Moody's Affirms Ratings on Pfizer (PFE) Amid Move to Acquire Medivation (MDVN); Outlook Remains Negative

August 22, 2016 2:13 PM EDT

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Moody's Investors Service affirmed the ratings of Pfizer Inc. (NYSE: PFE) and related subsidiaries, including the A1 senior unsecured long-term rating and the Prime-1 commercial paper rating. The rating outlook remains negative. This action follows the announcement that Pfizer will acquire Medivation, Inc. (unrated) for approximately $14 billion.

"The affirmation reflects Pfizer's strong financial profile and the use of existing cash to fund the Medivation acquisition," stated Michael Levesque, Moody's Senior Vice President. Medivation brings a growing, profitable oncology product as well as several pipeline opportunities. Risk factors include high valuation, and the uncertainty that ongoing clinical trials of Xtandi will lead to substantially broader use.

"The continuation of the negative outlook reflects the potential that Pfizer's low US cash levels will lead to future debt issuance for US cash needs, as well as the potential for Pfizer to split its business, which would have negative credit implications" continued Levesque.

The following ratings were affirmed:

Issuer: Pfizer Inc.

Issuer Rating at A1

Senior Unsecured Bank Credit Facility at A1

Senior Unsecured Commercial Paper at Prime-1

Senior Unsecured Regular Bond/Debenture at A1

Issuer: Pharmacia Corporation (Old Monsanto)

Backed Senior Unsecured Regular Bond/Debenture at A1

Issuer: Puerto Rico Ind Med&Env Poll Ctl Fac Fin Auth

Backed Senior Unsecured Revenue Bonds at A1

Issuer: Wyeth

Backed Senior Unsecured Regular Bond/Debentures at A1

The outlook on all long term ratings is negative.

RATINGS RATIONALE

Pfizer's A1 senior unsecured rating reflects its position as one of the world's largest pharmaceutical companies, its strong diversity, its high profitability, and its strong cash flow. Pfizer's has a conservative capital structure, with over $20 billion of cash and investments post-Medivation, and gross debt/EBITDA of about 2.3x. Key branded products like Eliquis and Lyrica will continue to grow, as will Medivation's prostate cancer drug Xtandi and Pfizer's recently launched cancer drug Ibrance. Including the impact of products facing generic competition, Pfizer will grow earnings in the low single digits. The A1 rating reflects Moody's expectation that Pfizer will sustain positive underlying revenue and earnings growth, solid credit ratios including debt/EBITDA close to 2x, and very large cash holdings.

Tempering these strengths, Pfizer's growth will lag that of industry peers. This is because a number of its products are no longer patent-protected and are declining in most markets, despite growth in emerging markets. These drugs, generally comprising the Global Established Products unit, will be a drag on Pfizer's aggregate growth. Pfizer will continue to evaluate the potential of splitting up its businesses, with a decision expected by the end of 2016. In light of modest growth, there is event risk associated with acquisitions.

The negative outlook reflects the rising potential that acquisitions result in financial leverage that is sustained outside of the ranges Moody's has incorporated in the A1 rating. The negative outlook also reflects the nearing proximity to the late-2016 timeframe in which Pfizer will announce whether it will split its business.

The ratings could be downgraded if debt/EBITDA is sustained materially above 2.0 times, if there are significant pipeline setbacks, or if a split of Pfizer's business appears increasingly likely. Conversely, the ratings could be upgraded if Pfizer sustains solid top-line growth, and key credit ratios are sustained at very strong levels including CFO/debt above 50% and debt/EBITDA below 1.5 times. However, upward pressure is unlikely until the possibility of a split is ruled out.



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