Allergan (AGN) Ratings Affirmed by Moody's Amid Scrubbed Deal with Pfizer

Moody's Investors Service confirmed the Baa3 senior unsecured rating of subsidiaries of Allergan plc (NYSE: AGN), including Actavis, Inc., Actavis Funding SCS, Allergan Inc., and Forest Laboratories, Inc. (together, "Allergan"). The confirmation follows the announcement of the termination of the proposed combination with Pfizer Inc. (rated A1 stable). The outlook is stable.

"Allergan will likely pursue acquisitions and share repurchases that will erode its significant cash balance following the divestiture of the generics business to Teva" said Jessica Gladstone, Senior Vice President with Moody's. "However, we believe this will be balanced with enough debt repayment to maintain an investment grade credit profile."

Ratings confirmed:

Senior unsecured notes, at Baa3

The outlook is stable.

RATINGS RATIONALE

The Baa3 rating reflects Allergan's significant scale and good diversity by therapeutic area and product. The rating is also supported by Moody's expectation of strong free cash flow due to Allergan's high profit margins, efficient tax structure and modest capital expenditures. Further, the company does not pay regular shareholder dividends, and has global access to its cash without incremental US taxes. The ratings are also supported by Allergan's good product pipeline which Moody's believes gives the company a healthy organic growth outlook.

The Baa3 rating is constrained by the company's high financial leverage and its aggressive acquisition appetite. Moody's estimates that, pro forma for the divestiture of the generics business to Teva (including repayment of all term loans), that gross adjusted debt/EBITDA will approximate 4.5x, which is high for an investment grade rating. The high gross debt leverage will be mitigated by the fact that Allergan will have over $20 billion of cash following the repayment of the term loans. Allergan will also hold another $6-7 billion of Teva stock that is subject to a 12 month lock-up period, but which can eventually be monetized to provide additional cash. The rapid pace of major acquisitions and divestitures has the potential to cause operating disruption, loss of management focus, and challenges with oversight of an increasingly complex, rapidly evolving organization.

Moody's could downgrade Allergan's ratings if the company encounters significant integration (or dis-integration) challenges or deterioration in operating performance due to increased competition on key branded franchises, or significant quality or legal issues. While Allergan will have significant financial flexibility following the divesture of the generics business to Teva, if Moody's believes that the company's financial policies will result in adjusted gross debt/EBITDA that will be sustained above 4.0x, the ratings could be downgraded.

Ratings could be upgraded if Moody's believes that creditors will benefit from divestiture proceeds either through debt repayment or tuck-in acquisitions that improve the long-term growth outlook. Moody's would also need greater clarity around Allergan's financial policies before considering an upgrade. Key to an upgrade would be reduced risk of large, debt funded acquisitions. Additionally, the ratings could be upgraded if Moody's believes that debt/EBITDA will be sustained below 3.0x.

The principal methodology used in these ratings was Global Pharmaceutical Industry published in December 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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