S&P Lowers Outlook on Celgene (CELG) to Stable Following Receptos (RCPT) M&A Announcement

Standard & Poor's Ratings Services affirmed its 'BBB+' corporate credit rating on Celgene (Nasdaq: CELG) and revised the outlook to stable from positive.

The rating affirmation is predicated on our expectation that Celgene will reduce leverage to 1.4x by the end of 2017 through EBITDA growth from its existing commercialized product portfolio. While contribution from Receptos is not expected until at least 2018, Celgene's financial performance continues to exceed our expectations and has given the company capacity to fund this acquisition with up to 100% debt. Moreover, Celgene's conservative financial policy has kept leverage at well under 1.5x over the past five years, which gives us confidence that it will sustain leverage at 2x or less once that level is reached by the end of 2017.

"The outlook revision to stable reflects higher leverage following the Receptos acquisition," said Standard & Poor's credit analyst Maryna Kandrukhin. We still expect Celgene's strong product growth to result in significant business risk improvement by 2017, a factor that previously supported our positive outlook on the company. At the same time, we project it will take several years for the company to reduce leverage to its pre-acquisition level and, while we believe the company will be disciplined about maintaining its leverage below 2.0x in the long run, we don't have full confidence it will be committed to sustaining it below 1.5x, as it did for the past five years.

The acquisition of Receptos will expand Celgene's late-stage pipeline to include Ozanimod, a product that has three phase-III trials: one for ulcerative colitis and two for relapsing multiple sclerosis. This provides immediate support to the late-stage pipeline, which we believe will be strengthened further if Celgene's four phase II products advance to phase III over the next two years. Still, since we do not expect Ozanimod to add product or revenue diversity over the next two years--revenue or EBITDA contribution from Ozanimod will not occur until 2018 at the earliest--we are not revising our current assessment of a "satisfactory" business risk profile. The recent collaborations with Juno and AstraZeneca also do not affect our perception of Celgene's late-stage pipeline, or business risk, since investments consist only of phase I or preclinical products.

The stable outlook reflects our base-case expectation that continued growth of Celgene's existing commercialized products will reduce leverage to less than 2x by the end of 2017.

We could lower the rating if Celgene does not achieve our base-case expectations and sustains leverage at more than 2x over the next two years. This could occur if the company faces an unforeseen setback to Revlimid on the regulatory, patent, or commercial fronts given the high dependence on this product. Given high levels of leverage in the first year of the acquisition, there is little cushion to absorb underperformance.

We could raise the rating if we become confident that Celgene can meet our longer-term base-case expectation and reduce leverage to 1.5x or less by the end of 2017. Commensurate with the decline in leverage would be our expectation that Celgene would sustain leverage below 1.5x and that continued product growth will result in Celgene having four blockbuster drugs by the end of 2017 with Revlimid concentration declining to 55% to 60% of sales. This would strengthen our perception that Celgene's business risk profile is more comparable to higher-rated peers and potentially result in an upgrade.

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