Fitch Rates Eli Lilly's $1B Notes Issuance 'A'
CHICAGO -- February 21, 2014
Fitch Ratings has assigned an 'A' rating to Eli Lilly & Co. Inc.'s (Lilly) $1
billion senior unsecured notes issuance. A full list of ratings is shown at
the end of this release.
Lilly issued $600 million of 1.95% notes due in 2019 and $400 million of 4.65%
notes due in 2044. The net proceeds of the issuance will be used to
repay/refinance existing debt and for general corporate purposes.
The ratings apply to approximately $5.2 billion of debt at Dec. 31, 2013.
Lilly's short-term debt, including the current portion of its long-term debt,
is roughly $1 billion.
KEY RATING DRIVERS
Fitch believes Lilly will maintain a credit profile supportive of its 'A'
rating despite facing significant operational headwinds during 2014. Fitch's
rating actions are based on the following:
--Lilly faces significant patent risk with three of its top drugs, which
account for roughly 30% of total firm sales and are scheduled to lose patent
protection during the next two years.
--Fitch expects LLY will return to top-line growth during 2015-2016 with the
annualizing of patent expiries and continued strength in established and new
products such as Amyvid, Alimta, Cialis, Effient, Erbitux and
--Fitch believes Lilly's late-stage pipeline, particularly strong in
treatments for diabetes and cancer, offers the company numerous opportunities
to sustain longer-term growth.
--Fitch anticipates margin compression in 2014 due to Cymbalta's patent
expiry. However Lilly's cost cutting measures should result in a leaner cost
structure, paving the way for margin expansion in 2015-2016 as sales rebound.
--Fitch forecasts that Lilly will generate approximately $600 million-$800
million of free cash flow (FCF; cash flow from operations minus capital
expenditures and dividend payments) in 2014.
--Relatively aggressive share repurchases from now through 2017 are
incorporated in Fitch's forecast. However, cash dividend increases are
expected to be modest and acquisitions targeted.
--With leverage (total debt/EBITDA) of 0.74x for the latest 12-month (LTM)
period ended Dec. 31, 2013, Fitch looks for Lilly to operate with debt
leverage of 1.1x-1.3x during 2014.
--Fitch assumes the company will maintain adequate liquidity during the
upcoming patent cliff, supported by FCF generation, balance sheet cash, and
availability on its revolving credit facility.
SIGNIFICANT PATENT CLIFF
Lilly faces significant patent expiries through 2014. Its largest selling
drug, Cymbalta, lost U.S. patent protection in December 2013 and will lose
patent protection in Europe in August 2014. Cymbalta accounts for roughly 24%
of total company sales. Evista loses U.S. market exclusivity in March 2014 and
accounts for approximately 4% of total firm revenues.
REBOUND WITH PATENT-PROTECTED PRODUCTS
Fitch expects Lilly will return to top-line growth during 2015-2016, achieving
annual sales in excess of $20 billion. The negative effect of near-term patent
expiries on revenues will have effectively annualized in early 2015. Currently
marketed drugs including Amyvid (Alzheimer's diagnosis), Alimta (cancer),
Cialis (erectile dysfunction), Effient (cardiac thrombosis), Erbitux (cancer)
and Tradjenta/Jandueto (diabetes), in aggregate, have decent intermediate-term
growth potential. These drugs, combined, generate roughly $5.2 billion in
annual revenues for Lilly and address large and growing treatment markets.
Lilly has improved its growth prospects for the intermediate- to longer-term,
as it has been making significant progress in building its late-stage
pipeline. The company currently has four drug candidates in registration to
treat diabetes and gastric cancer (and possibly lung cancer). In phase III
development, Lilly has a growing number of therapeutics, including three to
treat cancer and two to treat diabetes. In addition, its phase III pipeline
contains drugs to treat lupus, psoriasis, high cholesterol, depression, and
rheumatoid arthritis. The company has partnered with Boehringer Ingelheim in
its efforts to develop diabetes medications.
EFFORTS TO SUPPORT MARGINS
Fitch expects Lilly to remain focused on controlling costs in order to support
margins while balancing its need to invest in growth. The company faces a
number of operational headwinds, including the anticipated near-term patent
expiries. As such, Lilly has cumulatively taken approximately $391 million out
of SG&A during the last 12 months (ended Dec. 31, 2013). During the same
period, the company has remained steadfast in funding longer term growth by
increasing research and development spending by roughly $310 million.
Nevertheless, Fitch anticipates materially compressed EBITDA margins (24%-25%)
during 2014 and improvement thereafter.
POSITIVE BUT SUBDUED FCF
Fitch forecasts positive but lower FCF of approximately $900 million during
2014, as Lilly contends with the loss of profitable U.S. sales of Cymbalta and
Evista. Expected cash flow from operations of roughly $4.1 billion should be
sufficient to fund $2.2 billion in cash dividends and $1.3 billion in capital
expenditures. Fitch believes FCF will grow from 2014 levels over the long run,
as revenues and margins recover.
RELATIVELY AGGRESSIVE CASH DEPLOYMENT
Fitch incorporates roughly $5 billion in share repurchases from now through
2017-2018, funded with FCF and cash on hand. However, Fitch models only
incremental dividend increases and targeted acquisitions during the same
forecast period, which will not likely stress Lilly's balance sheet.
LEVERAGE TO INCREASE IN 2014
Fitch looks for Lilly to operate with debt leverage of 1.1x-1.3x in 2014
during the height of the patent expiries. This is a sharp increase from
current leverage of 0.74x. Fitch recognizes that there is some uncertainty
surrounding its forecasted leverage range for 2014, since the forecast will be
influenced by the level of profitability the company will generate during the
period, as well as the discipline Lilly exercises regarding balance sheet
debt. Fitch assumes Lilly will refinance the $1 billion senior unsecured notes
maturing in March 2014.
Fitch assumes Lilly will maintain adequate liquidity, supported by FCF
generation, balance sheet cash and availability on its revolving credit
facility. At Dec. 31, 2013, the company had approximately $5.4 billion of cash
and short-term investments, full availability on its $1.2 billion credit
facility which matures April 7, 2015, and roughly $7.6 billion in noncurrent
investments. Lilly generated approximately $2.5 billion in FCF during the LTM
At Dec. 31, 2013, Lilly had approximately $5.2 billion in debt outstanding.
Fitch believes the company's debt maturities are manageable with roughly $1
billion maturing in 2014, $200 million in 2016, and $1 billion in 2017.
Fitch's forecast assumes that Lilly will refinance these maturities with new
debt issuances, as evidenced by its recent notes issuance.
Future developments that may, individually or collectively, lead to a revision
of the Rating Outlook to Positive include:
--Revenues continue to expand for recently launched patent protected products,
including Amyvid, Alimta, Cialis, Effient, Erbitux and Tradjenta/Jandueto;
--The company employs adequate cost controls to generate sufficient
profitability while limiting increases in debt to maintain leverage
sustainably below 1.3x;
--Cash is deployed conservatively, with the majority of the planned $5 billion
share repurchase program funded through cash flow as opposed to debt issuance.
Future developments that may, individually or collectively, lead to a Negative
Rating Outlook and/or a one-notch downgrade to 'A-'/'F2' include:
--Operational stress from, but not limited to, patent expiries drives leverage
durably above 1.7x;
--FCF deteriorates without the expectation of a timely trend reversal.
Fitch currently rates Eli Lilly as follows:
--Long-term IDR at 'A';
--Senior unsecured debt rating at 'A';
--Bank loan rating at 'A';
--Short-term IDR at 'F1';
--Commercial paper rating at'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 15, 2013.
--'Rating Pharmaceutical Companies - Sector Credit Factors', Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating Pharmaceutical Companies
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Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)
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