Wyeth Credit Rating Affirmed

S&P cites the company's still-solid position in the high-margin pharmaceutical business and its relatively young and diverse drug portfolio

On Sept. 27, 2002, Standard & Poor's said it affirmed its 'A' corporate credit and long-term ratings and its 'A-1' short-term ratings for Madison, N.J.-based Wyeth (WYE ) and its subsidiaries. The outlook remains stable. The company had about $10 billion of debt outstanding at June 30, 2002.

The action was in response to Wyeth's announcement that it was lowering earnings estimates for 2002, mainly because of the recent decline in sales of its lead product, the hormone replacement therapy (HRT) franchise, Premarin/Prempro, and was incurring an additional diet-drug litigation-related charge of $1.4 billion.

The ratings and outlook on Wyeth reflect the company's still-solid position in the high-margin pharmaceutical business and its relatively young and diverse drug portfolio, partially offset by the uncertain impact to sales of its Premarin/Prempro franchise, financial leverage resulting from the 1999-2000 settlement of its diet-drug litigation, and the possibility of additional charges.

Wyeth's drug portfolio remains diverse, with several products, such as the antidepressant, Effexor; the pneumococcal vaccine, Prevnar, the gastrointestinal drug, Protonix; and the rheumatoid arthritis treatment, Enbrel, generating strong growth. The company has increased drug-development productivity over the past several years, having launched several new products. Unlike several of its major pharmaceutical peers, Wyeth also does not face any significant near-term patent expirations.

However, sales of Wyeth's lead franchise, Premarin/Prempro, have been hurt by the recent halting of a federal study of HRT, due to an increased risk of breast cancer. Premarin/Prempro generated more than $2 billion in sales in 2001 and represented 22% of Wyeth's pharmaceutical sales. Sales of Premarin/Prempro have declined roughly 25% thus far but have seemingly stabilized. Nevertheless, the long-term impact to sales is unknown.

Meanwhile, the company has incurred an additional $1.4 billion charge relating to its 1999 litigation settlement involving its two withdrawn diet drugs, Redux and Pondimin. The charge is the fourth in four years. The latest charge is due to a greater-than-anticipated number of claims filed in the nationwide settlement. Standard & Poor's expects that, while further diet-drug litigation charges are a possibility, any more such charges will be individually less than $2 billion and that related cash payouts will be spread out. The remaining $2.2 billion litigation reserve, including the $1.4 billion charge, is projected to be paid out over the next several years.

Financially, the company remains conservative and is focusing on de-levering its balance sheet. Net debt leverage is roughly 39%. The company has largely funded its $14.65 billion diet-drug settlement, having paid out $12.3 billion over the past 3 1/2 years.

As of June 28, 2002, Wyeth had $3.2 billion in on-hand cash and cash equivalents. The company also has a $3 billion 364-day credit facility, expiring March 2003 but renewable for another year and a new $2 billion 364-day credit facility, which will be reduced to two-thirds its committed amount on Dec. 31, 2002, and one-third on May 8, 2003, to support commercial paper borrowings. Other than amounts outstanding under the company's commercial paper program, Wyeth does not have any significant debt maturities over the intermediate term.

With the completion of Amgen Inc.'s acquisition of Immunex Corp., Wyeth, which owned 41% of Immunex, received 98.3 million shares of Amgen, as well as $1 billion in cash. Wyeth may seek to liquidate its 7.7% ownership of Amgen, although Wyeth cannot sell more than 20 million shares per quarter. At current share prices, Wyeth's stake in Amgen is valued at more than $4 billion. Wyeth is also in the midst of selling certain assets of its generic human injectable pharmaceuticals to Baxter Corp. for $305 million. Thus, given Wyeth's significant on-hand cash, borrowing capacity under its credit facility, proceeds from the subsequent sale of its stake in Amgen, and expected strong funds from operations, liquidity is expected to remain significant.

The current rating and stable outlook does not factor in additional significant diet-drug litigation-related charges or a further steep decline in Premarin/Prempro sales. Standard & Poor's expects that the company will use its continued strong cash flows generated from its diverse pharmaceutical portfolio and proceeds from the any divestiture of its Amgen shares to fund future litigation payments and debt reduction.

From Standard & Poor's CreditWire

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