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Fitch Raises Outlook on Bristol-Myers Squibb (BMY) to Stable; Notes Firm Leverage Level, Pipeline Progression

December 11, 2014 2:58 PM EST

Fitch Ratings has affirmed Bristol-Myers Squibb Co.'s (Bristol- Myers, Bristol) (NYSE: BMY) Issuer Default Rating (IDR) at 'A-' and has revised the Rating Outlook to Stable from Negative. The ratings apply to approximately $7.27 billion of debt outstanding at Sept. 30, 2014. A full list of the company's ratings follows at the end of this press release.

KEY RATING DRIVERS

--Fitch expects Bristol-Myers to operate with leverage below 2.0 times (x) following the divestiture of its diabetes business. Leverage at Sept. 30, 2014 was 1.76x compared to 1.96x at Dec. 31, 2013 - just prior to the divestiture.

--Fitch anticipates that continued market uptake of Bristol's medicines with longer patent protection and the successful commercialization of key research projects will help offset the effects of the patent expirations of Baraclude and Abilify during 2015.

--Bristol has made progress in advancing a number of late-stage pipeline candidates that treat various cancers and hepatitis C, which will help longer-term growth.

--Baraclude and Abilify patent expirations will be a headwind to sales and cash flows in 2015. Nevertheless, Fitch does see meaningful operational improvement in 2016 as new and established patent-protected drugs continue to gain traction and patent expiries are more manageable.

--The sale of the company's diabetes business has reduced EBITDA and left Bristol less diversified. However, Fitch believes the company will benefit from its narrower strategic focus from gains in operational efficiency and research productivity in the intermediate to long term.


--Fitch believes Bristol will use a cash deployment strategy that generally preserves cash through 2015 by moderating its share repurchases.

Leverage Expected to Remain Below 2.0x

Fitch expects that Bristol will operate with gross debt leverage (total debt/EBITDA) below 2.0x during the forecast horizon. In fact, leverage has remained at or below 1.8x since the diabetes divestiture in early February 2014, as the company paid down approximately $755 million in debt during the first quarter of 2014 and has maintained profitability during the past nine months. The revision of the Rating Outlook to Stable from Negative is, in part, driven by the company's demonstrated willingness and ability to conservatively deploy cash in order to maintain its 'A-' credit profile.

Patent Protected Products Growing

Bristol has a number of growth drivers for the intermediate term that will help to mitigate the roughly 20% of sales at risk to patent expiries through the end of 2016. The company's longer-dated patented products continue to generate solid growth. Sprycel (chronic myeloid leukemia), Yervoy (metastatic melanoma) and Orencia (rheumatoid arthiritis) are generating strong double-digit growth as favorable clinical outcomes drive increased utilization. Eliquis (blood clots) revenues have increased eight-fold over the prior year due to positive clinical data and improved formulary positioning. Erbitux (head/neck and colorectal cancer) continues to grow at mid single-digit rates.

Pipeline Progress

Bristol-Myers has made meaningful progress with its late-stage pipeline during the past year. Elotuzumab/BMS-901608 (cancer) was granted breakthrough therapy designation by the FDA for triple combination with lenalidomide and dexamethasone for the treatment of multiple myeloma in May 2014. Daklinza/daclatasvir (hepatitis C) was approved in Europe in August 2014 and submitted to the FDA in April 2014, although the FDA has issued a Complete Response Letter to the company. Phase III studies were initiated with Beclabuvir/BMS-791325 (hepatitis C) in March 2014.

Opdivo/nivolumab (cancer) has had numerous developments during the past year. It was submitted to U.S. and European regulatory authorities for approval in September 2014 and approved in Japan in July 2014. The drug has also generated positive clinical data for the treatment of melanoma and lung cancer. Bristol has announced it will collaborate with Novartis, Kyowa Hakko Kirin, and Five Prime by combining their drugs with nivolumab for the treatment of various cancers.

Moderate Impact from Patent Losses in 2015 - 2016

A second wave of drug patent expirations occurs in 2015 - 2016 when Baraclude and Abilify lose market exclusivity in the U.S. The maturing medicines account for roughly 20% of total revenues. The patent expiration of Baraclude in the U.S. is immaterial, although the expected loss of exclusivity in international markets in October 2016 poses a moderate challenge, as its international sales account for roughly 8% of total firm sales.

Expected strong performance of Yervoy and Eliquis 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 on sales growth and operating margin should be more moderate than what Bristol experienced during 2012 when Plavix lost most of its sales because of generic competition after its U.S. patent expired.

Sharpened Strategic Focus

In its effort to narrow its strategic focus, Bristol-Myers sold its diabetes business to AstraZeneca in the February 2014. Fitch believes, over the long term, the benefits of an increased strategic focus - improved operational efficiencies and research productivity - will offset the negative effect of divestiture-related decrease in product portfolio diversification.

Bristol received $2.7 billion cash at closing and will receive $800 million in potential approval milestones and sales performance milestones of potentially $600 million payable in 2020. The company will also receive specified royalties on the diabetes' business net worldwide sales through 2025.

Soft Near-Term FCF

Fitch forecasts relatively soft annual free cash flow (FCF; cash from operations less dividends and capital expenditures) generation of roughly $500 million to $700 million during 2014 -2015, mainly the result of top-line pressure from patent expiries and the loss of contribution from the diabetes franchise. Steady improvements should follow in 2016 and beyond as new products, recently-launched and to-be-launched, gain traction. FCF in the latest 12 month (LTM) period ended Sept. 30, 2014 was $1.07 billion, compared to $166 million in prior year's LTM period.

Cash Preservation through Patent Cliff

Fitch believes that Bristol will deploy cash in a relatively conservative manner throughout 2015. While Fitch expects that Bristol will continue to support its dividend, the company will likely lean towards cash preservation over significant share repurchases. During the LTM period ended Sept. 30, 2014, share repurchases declined significantly and issuances actually exceeded purchases with net proceeds of $310 million compared to net repurchases of $376 million in the prior year period.

RATING SENSITIVITIES

Positive: While Fitch does not anticipate a positive rating action in the near term, future developments that may, individually or collectively, lead to such an action include:

Given the anticipated operational pressure from expiring drug patents through 2016, Fitch would consider a positive rating action if it believes gross debt leverage will be maintained below 1.7x and FCF will remain positive through the forecast period. Drivers of operational improvement that would support a positive revision 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, Opdivo/nivolumumab.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

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 negative Rating Outlook or 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 borrowings.

Fitch affirms Bristol-Myers Squibb's ratings as follows:

--IDR at 'A-';
--Senior unsecured debt at 'A-';
--Bank loan at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.

The Rating Outlook has been revised to Stable from Negative, and the ratings apply to approximately $7.27 billion of debt at Sept. 30, 2014.



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