ended June 30,
2013 period, or 35.3% 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 a 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, should provide support during the 2015
-2016 patent expiry period. As such, the negative effect to sales growth and
operating margin should be more moderate than that experienced in the present
patent expiration period.
Leverage to Remain Below 2.0x
Gross debt leverage has risen to 1.92x for the LTM period ending June 30, 2013
from 1.38x in 2012, and is expected to range between 1.6x and 2.0x through
2014. Margin contraction and an increased debt load led to the increase in
total debt leverage since the end of the year. Fitch anticipates improvement
in debt leverage in 2014 following annualizing the Plavix patent loss.
However, the decrease will reverse in2015 in conjunction with the next patent
expiration period, yet remain below 2.0x.
Profitability 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 operating 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
potentially first-in-class oncology treatment, nivolumumab.
Free Cash Flow Moderates
FCF was approximately $20 million (excluding the payment from AstraZeneca) for
the LTM period ended June 30, 2013. Working capital uses plus significantly
lower Plavix and Avapro sales resulted in CFO dropping by $439 million in the
first six months of 2013 versus the prior year six-month period. Fitch
anticipates working capital usage to largely reverse in the second half of
2013 as the company works down inventory and accounts receivable, resulting in
FCF of about $450 million for the year. FCF generation will rebound to around
$550 million in 2014, after the annualization of the 2012 - 2013 patent
losses, assuming a stable dividends and capital spending policy. The company
increased the dividend 2.6% for 2013 and paid out $2.29 billion for the LTM
period ended June 30, 2013.
Bristol-Myers Squibb has adequate sources of liquidity. At June 30, 2013, the
company had full capacity under $3.0 billion in five-year revolving credit
facilities comprising $1.5 billion expiring in September 2016 and $1.5 billion
expiring in July 2017. The revolvers contain no financial covenants. Also on
June 30, 2013, Bristol-Myers Squibb had cash and short-term investments of
$2.8 billion and long-dated securities of $3.2 billion. Roughly $700 million
of cash, cash equivalents and marketable securities resides domestically. The
next significant debt maturity is 500 EUR million in 4.375% unsecured notes
due in November 2016.
Fitch views an upgrade as unlikely given anticipated operational pressure from
expiring drug patents through 2016. However, positive action would be
warranted if gross debt leverage is maintained below 1.7x and FCF margin is
maintained at 8%. Drivers of operational improvement would include strong
demand for new therapeutics as well as successful commercialization of
promising oral Hepatitis C treatments and the potential first-in-class
oncology drug, nivolumumab.
Ratings pressure would result if the company is not successful in mitigating
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 margin compression and incremental debt.
Fitch rates Bristol-Myers Squibb as follows:
--Senior unsecured debt 'A-';
--Bank loan 'A-';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The ratings apply to approximately $6.7 billion of debt at June 30, 2013, and
the Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Pharmaceutical Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Rating Pharmaceutical Companies
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Bob Kirby, CFA, +1 312-368-3147
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Michael Zbinovec, +1 312-368-3164
Dave Peterson, +1 312-368-3147
Brian Bertsch, +1 212-908-0549
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